July 31, (THEWILL) – Politics is in the air and Nigerians are currently swayed by the ongoing electoral processes leading to the 2023 general elections. How far their focus on politics matters would go in the next few months is uncertain as the bad news of the economy is gradually creeping rudely into the public domain courtesy of the sudden rise in the Naira/Dollar exchange rate, increase in petrol price with their trickle down impact on the economy and welfare of the people, courtesy of the non-remittance of crude oil sales to the Federation Account by the Nigeria National Petroleum Corporation, NNPC, in the past seven months.
As the traditional cash cow that kept the Nigerian economy running with billions of remittances from crude oil sales for many years, the rebranding of NNPC as a limited liability company last week by the Federal Government has kept many alert to what changes that the new status will bring.
“The transitioning of the NNPC to a limited liability company is a laudable move. It would unlock the enormous value in our oil and gas sector for the benefit of the Nigerian economy and its citizens. The assets available to the NNPC are awesome. With the right business model, the returns on investment will be phenomenal,” the CEO, Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, told THEWILL last Friday.
Yusuf, who was a one-time Director-General of the Lagos Chamber of Commerce and Industry, LCCI, lauded the transitioning of the NNPC to a limited liability company, saying it would unlock the enormous value in the nation’s oil and gas sector for the benefit of the Nigerian economy and its citizens. He, however, noted that the success of the company would depend on the extent to which the NNPC is decoupled from the political leadership and the bureaucrats.
According to Yusuf, “The business model must be such that it will decouple the company from political interference and meddling by the bureaucracy. The management must be independent and professional. Overtime, there should be a dilution of ownership and the company should be listed on both the domestic and international stock markets. This is imperative to alter the ownership structure and foster good corporate governance.”
Other experts have identified several ways of achieving the objectives of the new NNPC structure and steering the system away from the old order.
Dr. Nnaemeka Obiaraeri, Managing Director/CEO, Taurus Oil and Gas Limited, a firm with expertise in finance and global oil and gas, advocates quick and total unbundling of NNPC to eliminate direct government control and involvement to the barest minimum. Obiaraeri told this newspaper that the government is holding huge assets that need to be disposed of to generate funds and also pave ways to minimise state control of the nation’s oil company.
NEW NNPC
President Muhammadu Buhari on July 19, 2022 performed the historic unveiling of the New Nigerian National Petroleum Company (NNPC) Limited.
Coming after the nation’s oil company had towed the path of poor corporate governance, Nigerians were eager to see a truly new entity after 45 years of unmatched infamy: A break from the old order.
Over the years, the oil and gas sector, which contributes relatively less to total GDP (6.63 percent in Q1 2022), accounts for 95 percent of Nigeria’s foreign exchange earnings and about 80 percent of its budget revenues. With Nigeria ranked the sixth largest oil producer in the world, and blessed with the sweet, low-sulphur, top-grade Brent Crude variety, crude oil effectively remains the country’s economic livewire with NNPC as the husbandman.
IN THE BEGINNING
The old NNPC remained a cash cow for the Federal Government. Its statutory role, from the inception, was to manage the vast oil and gas resources of the country and generate money to boost the nation’s treasury with petrodollar. What happens to NNPC is felt in every aspect of the people’s lives, reflecting its old motto:
“We touch your lives in many positive ways”.
Consequently, when the global oil market sneezes, the domestic economy catches flu, with NNPC conveying the shocks that define the behavioural impact on the known economic agents – government, firms and households.
As a rule, every month, the three tiers of government look forward to the Federation Accounts Allocation Committee (FAAC) meeting. Bowls in hand, they converge on Abuja to share the national cake baked with proceeds from the crude sales as the main ingredient – supplied by NNPC. The quantity of the ingredient determines the size of the cake and what each beneficiary gets and defines their woes as the case may be. Not anymore with the new status.
A simple way to understand the depth of trouble in which the Nigerian economy is currently immersed, is by looking at what has happened to its critical source of revenue since the beginning of the year. For five consecutive months, the ‘old’ NNPC made zero remittance to FAAC as at May 2022. This anomaly was as a result of the huge sum of money spent in the payment of petrol subsidy, a widely discredited fraudulent federal government program, which has eroded the gains of the firm, and it gets worse by the day.
The national oil company disclosed in its monthly presentation to FAAC on Wednesday June 22 that the subsidy claims eroded the gains it had recorded. According to NNPC, which is struggling to generate enough revenue to cover the soaring cost of subsidising the product, the nation incurred an estimated petrol subsidy of N2.1 trillion in the first six months of this year. This explains the paradox of a failure to benefit from the spike in global oil prices amid supply shortages. It also points to clearly difficult times for a hemorrhaging economy in the grips of stifling fiscal policies.
