appendices final report on the financial, physical and process audit of the nigeria oil and gas industry

197 Pages·2017·2.17 MB·English

APPENDICES
FINAL REPORT ON THE FINANCIAL, PHYSICAL AND PROCESS AUDIT OF THE
NIGERIA OIL AND GAS INDUSTRY: AN INDEPENDENT REPORT ASSESSING AND
RECONCILING PHYSICAL AND FINANCIAL FLOWS WITHIN NIGERIA’S OIL AND
GAS INDUSTRY - 2015

Prepared by:
Haruna Yahaya &Co,

(Chartered Accountants)
Ahmadu Bello House,
Shiroro Road Minna,
E-Mail: [email protected]
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Table of Contents

Appendix 1: Description of Services/Terms of Reference for the 2015 EITI Report……….……....................1
Appendix 2: Oil and Gas Producing Companies……………………………………………………………...25
Appendix 2b: Unilateral Disclosure Companies……………………………………………………………...26
Appendix 3: Audit Checklist………………………………………………………………………………….27
Appendix 4: Audited Financial Statement and Attestation Letter………………………………………….....32
Appendix 5: Business Model/ Relationships ………………………………………………………………....34
Appendix 6: Social Expenditures………………………………………………………………………….….34
Appendix 7: Pricing Models...................................................................................................................….......35
Appendix 8: Schedule of Pricing Shortfall- Export Crude
Appendix 9: Schedule of Converting Aggregated Monthly Dollar Invoices into Naira
Appendix 10: Schedule of Pricing Shortfall- Domestic Crude
Appendix 11: 2015 NNPC COMD Lifting Profile from All Streams
Appendix 12: Detailed Comparison of the 2014 and 2015 of Federation Export Crude Oil Sales
Volume and Values (Sales Receivable)……… …………….……………………………....….37
Appendix 13: Detail of 2014 And 2015 Comparison of Gas Sales Volume and Values (Sales Receivable)....38
Appendix 14: Detailed Comparison of the 2014 And 2015 of Federation Export Feedstock Sales
Volume and Values (Sales Receivable)………………………………………………………..39
Appendix 15: Detail Analysis and Reconciliation of Outstanding Balance of Export Crude Oil & Gas
Receivable Control Account…………………………………………………………………...40
Appendix 16: Analysis of NNPC Record for “Un-explained Difference………..……………………………44
Appendix 17: Revaluation of NNPC Equity Interest in OMLS 60,61,62 &63………………………….….…47
Appendix 18a: Analysis of NESS Received By CBN On Crude Export With NXP No…..……….….…..….50
Appendix 18b: Analysis of NESS Received by CBN On Crude Export Without NXP No……….………….55
Appendix 19: Crude Production, Export and Losses Report - Company by Company Analysis……….…….58
Appendix 20: Terminal Balances.............................................................................................................…....104
Appendix 21: Gas Production and Utilization Report - Company By Company Analysis………………….137
Appendix 22: Detailed Company Level Analyses of Off-Shore Processing Arrangement………………….188
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APPENDIX 1
DESCRIPTION OF SERVICES/TERMS OF REFERENCE
CONSULTANT FOR THE 2015 EITI REPORT - NIGERIA
1. BACKGROUND
The Extractive Industries Transparency Initiative (EITI) is a global standard for improving transparency and
accountability in the oil, gas and mining sectors.
EITI implementation has two core components:
• Transparency: oil, gas and mining companies disclose information about their operations, including
payments to the government, and the government discloses its receipts and other relevant
information on the industry. The figures are reconciled by a Consultant and published annually
alongside other information about the extractive industries in accordance with the EITI Standard.
• Accountability: a multi-stakeholder group (MSG) with representatives from government, companies
and civil society is established to oversee the process and communicate the findings of the EITI
reporting and promote the integration of EITI into broader transparency efforts in that country.
It is a requirement that the Consultant is perceived by the multi-stakeholder group to be credible, trust
worthy and technically competent (Requirement 4.9b). The Consultant’s report will be submitted to the
NSWG for approval and made publicly available.
The requirements for implementing countries are set out in the EITI Standard1. Additional information is
available via www.eiti.org
By the EITI rules, implementing countries are required to publish their annual reports for the period not later
than two preceding years. The Oil and Gas Industry Audit 2015 Report must be published by the end of the
2017 to ensure Nigeria meets the EITI Standard.
EITI Implementation in Nigeria
Nigeria signed up to the EITI in 2003, implementation began on 16th February 2004 when NEITI was
established as part of the overall economic reform programme agenda of the Obasanjo Administration at
the time. For details of Nigeria’s sign up to the EITI, the functions, methods, processes and benefits of NEITI,
please visit our Website www.neiti.org.ng
NEITI implementation of EITI in Nigeria began with legislation - the NEITI Act of 2007. This law was the first
pillar in the institutionalization of NEITI and EITI process in Nigeria. It also made Nigeria the first country to
back the process with a law. The NEITI Act 2007 is today a reference point in all advocacy, public agitation
and demand for transparency in the extractive sector in Nigeria.
2. Objectives of the assignment
On behalf of the Nigeria Extractive Industries Transparency Initiative (NEITI) and NSWG, the NEITI seeks a
competent and credible firm, free from conflicts of interest, to provide Consultancy services in compliance
with the NEITI Act and in accordance with the EITI Standard. The objective of the assignment is to:
1. Produce the NEITI 2015 Oil & Gas Industry Audit Report in compliance with the NEITI Act and in
accordance with the EITI Standard as set out in Section 3 below. The report shall be titled:

