January 30, 2023

NNPC: Beyond A Drain On National Economy

10 min read

Nigeria’s National Oil Company (NOC), Nigerian National Petroleum Corporation (NNPC) has almost always been in the eye of the storm since its creation in 1977. In times like this, when oil firms across the world are facing critical challenges, especially as oil dependent economies like Nigeria are struggling to survive, KINGSLEY JEREMIAH examines the reforms that could retune the corporation to competitiveness and recent efforts being made by the state oil firm along this line.

For what seems like ages, the fundamental issues that have been raised against the NNPC bother on loses, transparency, accountability, opacity and efficiency. The Nigeria Extractive Industries Transparency Initiative (NEITI) and other civil society organisations, for instance, have repeatedly picked issues with the NOC over unremitted funds and operational opacity, which limit the potential of the state oil firm, particularly when benchmarked against global best practices.

While the different subsidiaries of NNPC seem to fulfill the objectives of their creation, most stakeholders have remained concerned about service delivery over the years and the roles political actors and key individuals have played in managing the affairs of the oil firm. Though a leading oil producing country, with huge oil and gas resources, a large percentage of Nigeria’s population have remained poor, indicating that the abundant resources have not impacted living condition of most Nigerians.

It was amid the rash of allegations of misdeeds and/or underperformance and the need to reposition the corporation that, perhaps, led the firm’s former Group Managing Director (GMD), late Maikanti Baru to embark on a monthly publication of its financial and operational records. That was to feed the public with needed information on NNPC’s operations. Yet, there were some gaps.

When the new GMD Mele Kyari came into office last year July, he admitted the loopholes and underscored the need for Transparency, Accountability and Performance Excellence (TAPE) at the corporation. Under the TAPE agenda, the corporation seeks to maintain a positive image and share values of integrity and transparency with all stakeholders, while the accountability aspect would assure compliance with business ethics, policies, regulations and accountability.

The oil firm also noted that it would entrench a high level of efficiency anchored on efficient implementation of business processes while ensuring domestic refining of crude, especially by pursuing ongoing refinery rehabilitation exercise.

Last month, a year after the inauguration of the GMD, the oil firm published the audited report of its subsidiary for the first time. The development is seen by some stakeholders as a willingness by the corporation to become clear and credible with regards to information on revenue, assets and expenditure, which are the most basic requirements of regulatory excellence. Also, for a company struggling with public trust, stakeholders said the move may engender public confidence and trust, because addressing the perception of corruption is critical.

Commenting on the recent release of the audited report, Kaduna State Governor, Nasir El-Rufai said the current GMD’s time may change the fortunes of the NNPC and indeed, Nigeria. He noted that Kyari appears to have been busy plugging leakages and repositioning the Corporation for transparency and accountability.

NEITI, which had canvassed openness in NNPC stated, “Given NNPC’s antecedents and its prominent role in the sector and in the country, the publication of its audited accounts is positive, signaling more openness for the oil and gas sector and for Nigeria. When combined with the monthly reports that NNPC started publishing in 2016, this development marks a sea-change for a national oil company that used to be renowned for opacity.”

Beyond The Reports

The ability of the corporation to sustain the current efforts has, however, remained a concern for stakeholders, who insist that transparency and information disclosure must move beyond financial disclosures to sustainability and how the company is contributing to the attainment of the Sustainable Development Goals across sectors, especially at a time oil companies globally are considering their profile as energy concerns.

Similarly, Professor of Energy Economics and Policy Research and Director, Energy Information Division, Centre for Energy Studies, Wunmi Iledare, noted that the company must find a way to deal with the cost centres that are highly subsidised by other business units. “The refineries represent one of those cost centres that need to be revamped. I still don’t believe they should be sold; but that is a discussion for another time.

