NNPC Limited – Old Wine New Bottle?

September 20, 2022

NNPC Limited – Old Wine New Bottle?

On the 19th of July 2022, Nigeria’s state-owned oil company, the Nigerian National Petroleum Company (NNPC), fully transitioned to a Limited Liability Company. The NNPC has spent decades preparing for its transition to a fully independent and commercialized entity, which, on paper, should place it in the same category as several other multinational state-owned oil corporations such as Petronas of Malaysia, Petrobras of Brazil and Saudi Arabia’s ARAMCO.

Examining the historical context is crucial at this juncture to fully grasp the significance of this transition. The NNPC was founded in 1977 by Decree 33 which merged the Nigerian National Oil Corporation (NNOC) and the Federal Ministry of Mines and Steel. Its mandate was to manage all government interests in the Oil & gas industry on behalf of the Federal Government of Nigeria. Its decision-making was always subject to the approval of the Federal Executive Council (FEC). The transition to NNPC Limited (Ltd) is a direct consequence of oil industry reform in line with the provisions of Section 53 of the Petroleum Industry Act (PIA). The PIA was enacted in August 2021 after over a decade of political wrangling and an estimated $50bn in lost investment. The Act restructured the governance and administration of the oil industry, implemented a more progressive fiscal structure that prioritises royalties over profits, and enhanced the terms of engagement for host communities.

In September 2021, NNPC Ltd was incorporated with a share capital of ₦200 billion. It will no longer remit funds into the Federation Account as it is now obligated to pay taxes and royalties to the Federal Government in line with the Companies Income Tax Act (CAMA), 2004 and dividends to its shareholders (Ministry of Finance [50%] and the Ministry of Petroleum [50%]). Crucially, the NNPC will retain 20% of profits after paying dividend and 30% (of profits) to the frontier fund. By implication, we expect lower oil revenues to accrue to the federation account in the near term. While this will have varying degrees of impact on the fiscal positions of different sub-nationals, it could re-ignite the “restructuring” argument as the three tiers of government are likely to seek more innovative ways to generate revenues internally and bridge the shortfall.

Unshackled but Subsidy question still hovering

With its new status, NNPC Ltd is now repositioned as a profit-driven establishment, free from the old bureaucracy associated with the public sector, which should quicken its internal processes, leading to greater flexibility and efficiency. It will also no longer be subject to the institutional obligations of the Public Procurement Act (PPA) and Fiscal Responsibility Act (FRA). It will not be concerned with issues bordering on the determination of petrol pricing and subsidy. This is worthy of note as the company’s transition to a commercial entity is crucially dependent on a shift to market-based petrol pricing. Coincidentally, an upward adjustment of petrol prices (from the government-approved price of ₦165 per litre to ₦170-₦190 per litre) was enforced across the country by petroleum marketers just as the unveiling was concluded. This is purportedly due to rising diesel prices, which have raised logistics costs. While the government has distanced itself from the price adjustment, its failure to clamp down on the marketers could be indicative of its willingness to commence the gradual removal of petrol subsidies.

What does this mean for funding?

NNPC Ltd will no longer be reliant on government spending and will be completely responsible for its own Joint Venture (JV) cash calls (previously the responsibility of the FG) and will need to become innovative with how it positions itself for capital. We expect to see the use of incorporated Joint Ventures (IJVs) to fund its operations which will give it better flexibility – with carry arrangements or funding and technical services agreements (FTSA). This improved flexibility also creates financing opportunities for private sector lenders. NNPC Ltd has already secured a $5bn corporate finance commitment from the African Export-Import Bank to fund major investments in Nigeria’s Upstream sector.

How does NNPC become as well-run as its global peers?

The end game is to be as profitable as oil giant Saudi ARAMCO. An entire staff overhaul could be imminent if that is to be achieved. The NNPC Group was notorious for its lack of transparency and inefficiency until 2019, when it published audited financial statements for the first time in 40 years. Reorienting employees with the high-quality business ethics, principles, practices and procedures obtainable in IOCs is no easy task. Barring a radical shift from the civil-service-like organizational culture, expecting different results from the same members of staff would be akin to putting old wine in a new bottle. While the government will no longer have control over the staffing of NNPC Ltd, the President is responsible for appointing “independent” members of the Board of Directors and the Group CEO/MD giving room to political meddling and calling into question the corporations supposed independence.

The proven success of the Nigerian Liquified Natural Gas (NLNG) model is illustrative of how an enterprise with equity stake by the state should operate. Shell operates NLNG, 49% of which is owned by the federal government via NNPC. Shell and other IOCs such as Total and Chevron are the minority shareholders, but it provides the majority of the management staff and the chief executive officer, ensuring that their business principles and practices are adhered to. The company has continued to post profits and remains one of the best investment decisions made by the Nigerian government.

Now that all the employees have been transferred to the new organization, we expect that a skill-gap assessment will be conducted to determine the extent of existing gaps and how to bridge them. The options available include enhancing the skill sets of current staff, hiring new staff, and partnering with companies that already possess the necessary technical skill set. This is particularly crucial in the area of renewable energy where the organization has little track record or expertise and hopes to delve into in the coming years as the global energy transition to green energy intensifies.

Push for Renewables

As part of a push for a greener portfolio, some IOCs, such as Shell, have been divesting from Nigeria by disposing their on-shore assets. As the JV partner of IOCs, NNPC Ltd is well positioned to acquire their assets as they exit onshore oil fields. This indicates that NNPC Ltd may be in competition with other indigenous oil producers to acquire these assets even as we expect more divestments in the future. How it could plausibly play the role of both JV partner and competitor remains to be seen.

Any decarbonization plan, which is crucial to attracting long-term foreign investment, is still unclear at this point. In addition, the near-industrial scale of oil theft and vandalism, which has seen Nigeria’s oil output decline steadily by 23.4%, from 1.41 million barrels per day (mbpd) in January to 1.08mbpd in July 2022, casts doubt on the optimism regarding the performance of NNPC Ltd.

NNPC Ltd faces an uphill battle to convince Nigerians and the rest of the world that this is more than just an effort at rebranding. As with numerous economic reforms in Nigeria that should have occurred decades earlier, it is hoped that this transition has not come too little too late.

 

 

 

 

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