At a time when oil producers are flush with cash, Nigerians are going through tough economic conditions, validating calls for deep scrutiny of its national oil company, which has failed to turn the country’s oil and gas resources into maximum value for its people.
President Bola Tinubu, at his inauguration on May 29, said monetary policy needed a thorough housecleaning, but an analysis of the results of other national oil companies in comparison with the Nigerian National Petroleum Company Limited (NNPCL) indicate that this ‘housecleaning’ should not end at the Central Bank of Nigeria.
Last year, Saudi Aramco declared a profit of $160 billion, the largest ever recorded by a publicly traded firm, while the NNPCL couldn’t even remit enough of the proceeds of oil sales to fund the government’s budget.
Nigeria is Africa’s biggest oil producer with reserves standing at 37 billion barrels but produced an average of 1.5 million barrels daily last year. In contrast, Saudi Arabia, with 258 billion barrels of oil in reserve, pumped over 11.5 million barrels daily on average in 2022.
Nigeria’s African peers, Angola and Algeria, with only 9 billion and 12 billion barrels in reserves respectively, are trailing with average production of 1.1 million barrels daily. At Nigeria’s current production rate, its reserves could last for about 55 years, while Saudi Arabia has about 70 years to exhaust reserves that are five times Nigeria’s.
This means that Nigeria is not extracting enough value from its oil at a time when revenues are badly needed to shore up declining revenue and prop up a bruised currency. In the second quarter of this year, Saudi Aramco paid cash dividends worth $29.38 billion, with most of it going to the government. NNPCL’s books were bogged down by subsidies.
“The oil industry has been in a mess, with the Petroleum Industry Act (PIA) being the only bright spot in the last few years. From the oil subsidy to non-functional refineries, to oil theft and many others, the sector has not fulfilled its potential,” said Adewale-Smart Oyerinde, director-general of the Nigeria Employers’ Consultative Association.
The NNPCL, as the country’s oil firm, is at the centre of the chaos. Entrusted with 445,000 barrels of the country’s share of oil output from various contracts with local and international oil partners, the company has over the years turned to swapping crude for refined products because it could not maintain its refineries.
When the company began the opaque oil swaps in 2010, its refineries were working at only around 20 percent of capacity. The next year, banks unwilling to finance more open account imports that were at a deficit of over $3 billion forced the government to start granting waivers to marketers, ushering in the era of fraudulent petrol subsidies.
In the eight years of President Muhammadu Buhari, Nigeria burnt over N11 trillion on subsidies, according to government data, enough to build and equip another refinery. Though the NNPCL claimed it has spent billions of naira refurbishing its decrepit refineries, they produce nothing and record billions of naira in personnel payment.
The government has said the Port Harcourt refineries would start producing in December; even if it happens, inadequate crude output poses a threat. Already, NNPCL has pledged 67 percent of its share of oil production in the Dangote Refinery, which could challenge other local refineries. Unless production gets to 2 million barrels daily, Nigeria will continue to struggle.
Business operating models
Also requiring cleanup is NNPCL’s operating models. It uses Joint Venture Agreements with local and international oil companies to produce in onshore and shallow water oil wells. It owns 60 percent of benefits in these agreements but often fails to contribute its share of costs, leading to what is known as cash call arrears in the industry.
Most of these fields are troubled by sabotage and local community issues, forcing its multinational partners to opt-out. Under Nigerian law, they are required to decommission these fields – essentially leaving them the way they met them environmentally – but the costs are enormous. So they found a creative solution by selling their stake to local oil companies.
But NNPCL has kicked against this arrangement. Shell, ExxonMobil and recently, ENI have struggled to exit stakes in onshore assets. NNPCL had said it had the right of first refusal and in the case of ExxonMobil, NNPCL sued the oil major at the Federal High Court to stop the deal. Tinubu’s government with its determination to harness oil and gas resources may yet compel the NNPC to play ball.
Despite its insistence that it must have a right of first refusal in any divestment deals, the NNPCL, in comparison to other local producers like Aradel and Seplat cannot even deliver enough value from the fields it is managing alone.
Its subsidiary, the Nigeria Petroleum Development Company, which was created in 1988, has over two dozen fully or partially owned oil and gas blocks, more than many OPEC countries, yet 70 percent of its fields are dormant. Of those that are producing, the majority are under expensive financing and technical contracts with third parties.
Natural gas underperforms
Russia’s war against Ukraine threw the oil and gas market into a spin. Countries with huge reserves made a killing but Nigeria struggled. For example, Russia has the biggest gas reserves in the world at 38 trillion cubic meters and makes close to $1 billion selling gas; Nigeria with a third of gas reserves on the continent struggles to earn substantially from its resources.
The Nigeria LNG Limited (NLNG) has represented the country’s best ability to exploit its gas resources but even that is struggling.
Philip Mshelbila, MD/CEO of NLNG, in a visit to President Tinubu last month, said challenges around pipeline vandalism had constrained the company’s production, with consequent loss of revenue to the government.
“Besides, multiple taxation from various government agencies and the Finance Act, which is being amended yearly, distorts corporate planning and puts business on the back foot, stifling investor confidence and investment opportunities in the sector,” the company said in a statement.
Following the removal of subsidies, the Nigerian government has tried to encourage the use of natural gas for vehicles but the country’s vast gas resources lack the required investments to get them off the ground.
However, the NNPCL, as a government company, has operated based on government directives, which often go contrary to market reality. It uses this meddling as a crutch but with the country’s dire fiscal situation, this may no longer suffice.
Speaking at the Nigerian Oil and Gas Conference in July, Mele Kyari, group CEO of NNPCL, also said the company was now a state agent helping to facilitate Production Sharing Agreements (PSA) and ensuring value is delivered.
“The PSA is not on the balance sheet of the NNPC, but we make sure you do your work because when you do it, we are compensated 40 percent of your profit, so it is important for us, it is business for us,” he said.
However, reliance on Production Sharing Agreements, which the country did not put up investment equity in, for the bulk of Nigeria’s revenue comes with significant risks. This puts the country unduly at the mercy of international oil companies.
The NNPCL under Kyari has worked to resolve issues around the fiscal environment, capacity, and regulatory environment based on provisions of the PIA. But they have not been able to attract new investments.