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Tough choices that turned NNPC to profitability after 44 years

Despite drop in oil demand, collapse of oil prices and significant reduction in economic activities due to outbreak of coronavirus pandemic, the Audited Financial Statements (AFS) of the Nigeria National Petroleum Corporation (NNPC) showed the corporation’s group achieved N287 billion profits in 2020.

Achieving this unprecedented feat for the state oil firm long associated with making losses was not without difficult choices. Dipo Oladehinde writes.

2020 has been unprecedented in the scale and magnitude of economic turbulence in Nigeria’s energy sector after recording its first index case on February 27 2020.

The spread of COVID-19 was responsible for the drop in global oil demand by 30percent, putting all previous forecasts to bed, putting pressure on oil-dependent economies like Nigeria whose oil sector account for more than half of government revenues and over 90 percent of foreign exchange,

To survive these challenges, NNPC was compelled to embark on cost optimization, operational efficiency and renegotiation of contracts downwards by about 30 per cent, among other tough measures.

BusinessDay analysis revealed the state-owned corporation slashed the various fees collected by directors of the national oil company from N606 million in 2019 to N214 million in 2020.

This represents a 60.2 percent reduction in directors’ fees.

Typically, directors’ fees entail compensation for services as a member of the board of directors of the company, excluding reimbursement of expenses or other non-regular forms of compensation.

Further highlights of the AFS revealed that while the Corporation’s group financial position increased in total current assets by 18.7 per cent compared to that of 2019, its total current liabilities increased by 11.4 percent within the same period.

The group working capital remained below the line at N4.56 trillion in 2020 as against N4.44 trillion in 2019, the AFS further revealed.

Similarly, the Corporation’s group revenue for the 2020 financial year stood at N3.718 trillion against N4.634 trillion in 2019, a decrease that could be attributed to the decline in the production and price of crude oil due to global impact of Covid-19.

Between 2019 and 2020, legal and professional fees paid by the corporation reduced from N30 billion to N24 billion while printing and stationery came down from N1.6 billion to N976 million.

Read Also: How NNPC manicured its books to extract N287bn profit

 

Also, Staff training and recruitment costs slumped from N12.8 billion to N7.5 billion in the year under review. NNPC also spent N678.171 on general and administrative expenses, a reduction from N695.949 in 2019.

The report encapsulated the performance of 20 of its subsidiary companies operating within and outside Nigeria.

The companies covered in the reports included the Nigerian Petroleum Development Company (NPDC), Warri Refining & Petrochemical Company Limited (WRPC), Port Harcourt Refining Company Limited (PHRC), Kaduna Refining & Petrochemical Company (KRPC), and Integrated Data Services Limited (IDSL), Nigerian Products and Marketing Company Limited (NPMC), Nigerian Pipelines and Storage Company (NPSC).

Others were the National Engineering & Technical Company Limited (NETCO), Nigerian Gas and Marketing Company Limited (NGMC), Duke Oil Services (UK) Limited, Duke Global Energy Investment Limited, Duke Oil Incorporated, NNPC Retail Limited, National Petroleum Investments Management Services (NAPIMS), The Wheel Insurance, NIDAS Shipping Services, NIDAS UK Agency, and NIDAS Marine.

Summarily, the report showed that its subsidiaries recorded a total revenue of N5.04 trillion with a profit of N1.01 trillion.

The report did not also mask the losses the group recorded. It showed that all the refineries recorded poor results, with Kaduna Refinery and Petrochemical Limited posting the worst performance, with an accumulated loss of over N423.43 billion compared to over N359.093 billion in 2017.

The bulk of the losses was attributed to direct operational costs, despite that none of the four refineries in the country has been functional for years.

Applause came for Kyari because the move was a radical departure from old norms as the national oil company hitherto published only its unaudited operational statements.

This is the third consecutive year that the NNPC is publishing its AFS, having done so for 2018 and 2019.

With this profitability, NNPC has joined other global corporations that are profitable.