“There are also a lot of administrative burdens on NNPC that impair its ability to operate as a profitable commercial enterprise. To a large extent, its agency role as the last resort for energy security and policy adviser come with cost impacting its cash surplus, if any. A good example is NNPC having to be sole importer of PMS in 2018 with a significant under-recovery. Unfortunately, politics dominated with Esau syndrome trumps economics arguments more often than not, worldwide,” he noted.

Another energy expert with the Facility for Oil Sector Transparency (FOSTER), Michael Faniran said, “the reports have validated the calls by stakeholders for NNPC to exit or restructure its loss-making enterprise outlook, most especially the refineries. The huge annual losses from these special business units (SBUs) erode the profits made by the other profitable subsidiaries.”

Faniran noted that there appears to be no audited accounts for the Central Headquarters (CHQ), where the Crude Oil Marketing Department (COMD) is located, which according to NNPC Monthly Financial and Operational Report for December 2018, accounted for N158.64 billion or nearly 45 per cent of the total losses of N355.62 billion incurred by all NNPC subsidiaries and units.

On his part, Prof. Adeola Adenikinju of the University of Ibadan advised that NNPC and government should be concerned with the losses from the refineries since NNPC now deducts its expenses upfront for supply of petroleum products to the domestic market. Though he noted that the current GMD, Mele Kyari and his team must be commended for continuing in the steps of his predecessor to make operations more transparent.

Tackling Losses

In the first-ever audited report, NNPC revealed that it posted over N1.01 trillion profit from its venture marketing subsidiary, National Petroleum Investment Management Services (NAPIMS), but recorded over N154 billion losses from its refineries’ operations for the 2018 financial year.

Being a perennial loss-making entity, the refineries recorded combined losses of N154 billion, while the production arm, Nigerian Petroleum Development Company (NPDC), recorded an after-tax profit of N179 billion for 2018 as against N157 billion in 2017.

Considering the performance of the subsidiaries, with some entities repeatedly making losses, some stakeholders view the decision to shut down the nation’s refineries as a step in the right direction pending when they are fixed.

Like many other industry players, Chief Executive Officer, Mudiame International Limited and Mudiame Welding Institute Limited, Sunny Eromosele, argued that leaving the refineries in private hands remained a viable solution for the refineries. While observing that the lingering challenge was solvable, he added that keeping the assets in government’s care would limit the need to diversify the economy from the oil sector.

Last year, the corporation embarked on rehabilitation of the refineries, beginning with the Port Harcourt refinery. According to the Group Managing Director, Mele Kyari, the corporation would not be involved in the management of the refineries after their rehabilitation. To him, on completion of exercise, the services of a company would be procured to manage the plants on an Operations and Maintenance (O & M) basis.

Stakeholders are of the view that with the country’s inability to fix the assets for over two decades, and considering the current economic realities, exiting subsidy and deregulating the nation’s downstream sector, would help address some of the lingering challenges, especially those facing the refineries.

In an interaction with journalists, Kyari admitted that most areas of the national economic framework were deeply connected to the oil and gas industry. He stressed that the industry is an enabler, a critical segment of the economy.

“The Banking sector will practically be meaningless or probably be inactive without the activities of the oil & gas industry. Many of the banks today are over-leveraged by oil & gas companies that if today, for instance, the oil and gas companies crash, the entire banking sector will come to a halt. About 60 percent of all debts in the banking sector are actually debts in the oil & gas industry. So, you can see the enormity of the leverage of this industry.

“It is an industry we need to pay attention to and ensure it works well for the good of all. We can’t see a post oil environment at the moment. People say that oil will become irrelevant soon, but the best of forecast I have seen oil being with significant contributions to the energy mix will be even up to 2050 and at least 70 percent of the energy mix will come from oil & gas. So, it will remain a relevant element in everything we do for long,” he said.

Kyari noted that the Coronavirus (COVID-19) pandemic had caused enormous distortions to economies across the world.