1https://eiti.org/document/standard
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Financial, Physical and Process Audit: An Independent Report Assessing and Reconciling
Physical and Financial Flows within Nigeria’s Oil Industry and Gas Industry – 2015”.
Others are to:
i. To report on the revenue flows and investment flows amongst the Covered Entities, as more fully
described below, with transactions made by participants (both public and private) in Nigeria’s oil and
gas industry.
ii. To undertake special verification work on certain classes of transactions
iii. To report on balances payable / receivable at the end of the audit period for certain financial flows
iv. To reconcile the physical/financial transactions reported by payers and recipients as appropriate, as
per the scope set out herein
v. To make observations from analysis of work done with the objective of making recommendations
that will aid policy making while considering recommendations from past reports
3. Scope of Work
The Consultant shall:
i. Develop, as necessary, template reporting structures for utilization by either public or private
entities; and
ii. Assess the volumetric aspects of production, liftings, utilization/exports, imports, unaccounted oil
and gas, and other relevant streams.
iii. The Consultant shall validate information collected on allocation of licenses including transfers and
map showing license and other related information
iv. Report royalties on a Project-by-Project basis. The NSWG defines a project as a license for each OPL /
OML.
v. Validate data obtained on revenue flows from the oil and gas industries detailing all payment streams
made by all Covered Entities to any Federation (Federal Government, State Government, or Local
Government) entity, including to/by NNPC. In addition, this detailing is to encompass certain
calculations that underlie the calculation of payments, fees, taxes and royalties owned by private or
public sector companies.
vi. Validate investment flows involving Government payments by way of Joint Venture investments,
loans (including loan repayment), and equity investment transactions including dividends paid or
received by Covered Entities, cost and profit oil transactions. Otherwise, the Consultant should report
that the figures have not been confirmed.
vii. Review all licensing processes and beneficial ownership and to report on the signature bonuses
attributable. This includes Nigeria Sao Tome & Principe from the Joint Development Zone (if any).
viii. Validate information on beneficial ownership from SOE – State Owned Enterprise (NNPC),
Midstream, JVs – Joint Venture companies and PSCs – Production Sharing Contract companies. For
this purpose, the NSWG has agreed that the beneficial ownership shall be a minimum of 5-(five) per
cent. The consultant should indicate whether the companies are registered in Nigeria or abroad;
whether they are publicly quoted or not (in Nigeria or abroad). The consultant shall specifically
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obtain from NLNG their ownership structure including the names of Beneficial Owners. This should
be confirmed to the CAC records.
ix. Obtain description of government policy on Contracts disclosure. The information obtained should
include MOUs, Side Letters, Contracts, Farm-in Agreements and other relevant documents including
marketing contracts for crude oil, and swap agreements
x. Analyse, and reconcile the physical, financial and related information pertaining to the revenue
flows, investment flows, and such other transactions which affect such flows amongst and between
the Covered Entities;
a. However, activities and entities involved in the petrochemical industry (e.g. refineries,
chemicals production), or the processing of crude oil and gas are not within the scope of work
but such entities are required to confirm their relevant stocks, receipts from and inputs to the
oil and gas sector.
xi. Report on NNPC’s share in export sales and domestic crude and circularise NNPC trading partners to
independently confirm NNPC’s volume and values of export and domestic sales.
xii. Build upon the analysis, findings and recommendations of the previous audit
xiii. Confirm data obtained about all information on Social Expenditures as mandated by Law or in
Contract.
xiv. Disclose information obtained on all Quasi-Fiscal Expenditure from NNPC such as security, SURE –P
etc.
xv. Obtain and validate payments made by NNPC in respect of fuel subsidy
xvi. Corroborate information collected on material arrangements involving provisions of goods and
services (including loans and grants and infrastructure works) in exchange for oil or production
concessions or physical delivery of such commodities.
xvii. Provide recommendations leading to standardized reporting methodologies which enhance industry-
wide reporting, sector analysis, and transparency
xviii. The Consultant will report in writing to the Client every month on progress made in completing the
work plan.
xix. Upon approval of the final report, the Consultant will make a detailed presentation of the report to
the Technical staff
xx. The Consultant shall offer, to the extent applicable and/or necessary, recommendations for
improvements it finds or believes may improve the efficiency of the sector, or the effectiveness of
Government procedures for managing the sector, or any other such matter the Consultant may
consider pertinent.
It is noted that, for purposes of establishing the scope of work under these Terms of Reference, Consultant is
not obligated to undertake such tasks or activities necessary to implement such recommendations, if and
when proffered. Any such remedial actions pursuant to these recommendations, if any at all, shall be
pursuant to separate written and mutual agreement between the Client and Consultant.

