How can NNPC Limited succeed?

On the 19th of July, President Buhari and the Abuja political big boys unveiled the Nigerian National Petroleum Corporation Limited (NNPC Limited).

While some of us were hating from outside the club, the unveiling was awash with the typical “standing on existing protocols” and fanfare you would expect from a government party. In fact, the junior minister for petroleum said the unveiling gave him “goosebumps” (don’t ask me) and that it was a new dawn for Nigeria. 

How so? Well, in the president’s words (who is also the minister for petroleum), “NNPC Limited will operate as a commercial, independent and viable national oil company (NOC) at par with its peers around the world, to sustainably deliver value to its over 200 million shareholders and the global energy community, while adhering to its fundamental corporate values of integrity, excellence and sustainability”.

It’s a mouthful, but the president essentially said that NNPC Limited would focus on maximising its shareholders' value while keeping up with corporate governance standards. While its sole shareholder is still the government, we’re all indirect shareholders because the government’s revenue should ultimately be for the citizens’ benefit. If NNPC Limited makes a profit, the government earns more revenue from oil, and we all benefit through better schools, healthcare, roads, civil service salaries, etc.

But what does success look like for NNPC Limited? While the president’s words might indicate that the company’s success is already a foregone conclusion, I’m sceptical. The old NNPC was basically the government’s purse taking on government expenses like subsidies which eroded the company’s profits. Its business practices were also very opaque until 2019 when the company published audited reports for the first time in over 40 years.  Even though old things have passed away and all things have become new with NNPC Limited, how can we be sure that the inefficient business practices and weak corporate governance of the old NNPC will not linger?

According to Humphrey Onyeukwu, an oil and gas corporate lawyer, success in the short term (six months to a year) would mean NNPC Limited’s ability to transition from a public corporation to a commercial entity. This would entail instituting sound corporate governance principles, hiring the right people, strong decision making and other critical pillars for it to compete locally and internationally. This also includes weaning it off the stranglehold of government and politicians known to influence hiring and management decisions in the company. 

So, what are NNPC Limited’s chances of achieving this short-term success characterised by maximised shareholder returns, better corporate governance and independence from government control? Answering this question will require a quick peek at the Petroleum Industry Act (PIA), which sets the rules for NNPC Limited. We also need to understand what NNPC Limited needs to do to achieve this short-term success and the obstacles that stand in its way.

After this, we’ll know whether or not we should share the president’s optimism.

As it was pre-ordained in the PIA

The PIA is a framework that guides the petroleum industry in Nigeria and was signed in August last year. When it was still a bill (pretty much the same content, but it hadn't been signed), Stears analysed it to gauge whether the PIA would fulfil its primary purpose—make Nigeria’s oil and gas sector attractive to investors again. Our verdict was that it was too little, too late.

It was already too late in 2021, and the government’s slow, back-and-forth mode of implementation now certainly isn’t helping. For instance, the PIA states that the downstream sector should be deregulated, which means subsidy removals. But we're still dealing with the subsidy issue almost a year after the PIA was signed. Anyway, what does the PIA say about NNPC Limited?

We’ll pick out three key points in the PIA that tell us what we can expect from NNPC Limited. Then in the subsequent section, we’ll analyse these points to understand what effective implementation should look like.

Upon incorporation, NNPC Limited ceases to be a government corporation and is now a limited liability company under the Corporate and Allied Matters Act (CAMA). This means it’s supposed to operate like every other private company in Nigeria without recourse to public funds. In the past, the government has been known to borrow from the NNPC’s accounts. But now, the NNPC Limited is supposed to run efficiently and maximise returns to the government as its primary shareholder. This means no more government borrowing; NNPC Limited will pay taxes, dividends and royalties like every other profitable company in Nigeria. The difference is that it is still the national oil company, so everything it does should be in the government's best interests as directed by the board. 

There’s indeed no assurance that the government’s interests are the same as the citizen’s. That’s why NNPC Limited’s independence is key, with the board deciding how the company should be managed to maximise returns.

Another critical factor for NNPC Limited is that the PIA states that within 18 months of the Act, the ministers of petroleum and finance will guide the transfer of the old NNPC’s assets, interests and liabilities to NNPC Limited. However, any assets, liabilities and interests that don’t get transferred will end up being the government’s property. But, the assets, liabilities and interests that end up being transferred will significantly impact the company’s success, which is essential.

Lastly, the PIA states that NNPC Limited will follow corporate governance rules and guidelines. This means having a knowledgeable and effective board to steer the company in the right direction, releasing annual audit reports, and setting up board sub-committees to guide the company. But all this ultimately depends on the board members, i.e. their level of experience, education and integrity.

We’ve just set out the three metrics for judging the success of NNPC Limited—its ability to maximise profits, the transfer of assets, and the composition of its board. This framework will guide the rest of the conversation as we analyse the potential success of NNPC Limited.

So, based on these three key metrics, what are NNPC Limited’s chances of success?