He said: “What we have today is a recovery that nobody can tell you when it would end. When economies crash, recoveries can take long period. It can crash in two months and probably require two years to come back. Countries are recovering gradually. People are going back to work. Economies are reopening. In all of these, it will be tough for many economies, including ours. The Minister of Finance has said that Nigeria is already heading towards another recession. There is no better way of describing recession than saying that we have less money coming in, more things to do and you are unable to afford what you want to do.

“What that means in terms of government revenue is declining inflow. The 2020 Budget was initially premised on $57 to the barrel because that was done since 2019 as nobody saw this coming and by the third week of March, it became obvious that the benchmark was not sustainable. So, we rebased our budget to $30 to a barrel. That is the average for the year. We are still talking to the National Assembly to rebase this. We have seen a potential of rebasing it further even to $25 to the barrel. What that means in terms of revenue flow is that you will see a number of changes to realities. Businesses will have to readjust, costs have to be reduced, expectations have to come down and ultimately, we do need to focus on the basics to survive all through this period.”

To respond to these challenges, cut cost and engender profitability, Kyari said the NNPC has to shut down some assets as part of steps to ensure that the country benefits and the oil industry becomes a profitable business for Nigerians, and not just for a fragment of the society committed to frustrating the management’s efforts.

Combating Crude Oil Theft

The Corporation had admitted monumental stealing of about 30 per cent of its crude oil, particularly from Atlas Cove to Ilorin and also up to about 50 per cent on the line from Port –Harcourt into Aba and up to 60 per cent from Aba to Enugu.

Kyari stated that a number of steps were being deployed, engaging with partners particularly security agencies, to combat the losses, particularly on the Atlas Cove-Mosinmi line to less than 5 per cent.

“This is very monumental, it has never happened. But this also won’t have happened if we did not have the support of security agencies with a clear directive from the President to bring a stop to the situation and get it down to the barest minimum.

“However, there are still issues. We still have up to about 71 per cent of crude oil pipeline breaches this year alone, and losses in the excess of $48million compared to from about $755million of losses in 2019. It is a magnificent change. The efforts are paying off,” he said.

Gas To Power

Kyari disclosed that government was focusing on gas to power because gas brings development. “It is the biggest enabler. Oil brings cash but gas brings national development in the sense that if you can get power, you can get industries and other things built around gas, which will ultimately lead to national development. So, we focus on delivering a number of projects.

“Gas delivery to the western axis all the way into Lagos and across to the West African sub-region. The quantity of gas supplied there is not sufficient. What we are doing now is the combination of the expansion of the Escravos-Lagos Pipelines (ELPS) line and the OBB3 to have additional billions of standard cubic feet of gas into our network and the result will be an explosion. What kept us from not realising this was to cross the River Niger with pipeline. Two or three previous attempts failed but finally we have gotten a solution. I can assure you that by the end of this month, we will cross the River Niger and that will kick in about one billion standard cubic feet of gas, which will also enable the Trans-Nigeria pipeline from Obiobem all the way to Kano, called Abuja-Kaduna-Kano AKK pipeline. This is an extension of that line from Ajaokuta to Kano.”

According to the NNPC boss, the project will open the possibility of increasing the supply into the ELPS line. “We have gotten a financial closure; we have started the project on our own, and we have moved pipes to locations. Probably by middle of 2022, our target is for the completion of the AKK pipeline. We hope the ELPs and OB3 line will be commissioned and once we do that, we will see the effect on our National schedule; not just to power because this gas can give you gas to industries and also dedicated supplies into industries so that they can upgrade and power themselves. The result will be obvious because we have seen this work in Ikeja area, in Ogun state and the scale of development this has brought is massive. Gas is Power and we are very determined to make sure we deliver on this.”

Kyari revealed that the country has 33 gas-powered plants with installed generation capacity of about 9,764 MW and available generation capacity of up to 5,352 MW. “The contracted gas to be paid for is about 1,499 million SCF per day. What this means is that we have gas-powered plants that cannot take gas because of constraints along the transmission and distribution lines. But we are creating the corridor for most of our gas pipelines in partnership with some investors.”

Culled from Guardian Newspaper

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