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4. The EITI Reporting process
The EITI reporting process has five phases (see figure 1). The Consultant is expected to undertake the
following tasks in the different phases as elaborated below.
Figure 1 – Overview of the EITI Reporting process and deliverables

Phase 1 – preliminary analysis and inception report
The purpose of the inception phase is to clearly establish the scope of the EITI reporting process, including
the reporting templates, data collection procedures, and the schedule for publishing the EITI Report. The
findings from this first phase shall be documented in an inception report. The Consultant is expected to
undertake the following tasks:
1. The Consultant shall review the relevant background information, including the governance
arrangements and tax policies in the oil and gas industries, the findings from any preliminary scoping
work (if any), and the conclusions and recommendations from previous NEITI Reports and
Validations.
2. The Consultant should review the scope proposed by the NSWG with a particular focus on:
i. Reviewing the comprehensiveness of the payments and revenues to be covered in the EITI
Report as proposed by the NSWG and in accordance with EITI Requirement 4.
ii. Reviewing the comprehensiveness of the companies and government entities that are
required to report as defined by the NSWG and in accordance with EITI Requirement 4.1
iii. Supporting the NSWG with examining the audit and assurance procedures in companies
and government entities participating in the EITI reporting process. This includes
examining the relevant laws and regulations, any reforms that are planned or underway,
and whether these procedures are in line with international standards. It is recommended
that the EITI Report includes a summary of the findings, otherwise the NSWG should make
the results of the review of audit and assurance practices publicly available elsewhere.
3. On the basis of 1 and 2 as applicable, produce an inception report that:
Includes a statement of materiality confirming the NSWGs decisions on the payments and revenues
to be covered in the Report, including:
i. The definition of materiality and thresholds, and the resulting revenue streams to be
included in accordance with Requirement 4.1(b).
ii. The sale of the state’s share of production or other revenues collected in-kind in
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accordance with Requirement 4.2.
iii. The coverage of infrastructure provisions and barter arrangements in accordance with
Requirement 4.3.
iv. The coverage of social expenditure in accordance with Requirement 6.1.
v. The coverage of transportation revenues in accordance with Requirement 4.4.
vi. Disclosure and reconciliation of payments to and from state owned enterprises in
accordance with Requirement 4.6.
vii. The materiality and inclusion of direct sub-national payments in accordance with
Requirement 4.5.
viii. The materiality and inclusion of sub-national transfers in accordance with Requirement
5.2.
ix. The level and type of disaggregation of the EITI Report in accordance with Requirement
4.7.
Includes a statement of materiality confirming the NSWGs decisions on the companies and
government entities that are required to report, including:
i. The companies, including SOEs that make material payments to the state and will be
required to report in accordance with Requirement 4.1(c).
ii. The government entities, including any SOEs and sub-national government entities, that
receive material payments and will be required to report in accordance with Requirement
4.1(c-d), 4.5 and 4.6.
iii. Any barriers to full government disclosure of total revenues received from each of the
benefit streams agreed in the scope of the EITI report, including revenues that fall below
agreed materiality thresholds (Requirement 4.1(d)).
Based on the examination of the audit and assurance procedures in companies and government
entities participating in the EITI reporting process (1.2.3 above), confirms what information
participating companies and government entities are required to provide to the Consultant in order
to assure the credibility of the data in accordance with Requirement 4.9.
The Consultant should exercise judgement and apply appropriate international professional
standards2 in developing a procedure that provide a sufficient basis for a comprehensive and reliable
EITI Report. The Consultant should employ his /her professional judgement to determine the extent
to which reliance can be placed on the existing controls and audit frameworks of the companies and
