The much-maligned national oil company, the Nigerian National Petroleum Corporation (NNPC), may be punching way below its weight, but Aso Rock shares the bulk of the blame for its subpar performance.
To illustrate, in its 2019 financial statement, the NNPC cut its losses by a massive 99.70 percent from N803 billion in 2018 to N1.70 billion in 2019 and for the first time in its 43-year history, five subsidiaries recorded over 15 percent increase in profits.
The significance of this feat becomes clearer when compared with the performance of its peers. In 2019, Saudi Arabia’s state oil giant Aramco saw profits dip by almost 21 percent. It posted a net profit of 330.69 billion Saudi riyals ($88.11 billion) after zakat and tax in the period ended Dec. 31, down from 416.52 billion riyals a year earlier.
Multinational oil companies also struggled that year. Profits at Royal Dutch Shell almost halved in the fourth quarter of 2019. Earnings for the period stood at $2.9bn, down 48 percent compared with $5.7bn in the same four months of 2018. Full-year earnings were also down, dropping by 23percent from $21.4bn in 2018 to $16.5bn.
Exxon Mobil reported a year-end net profit of $14.3 billion versus $20.8 billion in 2018. Though the decline was largely a result of more spending on driving oil-production from Guyana and West Texas’ Permian Basin, where Exxon is the most active driller.
Even Norway’s well-run national oil company, Equinor’s adjusted earnings before interest and tax fell to $3.55 billion in the fourth quarter from $4.39 billion in the same period of 2018.
So in a year when multinationals and many national oil companies struggled, NNPC reported a record profit. But this is where things sour for the corporation. That year, it spent over N1.7trillion as subsidies for petrol.
The NNPC was projected to invest US$5.3bn as capital expenditure into the upstream projects between 2018 and 2020 but NNPC is often so broke that it had to use future oil production to finance capital spending.
However, Aramco’s capital expenditure in 2019 was $32.8 billion, compared to $35.1 billion in 2018, and planned to spend between $25 billion and $30 billion the next year to assuage market conditions and commodity price volatility.
Equinor’s capital expenditure was $10.0 billion for 2019 and it further budgeted 1.4billion for exploration activity the next year. In the last few years, Equinor has substantially strengthened its competitiveness and improved its project portfolio.
Equinor has ambitious plans to achieve improvements with a cash flow effect of more than $3 billion from 2020 to 2025 through digital solutions and new ways of working. Equinor delivered an industry-leading unit production cost of USD 5.3 per barrel in 2019 and is targeting a 5percent improvement towards 2021.
But the NNPC Group and its subsidiary the National Petroleum Investment Services (NAPIMS) are so focused on returning cash to Nigerian governments and agencies through the Consolidated Revenue Fund and the Federal Accounts Allocation Committee (FAAC), at the expense of dedicating enough resources to grow.
Analysts say this is partly because the NNPC group does not have a clear capital investment and dividend policy and also because the government is so dependent on oil revenues. This removes any incentive to improve efficiency.
The clearest evidence of this is seen in the corporation’s inability to repay its cash call arrears (operating and capital expenditure) to international oil companies which accumulated because NAPIMS paid too much money to FAAC and not enough was set aside to pay its share of contributions to joint venture operations.
Nigeria announced exit from cash call arrears in January 2017, a debt burden that rose to $6.7bn according to NNPC data, by reaching an agreement with IOCs to trim down the amount to $5.1bn knocking off $1.6bn. By the terms of the agreement, Nigeria was to repay the balance in five years.
Four years later, the NNPC has only paid $1.5billion even after the initial $5.1bn has been further trimmed down to $4.6bn.
“They have literally killed the cow that is providing the milk,” one analyst said. “If you can’t pay your cash call debt, how are JV partners supposed to be encouraged to invest in increasing production?” This is a key reason why JV partners are unwilling to invest in new projects.
Mele Kyari, the NNPC GMD tried to unilaterally impose a dividend policy last year, promising a dividend of $500M to the Federal Government but he missed that target and there was no consequence.
This is also replicated in the subsidiaries. For example, NAPIMS has an annual budget of what it should remit to FAAC as profit, similar to what other NOCs return as dividend but there are no consequences for missing the target hence no incentive to hit it.
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The biggest evidence of their lack of incentives to increase efficiency is the corporate headquarter operating costs by NNPC Group which analysts say is too high and the deductions by NAPIMS on things like security and pipeline maintenance cost (which have been halted for now).
This is not what obtains in other climes. In an Aramco or Petronas, your ability to rise through the ranks and become a senior leader is dependent on increasing efficiency and hitting commercial targets. In NNPC, promotion is through turns after taking exams. There is no performance management which forces managers to increase efficiency.
The NNPC has had 20 GMDs in 43 years, a rough average tenure of 2 years. In contrast, Malaysia last year appointed the fifth president of its national oil company Petronas founded three years before the NNPC.
“NNPC’s corporate governance structure must also be restructured to reduce political interference in its operations,” said Ayodele Oni, energy lawyer, and partner at Bloomfield law firm.
This has particularly affected the recruitment to top management positions in the NNPC which has affected the consistency of its commercial policies and otherwise, Oni said.
To correct these anomalies, the energy lawyer said there needs to be a clear delineation of regulatory functions from commercial operations for the NNPC.
“As a national oil company, NNPC needs to be well-positioned to focus solely on commercial oil and gas operations,” said Oni.
Some analysts say the corporation should set out a clear capital investment and dividend policy approved by its Board and set clear targets for both the NNPC Group and NAPIMS.
These policies should take into consideration the growth aspirations of NNPC and its subsidiaries and implement a performance management framework for career progression that depends on hitting financial targets and not on tenure at the company, analysts say.
NNPC is currently struggling under the weight of the outsized role it is expected to play in the economy, hemorrhaging over N120billion monthly on subsidies.
Kyari told Nigerians that it is impractical to expect the state-owned corporation to remit full crude oil receipts when it is expected to use the same money to fund subsidies and other costs.
“You cannot eat your cake and have it, if you demand we sell below market price, there is a cost to it and someone will pay for it,” he said.
Kyari said that every year, the national assembly passes appropriations that require the NNPC to fund activities that are not commercial for example laying a pipeline to a location where there is no market.
This could be part of the government’s strategic decision to attract investment in that area but to the extent that there is no activity at the time, the investments made there by the NNPC would not yield returns and reduce the corporation’s remittance to the government.
“You cannot invest in things like this and ask the NNPC to charge it as a first-line charge and then expect the NNPC to remit full cost to the Federation,” the GMD said.