For instance, the Federal Government, which had initially budgeted to spend N443 billion on petrol subsidy between January and June, got the approval of the National Assembly in April to raise the subsidy amount to N4 trillion for the year. The World Bank had in its latest Nigeria Development update reported that “due to the petrol subsidy and low oil production, Nigeria faces a potential fiscal time bomb.”
This may escalate the 2022 fiscal deficit beyond N10 trillion. With the nation’s debt stock hitting N41.6 trillion as at Q1 2022, there were fears that the nation might be using about 100 percent of its revenue to service debts. This leaves a meagre revenue for capital and other recurrent expenditures and worsens the fiscal challenges by the day, thus underscoring the fears that the country might become really broke and unable to meet its obligations.
WHERE WE ARE
Speaking in Abuja at the public consultation to the draft 2023-2025 Medium-Term Fiscal Expenditure/Fiscal Strategy Paper, which officially commenced preparation for the 2023 budget, the Minister of Finance, Budget and National Planning, Zainab Ahmed, said on Thursday, July 21, that the economy was heading to a difficult course.
According to Ahmed, for the full-year 2022, oil revenues were projected at N9.37 trillion, but just 39 percent of the projected N3.12 trillion for April-January was realised.
Absorbing this ‘mess’ is a great trouble for NNPC which already absorbs the greed, corruption, mismanagement and inefficiency which the political space symbolises. For instance, the refineries spend billions of naira on salaries, wages and other benefits to workers despite producing no refined product in recent years.
The Port Harcourt refinery reported no income in 2020 but incurred administrative expenses of N19.22 billion, according to its audited reports. The refinery employed 487 new staff members in 2020. Its directors received N99.75 million as emoluments in 2020, a 67 percent increase from N59.66 million in 2019.
The workers, among the highest paid in the country, earn their salaries, promotions, allowances and go on local and foreign training while the facilities are idle. The government in 2021 earmarked about $3 billion to fix the refineries: $1.5 billion for the repairs of the Port Harcourt Refinery, while $897.6 million and $586.9 million were approved for Warri and Kaduna Refineries respectively.
Still, the Minister of State for Petroleum, Timipre Sylva, had said that the incoming government would continue from where this administration stopped in fixing the refineries “because government is continuum”.
NEW NNPC TO THE RESCUE
In due course, the Petroleum Industry Act was enacted to give legal teeth to the creation of the NNPC Limited which means abandoning the establishment’s old ways for a new route on the Commercialisation Expressway. The new NNPC has therefore been described as a child of the Petroleum Industry Act, passed into law in 2021. The Corporate Affairs Commission, in September 2021, completed the incorporation of the new company which makes NNPC a Company and Allied Matters Act (CAMA) organisation.
Below are 10 important facts about the new NNPC Ltd:
1. Section 53(1) of the PIA 2021 requires the Minister of Petroleum Resources to cause the incorporation of the NNPC Limited within six months of the enactment of the Act in consultation with the Minister of Finance on the nominal shares of the company.
2. What this means is that with the transition, the government will no longer have control over the staffing of the NNPC.
3. Section 53 (5) of the Act stipulates that shares of the company held by the government are not transferable or mortgaged unless approved by the government and the National Economic Council.
4. With the NNPC Limited coming on board, the new company will not concern itself with issues of petrol price determination, and subsidy.
5. The new NNPC will no longer remit into the Federal Account Allocation Committee. This invariably means no more money to be shared by state governors.
6. Sector 54(9) provides that the initial capitalisation of the NNPC Limited will not be less than its financial requirements to effectively discharge its commercial duties and deal with its obligations and liabilities transferred to it.
7. Following the transition of the NNPC Ltd to a commercial entity, it is believed the Federal Government will put an end to funding the oil firm’s projects as was obtainable since it was established in 1977.
8. The PIA also mandates the NNPC Ltd to conduct its affairs on a commercial basis in line with the Companies and Allied Matters Act. According to the law, the company will run on a commercial basis in a profitable and efficient manner without recourse to government funds. It shall declare dividends to shareholders and retain 20 percent of profits as retained earnings to grow its business.
9. Apart from profit-seeking, NNPC Limited is expected to operate above board by mandatorily making disclosures for every financial year.
10. It is expected that NNPC Limited may decide to go public later in future. The NNPC Ltd management has indicated that the firm will go public in the middle of 2023.
What has happened to the NNPC is commercialisation, not privatisation. NNPC still remains in the public sector. The only difference is that as a commercial entity, it will now have to pay more attention to its profit and cost centres and take appropriate decisions purely on a commercial basis.
While the New NNPC may still have a relationship with the government, the same government can no longer have control over the staffing of the NNPC, and control of the Minister of Petroleum will be limited. As a commercial entity, the NNPC is responsible to its shareholders while competence, quality will determine recruitment.