governments. Where deemed necessary by the Consultant and the NSWG, assurances may include:
i. Requesting sign-off from a senior company or government official from each reporting
entity attesting that the completed reporting form is a complete and accurate record.
ii. Requesting a confirmation letter from the companies’ external auditor that confirms that

2 For example, ISA 505 relative to external confirmations; ISA 530 relative to audit sampling; ISA 500 relative
to audit evidence; ISRS 4400 relative to the engagement to perform agreed-upon procedures regarding
financial information and ISRS 4410 relative to compilation engagements.
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the information they have submitted is comprehensive and consistent with their audited
financial statements. The MSG may decide to phase in any such procedure so that the
confirmation letter may be integrated into the usual work programme of the company’s
auditor. Where some companies are not required by law to have an external auditor and
therefore cannot provide such assurance, this should be clearly identified, and any
reforms that are planned or underway should be noted.
iii. Where relevant and practicable, requesting that government reporting entities obtain a
certification of the accuracy of the government’s disclosures from their external auditor or
equivalent.
The inception report should document the options considered and the rationale for the assurances to
be provided.
4. The secretariat shall collate, integrate and analyze contextual information in a manner that is
accurate, concise, clear and consistent. Information must also be sourced appropriately and conform
to the EITI standard. Analysis will consider recommendations from initial data collection and
stakeholder consultations. Further guidance on contextual information is presented in the table
below;
Non-revenue information Work to be undertaken by the Work to be undertaken by the
to be provided in the EITI Independent Administrator MSG/others
Report
Legal framework and fiscal Not applicable Provide an overview of the various
regime in accordance with contractual arrangements, the legal
EITI Requirement 2.1. framework, fiscal regime and relevant
regulatory agencies such as DPR,
NNPC (and its subsidiaries) and FIRS
operating in the industry. Information
can be sourced from Annual Reports
produced by DPR, NNPC and/or FIRS.
The overview will also document
current reform efforts.
An overview of the Not applicable This information can be sourced from
extractive industries, the DPR Annual Reports and the
including any significant NNPC Statistical Bulletin.
exploration activities in Engagements will also be held with
accordance with EITI the JDZ to document exploration
Requirement 3.1. activities in the zone.
Information about the Not applicable This information can be sourced from
contribution of the publications of the National Bureau of
extractive industries to the Statistics, MoF and FAAC Reports
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economy in accordance
with EITI Requirement 6.3.
Production and export data This information shall be gathered
in accordance with EITI and analyzed in line with Phase 5
Requirement 3.2 and 3.3 section (1)(ii) of this TOR
Information regarding state This information shall be gathered
participation in the and analyzed in line with the
extractive industries in section on financial flows, section
accordance with EITI (1)(vii) bullet 1, 2 and 6 of this TOR
Requirement 2.6 and 6.2.3
Information about the Not applicable This information can be sourced from
distribution of revenues FAAC Reports
from the extractive
industries in accordance
with EITI Requirement 5.1.
Any further information Not applicable This will include revenues earmarked
further information for specific programmes such as fuel
requested by the MSG on subsidy and SURE –P. This information
revenue management and can be sourced from Publications of
expenditures in accordance the Budget Office of the Federation
with EITI Requirement 5.3. and the OAGF
Information about license Not applicable This information can be sourced from
holders in accordance with the engagements with DPR and DPR
EITI Requirement 2.3 4, and Annual Report.
the allocation of licenses in
accordance with EITI
Requirement 2.2.5
Any information requested This information shall be collected
by the MSG on beneficial and analyzed as outlined in the
ownership in accordance section on Beneficial Ownership on
with EITI Requirement 2.5 6 page 24 of this TOR
Any information requested This information shall be collected