For instance, in 2018, Saudi Arabia’s Aramco made a $414.6b revenue; China National Petroleum Corporation recorded $392.9b revenue, and $79.45b accrued to Kuwait Petroleum Corporation. Algeria’s national oil company recorded $39b revenue in 2018.

To achieve profitability, the Group Managing Director of the NNPC, Mele Kyari said the company adopted some cost cutting measures and became more efficient, after renegotiating contracts and bringing initial values down by about 30 per cent, while focusing on accountability, transparency and avoiding elusive projects.

Disclosing that the process that paved the way for the profit started in 2015 with continuous implementation of strategies, Kyari added: “It is a continuous process. When I came on board, I learned from what was on ground, and also brought in a new perspective, which was to ensure that we build on what had been done.”

The GMD also added that the corporation on the heels of the COVID-19 pandemic introduced a technology that drastically cut travel cost through a reduction in in-person meetings and the general automation of processes that enhanced efficiency across the group’s businesses.

“We are going to listen to the Nigerian Stock Exchange as the Petroleum Industry Act (PIA) is very clear on what will happen to the NNPC ultimately,” Kyari said.

He added, “Law did not set a timeframe, but it allowed for an opportunity for shares of this company to be sold to members of the public.

“There’s the possibility of doing this, and obviously because you have profit today doesn’t mean that you are ready for an IPO. It is a very long and tedious process. But that’s very possible. To become profitable, we should be open to public investment, and I’m sure all of us will be looking forward to that,” Kyari told Journalists.

The NNPC had announced that it was considering an Initial Public Offer (IPO) of its shares after declaring profit for the first time in its 44 years of operation in the 2020 financial year.

This is also coming after President Muhammadu Buhari, earlier in August 2021, signed into law the PIA, which enables the state-owned oil giant to offer its shares to the public.

The Petroleum Industry Bill (PIB) was signed into law by President Buhari after it had been passed by the two chambers of the National Assembly in July.

The Federal Government said that a transitional committee has already been put in place to incorporate NNPC Limited adding that all shares in NNPC Limited are expected to be vested in the government at incorporation and held by the Ministry of Finance.

The government noted that although the new petroleum act has deregulated the oil sector, subsidy policies will remain in place till further notice.

It is believed that once the government and the organized labour are able to agree on the process of putting infrastructure in place, Nigeria will then go ahead with the deregulation.

Also, an implementation framework for actual deregulation will be established to mitigate the impact on ordinary Nigerians.

Analysts said the Petroleum Industry Act (PIA) is expected to bring about major structural changes to the oil and gas industry, including that of NNPC.

The implementation of the contents of the PIA will see to the incorporation of a commercial and profit-focused NNPC Limited under Companies and Allied Matters Act (CAMA), with ownership vested in the Ministry of Finance Incorporated (and Ministry of Petroleum Incorporated) on behalf of the Federation to take over assets, interests and liabilities of NNPC.

This structure is expected to pave the way for the eventual sale of shares to Nigerians.

Kyari also told Bloomberg that the earliest the corporation can issue its IPO to investors is in the next three years.

“NNPC will now be operated in line with the Companies and Allied Act. The NNPC may not be able to offer its shares to the public by 2022 or 2023 due to certain bottlenecks that had lingered over the years.

“But when you want to get ready for an IPO, you need to do things differently. You need to get your books correct; you need to recapitalise; you need to shape your portfolio and many more things that you have to do until you get IPO ready.

“Surely, it is not what we will do in 2022 or 2023; probably the earliest consideration will be in three years’ time.”

On its N287 billion profits, the GMD said, “Obviously this company is changing very fast and on the fast lane. We just declared profit for the fiscal year 2020.

“We are not getting ready for the IPO tomorrow; that is not exactly, that is not the situation. IPO really means this company is going to be profitable, it has a long trajectory, it has a short-term view of how things can be done better to align with the best practice in the industry,” Kyari concluded.

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