Teaching an old dog new tricks

First, NNPC Limited is supposed to be a profit-maximising company, which requires independence from the government—petrol subsidy; I’m looking at you. Maximising profits means maximising revenues and keeping costs low. As of 2019, NNPC’s costs made up 85% of its revenues, and the petrol subsidy made up 72% of its costs.

If you think 2019 figures are alarming, 2022 figures will be much worse. The subsidy is equal to the difference between the pump price of petrol (₦175) and the global market price. With high oil prices above $100/barrel and the high cost of refining globally, the market price of petrol in Nigeria should be close to ₦400. So, subsidy costs are a lot higher this year. The IMF estimates that Nigeria will need about ₦6 trillion in subsidies. Remember that this isn’t just the cost of petrol; it’s also the cost of the foreign currency since petrol imports are priced in dollars. So, we’re spending expensive, scarce foreign exchange on the petrol subsidy. Unsurprisingly, NNPC hasn’t made remittances to the Federation Accounts Allocation Committee this year.

So far, the NNPC Limited CEO, Mele Kyari, has said that NNPC Limited will no longer remit to FAAC. This makes sense because NNPC is no longer a government corporation and will pay taxes and royalties to the federal government. These will eventually be paid to the FAAC accounts for salary payments and government spending. On the subsidy issue, Mr Kyari has been super vague on the details, and so far, nothing has changed—petrol in Nigeria is still subsidised. As we’ve established, the petrol subsidy is counter-intuitive to a profit-maximising NNPC Limited and is against the best interests of its direct and indirect shareholders.

Second, we need to know what assets, liabilities and interests have been transferred to NNPC Limited and which will stay with the Federal government. Kyari’s response to questions on NNPC Limited’s asset base has been that “very soon, all will be revealed”.  For Tola*, a former international oil company (IOC) executive, “we need to know if the Federations equity interest in OPLs/OMLs will be transferred”.

Oil prospecting licences (OPLs) and oil mining licences (OMLs) give producers the right to extract oil from specific oil locations. In the past, old NNPC had percentage interests for returns from every OPL or OML granted. We must know whether these interests are transferred to NNPC Limited to ensure the line between the federal government and NNPC Limited is clear and that there’s no government interference in the company’s affairs. The government could still influence NNPC Limited if the assets aren't transferred, given that these are income-generating assets. While the president has given his word on the independence of NNPC Limited, the proof will be in the pudding when all the relevant assets and interests are transferred to the company.

Finally, how much can we expect NNPC Limited to stick to corporate governance rules? This will be the true test of whether you can teach an old dog new tricks. Old NNPC was ridiculously opaque. One example most people can relate to is how nepotistic, political and inefficient recruitment at the company is. But they’re also not transparent with their operations. Their inefficiency was evident when they finally released audited financial reports for the first time in 2019. From billions of naira spent on non-functioning refineries to high costs, the reasons behind their 40-plus years of secrecy were revealed—it was a super-inefficient company.

We expect an entirely different outcome from NNPC Limited. For one, they have a board now that’s supposed to guide the company to be transparent, efficient and operate in line with ethical standards. Second, the PIA mandates that they release annual audited statements. But, their success on the first point depends on the board, a sentiment echoed by Humphrey Onyeukwu, a corporate oil and gas lawyer. The board composition seems to be driven by political factors, especially with a chairperson who, according to the presidential spokesperson, was picked to repay a kindness to the president. This doesn’t inspire confidence as the board plays a pivotal role in NNPC Limited’s success.

It also doesn’t help that the social contract between the people and the government is tenuous at best, leaving many Nigerians doubtful and suspicious about the government’s intentions for the company. 

The thing around NNPC limited’s neck

Two significant obstacles still leave us with doubts about NNPC Limited’s future success. One is the subsidy which is more like a noose around NNPC Limited’s neck. The second is the broken social contract, which requires much more proof than an unveiling party in Abuja to convince Nigerians that NNPC Limited means business.

This article focuses on short-term success for NNPC Limited, but the bar is much higher for a successful NNPC Limited. The long-term outlook is for NNPC Limited (like Saudi Aramco) to put out an initial public offering (IPO) and sell shares to the public, meaning that soon, you and I could be direct NNPC Shareholders. So, it’s in our best interests for the company to succeed.

While direct comparisons with Saudi Arabia’s Aramco are somewhat unrealistic, for Tola*, a former international oil company (IOC) executive, a successful NNPC Limited could look more like Petronas, Malaysia’s NOC. Petronas’ 2021 annual revenue of $55 billion is still worlds away from NNPC’s estimated $5 billion revenue, but it has a similar structure to Petronas. Petronas is also an ex-government corporation turned private limited company now solely owned by the Malaysian government, which also has a subsidy issue.

It’s still too soon to make a fair comparison between Petronas and NNPC, but we’ll keep watching and hopefully, NNPC Limited lives up to its full potential.

* name changed to protect the identity.