3 Guidance Note 18: SOE participation in EITI Reporting,
https://eiti.org/files/GN/Guidance_note_18_SOEs_EN.pdf
4 Guidance Note 3: Licence Registers, https://eiti.org/guidance-notes-and-standard-terms-reference#GN3
5 Guidance Note 4: Licence Allocations, https://eiti.org/guidance-notes-and-standard-terms-reference#GN4
6 Template beneficial ownership declaration, https://eiti.org/files/Template-beneficial-ownership-
declaration-form.doc
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by the MSG on contracts in as outlined in the section on
accordance with EITI contract transparency on pages 9
Requirement 2.4 7 and 10 of this TOR
Phase 2 – Data collection
The purpose of the second phase of work is to collect the data for the EITI Report in accordance with the
scope confirmed in the Inception Report.
To facilitate early submission of the report, NEITI has taken the proactive step of collecting the relevant data
required for the Audit from the covered entities.
Phase 3 – initial reconciliation and data validation
The purpose of this phase is to complete validation of data provided by all covered entities; carry out an
initial compilation and reconciliation of the contextual information along with revenue and physical data
with a view to identifying any gaps and discrepancies to be further investigated.
The consultant will in this phase;
1. Provide advice (where necessary) to the NSWG on ensuring that the request for data validation includes
appropriate guidance to the reporting entities, and advice on where to seek additional information and
support.
2. Validate the data collected from the completed reporting templates (and associated supporting
documentation) directly from the participating reporting entities. NEITI will provide contact details for
the reporting entities and assist the Consultant in ensuring that all reporting entities participate fully. The
Consultant should provide advice on ensuring that appropriate safeguards are in place to protect the
integrity of the process.
3. Compile a database with the payment and revenue data provided by the reporting entities.
4. Prepare an initial reconciliation report based on the reported (unadjusted) data for consideration by the
NSWG.
5. Convene a reconciliation meeting, at which it will comprehensively reconcile the information disclosed
by the reporting entities, identifying any discrepancies (including offsetting discrepancies) in accordance
with the agreed scope and any other gaps in the information provided (e.g. assurances).
6. Identify any discrepancies above the agreed margin of error established at 0.05% of total revenues.
7. Prepare a post reconciliation report based on the clarifications made on identified discrepancies as
identified in (5) above, highlighting company by company status update. Ensure sign-off by covered
entities post reconciliation on a company by company basis
8. The Consultant is mandated to contact the reporting entities directly to clarify any information gaps or
discrepancies.
Phase 5 – investigation of financial and production discrepancies and draft audit report
The Consultant should contact the reporting entities and seek to clarify any discrepancies in the reported
data.

7 Guidance Note 7: Contract Transparency, https://eiti.org/guidance-notes-and-standard-terms-
reference#GN7
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