Checking Extractive Industry Revenues

1. Checking Extractive Industry Revenues RWI Training 29th June 2007 _____ Chris Nurse Hart Group

2. Overview • Money flows: getting started • Checking: what is supposed to be happening • Introduction to EITI (basic) • EITI process issues • Expansion of EITI

3. Money flows: getting started

4. Task: Review the financial flows diagram on Page 4 of the handout List the questions that arise from the diagram What income should the government expect? How would you know if it was correct? Asking questions

5. Checking How would you check: • Signature bonus? • Crude oil sales? • Royalty? • Tax on petroleum profits?

6. Signature Bonus • Agreed amount • Agreed timing (howwere these agreed?) • Any conditionalities? • Destination of payment

7. Crude Oil Sales (depends on how it is done) • Realisation value • Volume (standardised) • Price • Timing

8. Royalty Define and specify the calculation. Usually: • Volume • Value • Applicable percentage

9. Tax on Petroleum Profits • Income less costs • What income? • What costs? • What rate? Many issues, including: • Transfer pricing • Value for Money • Operation management processes

10. EITI: introduction RWI Training 29th June 2007 _____ Chris Nurse Hart Group

11. Introduction: what is EITI? EITI seeks to create transparency around payments that companies make to governments and revenues that governments receive from companies [paraphrase of EITI sourcebook (2005)] Pages 8 and 9 of the EITI sourcebook set out the EITI principles and criteria

12. “resource-rich countries” should implement EITI

13. Money flows: getting started

14. Review your checking processes for the financial flows diagram Which questions would be covered by “basic” EITI? Asking questions

15. Which are the Government covered entities? Management of the Central Bank accounts (AGF) Status of special funds (eg: PDF, PEF) Federal Inland Revenue Service Covered Entities Resolve by early mapping of flows, And sharing the maps

16. Which are the Company covered entities? Source of information Last minute discoveries! Legal entities or operating entities (JV)? Nominee participations in blocks? Covered Entities Resolve by early publication of list (?)

17. Financial reconciliations What period is under review? Cash basis accounting Legal entities or operating entities? Practical Reconciliation Issues Resolve by early broad consultation

18. Production sharing Define production What exactly is being reconciled? Terminal transactions? Export liftings? Measurement issues Physical Reconciliation Issues Resolve by early and open consultation between Companies and regulator

19. EITI planning Decisions to take

20. Affects: Confidentiality agreements and practices Dynamics within Stakeholder Working Group Template design Covered Entity attitudes Decide on reporting policy

21. (a) Aggregated (“the answer is”) or (b) disaggregated data? One report, or two? Information sharing within the stakeholder group? Transparency of audit / reconciliation process? Or filtered information? Reporting policy (2): content

22. Net Inflows to the Federation

23. Income to the Federation

24. Financial differences: up to 2%

25. Differences further investigated

26. Report example - disaggregated

27. Cash Calls paid to operators

28. Financial audit – issues • Accruals basis – continuing problem • Entity desire to be exonerated • Entity view of Materiality • Implications for reconciliation process

29. Confidentiality agreement Data sharing conflicts with secrecy agreements Need for waiver of rights Legal issues CA wording – takes time 2-stage approach may be possible (reconciliation / reporting) Clarity on scope of work – affects attitude to confidentiality Reporting Policy (3): confidentiality

30. How do stakeholder representatives relate to and from their constituencies? • Contract • Reporting • Confidentiality • Data Requests • Sign off process Process Management - structure There are complex relationships to be managed… Stakeholder Group Auditor • Gov’t Institutions • IOCs • Local Companies Covered Entities

31. Appoint the right ‘Points of contact’ in each covered entity Ensure the right skills are involved: Contacts should have financial control skills and direct access to technical skills In IOCs operational structures: Business units don’t see cash – treasury does. Contacts must have the authority to deliver Process Management - participation Resolve by early consultation with Companies and clarification of expectations

32. Be practical about timetables IOCs have internal reporting commitments – same people may be involved. Politicians have timeframes too Process Management - scheduling Be prepared to be flexible, first time

33. Footnotes • “Early”: Planning tends to be under estimated • Involve the Auditors in the design of the audit process • Level of effort, on all sides, tends to be underestimated

34. Validation

35. Validation process

36. Expansion of EITI

37. EITI Scope What are the transactions? Are the transactions correct? Is the outcome equitable for all stakeholders? Transactions What are the Processes? Are the Processes applied? Are the Processes effective and efficient? Governance System • NEITI scope was more ambitious… and included: • A cross-check of Financial with Physical transactions • Reconciliation of hydrocarbon mass balance • Review of key processes in the management of the sector EITI vs. Nigerian EITI Basic Plus Plus Plus

38. Not only “what was paid?” but “what should have been paid?” Substantial additional information required Substantially more audit work More expensive Verification of financial flows

39. Map of license areas

40. License information required

41. Upstream Liquids initial data requirements (Oil & NGL’s as separate production streams) Wells Listing & Linkages to production facilities Production Facility Volumetrics plus Well production reconciliation factors Transportation Volumetrics Storage Volumetrics Point of Export Volumetrics Shipments Volumetrics Opening & Closing Stocks Volumetrics Actual volumes plus volume reconciliation at standard temperature & pressure: 15oC / 1013mb

42. Upstream Gas initial data requirements (Gas and LNG as separate production streams) Gas Flared (vol) Wells Listing & Linkages to production facilities Production Facilities Volumetrics plus Well production reconciliation factors Own Use (vol) Reinjection (vol) Sales gas (vol) Storage Volumetrics Processing Volumetrics Transportation Volumetrics Point of Export Volumetrics Shipments Volumetrics Opening & Closing Stocks Volumetrics Actual volumes plus volume reconciliation at standard temperature & pressure: 15oC / 1013mb Mmscf for gas and Mmcm for LNG

45. Objectives of Technical Audit • Collect and reconcile hydrocarbon volumetric data (Oil & Gas separately) from Joint Venture (JV) operators, Production Sharing Contracts (PSCs), Service contracts and sole risk producers. • Reconcile this data to volumes fiscalised by Department of Petroleum Resources (DPR) • Identify how volumes were disposed of • Account for unaccounted hydrocarbons • Analyze upstream stock • Reconcile data relating to PPT and Royally to data obtained from Federal Inland Revenue Service (FIRS) • Analyze strengths and weaknesses of hydrocarbon volume reconciliation and reporting and Technical and Procedural improvement towards best practice and make them sustainable • How are Federal Govt. interests are protected

46. Actual quality of physical measurement • Identification of key measuring points / appropriateness for all major reporting purposes • Company measurement v measurement for fiscal purposes • Technical data about meters (e.g. make/type/spec./age • Meter reliability records (Company v DPR) • Company policies on meters’ maximum useful life, maintenance, maximum tolerable errors etc. • As above for storage tanks • Procedures for data transmission and reconciliation if and where appropriate • Company opinion on maximum overall measurement errors in total current system both from a company and DPR point of view

47. Physical audit: Vessel Fiscalisation • Name of Vessel • Owner • Owners of equity hydrocarbons • Charterer • Sailing date • Volume onloaded • Value onloaded

48. Process Audit Scope • Licensing procedures and processes • Appraisal and Investment • Capex / Opex approvals and reporting • Crude allocation to refineries • Importation of petroleum products

49. Benchmarking of Capital Expenditure Capex verification and linkage to benchmarking Value Analysis of Government investment in the sector Operating Cost verification and trend analysis Sector Governance “Plus” work in the following areas:

50. Benchmarking strategy • Capex benchmarking • in-country • international • Opex - ditto