What this means is that the old practice of anyone in government sending notes for NNPC allocation or employment would be untenable under the new arrangement. The influence of rent collectors would be watered down, if not completely eliminated. It also means that the country can no longer depend mainly on NNPC for Federation Accounts returns (FAAC). The Federal Government would be entitled strictly to returns on its shares.
Moreover, the New NNPC is owned by 200 million Nigerians holding 1,000 shares each at N1 per share. This translates to N200 billion – which is the initial share capital registered in the Corporate Affairs Commission in line with CAMA. The shares are held in trust by the Ministry of Finance Incorporated (MoFI) and the Nigerian Treasury both holding 50 percent each.
WHAT HAS CHANGED?
Most Nigerians are still confused about the ‘Old’ and ‘New’ NNPC, as they asked to know what really has changed. Others demand to see the practicability of the commercialisation of NNPC as a profit-oriented outfit, in the light of the existing structure of the firm. There are deep-rooted challenges with the subsidiaries that cannot easily be addressed with the current framework.
The NNPC Limited says it will send debit and credit notes for services rendered to demonstrate its own accountability. What will NNPC Ltd do if the government fails to pay? Who will the shareholders hold responsible?
Experts believe that New NNPC would not make any profit in the next three years with the current structure and workforce. Moreover, all the loss-making subsidiaries of NNPC Limited and its leadership remain intact. Data from Statisense, a data consulting firm showed that the NNPC has 23 subsidiaries running businesses in both Nigeria and Europe, with some of them founded in island countries.
These loss-making subsidiaries are still in “operation”. While the title of Mele Kyari has been changed from Group Managing Director to Group Chief Executive, the board of the subsidiaries appointed by the Federal Government remains intact. The transition exercise has further revealed the lopsided nature of the appointment of top executives of the old NNPC to the exclusion of the oil bearing Niger Delta.
Experts have raised concerns about the company’s employee structure, high credit sales, high indebtedness, low revenues and low gross profit as factors likely to hinder the success of the company under the new arrangement. How will NNPC succeed as a commercial entity with an employee level employed on political considerations? Transiting from a political or civil servant culture with a nonchalant attitude to a business entity with profit culture is considered a tall ordeal for the new entity.
An executive of the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), Mr Victor Ononokpono, sees the transition of the NNPC to a limited liability entity as a welcome development. He observed, like Muda Yusuf, CEO of Centre for the Promotion of Private Enterprises (CPPE), that the benefits would take some time to fully manifest.
“It is a welcome development and a huge step towards evolving a truly national oil company that is commercially positioned to compete favourably amongst its contemporaries around the globe. It is, however, going to be a gradual process. Don’t forget this is a Corporation that was structured and ran along a particular model for over 40 years since its creation in 1978. So you will expect a gradual unbundling of the various entities and strengthening of the administrative processes,” Ononokpono told THEWILL in a note.
He added, “A lot will change. It may appear a little bit slow but that is expected considering the legal obligations required of a limited liability company transiting from being a wholly State-owned entity to a public liability company with shareholders interest.
“Don’t forget about the plethora of Joint venture agreements with third parties – Assets and liabilities formalities and, of course, the remodelling of the 11 Small Business Units (SBU’s) which were not expressly assigned functions in the Petroleum Industry Act (PIA).
“The principal benefit for Nigerians is the repositioning of the corporation for profitability, which means more income for the nation, less wastage, and guaranteed premium services.”
An investment expert, and Vice-President at Planet Capital Limited, Paul Uzum, expressed concern over the possible impediments by the tardy structure of the old NNPC. He acknowledged the efforts to commence the repositioning of NNPC, but believed that not much has changed.
“The process has begun – making it profitable and independent of political strangulation. But fuel subsidy is still on. The government is still implementing price control on PMS; appointments into NNPC are still driven by political influence. So, the commercialisation is just in name, not in substance. With the current structure, nothing has changed and NNPC will hardly be profitable until you deregulate. For me, the best way out for NNPC is outright unbundling and privatisation of the units. Or better still, a Private sector-led Public Private partnership,” Uzum said.
Dr. Obiaraeri, who once worked for NNPC in the past, advised the Federal Government to model the New NNPC after the Saudi Aramco of Saudi Arabia, Petrobras of Brazil, Petronas of Malaysia and the ADNOC of Abu Dhabi to make the new NNPC work for the good of Nigerians.
He said: “Even South Africa and Angola have run their national oil companies successfully and profitably. Nigeria can emulate them and operate the New NNPC in the most professional manner.”
Obiaraeri wants a completely unbundled NNPC, reduced government’s holdings in the Joint Ventures, privatised refineries and deployment of effective steps to curb oil theft.
It is reported that the NNPC plans to disengage 500 employees with handsome severance packages as part of the transition process to a profit-making entity. NNPC Group General Manager, Public Affairs, Garba Deen Mohammed, did not respond to an enquiry sent to him by THEWILL on this report.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
