NNPCL has become a burden rather than a blessing. Penultimate to the current deal in the works, which seeks to borrow between $2 and $2.5 billion in loans through syndication with the lead arranger in a standard chartered bank—that happens to be one of the six (6) external asset managers to the Central Bank of Nigeria—NNPCL has facilitated $12 billion in crude oil-backed loans through a reserve-based lending structure where it pledges future production by tying expected daily outputs less domestic crude oil supply obligations and cost oil from specific wells.
Afrexim’s last reserve-based lending, in which it acted as the lead arranger and offshore account bank for NNPCL, with about 55,000 barrels staked per day over a period of 60 months (5- years) at a strike price of $57 per barrel for 164,250 barrels of future production pledged in exchange for $3.4 billion in upfront cash frontloaded into the federation account, shows that the business model of the number one state-owned enterprise that generates revenues from UJVs and PSCs is fundamentally broken.
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How did NNPCL get to the point where, despite the share purchase agreement it signed in 2022 with Dangote Oil Refining Company (DORC) to frontload $1bn in cash through a similar reserve-based lending model from Afrexim, it defaulted severally in meeting up with the clauses to pay for its equity by providing feedstock valued at $1.7bn, which in today’s market will amount to 20.7m barrels? Before I enumerate how NNPCL got here and discuss what I think should be the future of exploration and production for Nigeria’s state-owned enterprise, let’s focus a little on the potential of Dangote and what I think it can do for Nigeria’s energy security and macro-economic stability.
At full capacity utilisation of 650,000 barrels per day, Dangote refinery will produce:
49.4 mL of PMs
26.6 litres of diesel
10.4 litres of Jet A1
5.8 litres of petroleum coke
4.6 litres of HPFO
3.4 mt of LPG
4.6 mt of bitumen binders
2.3 mt of petrochemical feedstock
2.3 litres of base oil
1.15 mL of Kerosene
The question now is: Can NNPCL guarantee that he gets feedstock under the domestic crude oil supply obligations that are covered in Section 109 of the PIA 2021? So far, the answer is No! And this is because most of the feedstock under domestic crude oil delivery obligations is either allocated to non-existent moribund refineries and sold at the official market rate of $60 per barrel (that happens to be a 27 percent discount to the open market rate), or the oil that falls under its export quota is actually used to pay for a forward sales agreement that amounts to about $12 billion since 2019 and comes to anywhere around 250 million barrels in reserves pledged.
The reason why it’s especially important that Dangote is not left in the cold to use his trading arm in London to fend for his crude oil feedstock need is because his company is going to pursue maximum value from export of its derivatives as opposed to supplying the local markets and helping Nigeria to not only backwardly integrate the $2.4bn it spends in the monthly importation of nine (9) items that form its energy basket, but also provide liquidity from net export proceeds through autonomous FX sources that meet the demand for FX in the domestic markets.
“And this is because most of the feedstock under domestic crude oil delivery obligations is either allocated to non-existent moribund refineries and sold at the official market rate of $60 per barrel (that happens to be a 27 percent discount to the open market rate).”
The question now is: How will Nigeria address the challenges posed by international oil companies (IOCs) divesting from onshore assets due to depleted fields, declining production quality, insecurity from incessant community issues, rampant vandalism, and high-pressure tapping on pipelines from flowstations to export terminals? Furthermore, the exit of international contractors from providing engineering, procurement, and construction (EPC) for deep-offshore platforms—especially in joint venture models where NNPC owns 60 percent for royalty and tax oil and the IOC owns 40 percent for cost oil—compounds the problem. Legacy debts on joint venture cash calls for capital expenditures (capex) and operational expenditures (OPEX) have left IOCs “carrying” NNPCL’s financial burdens. Additionally, the lack of capital to contribute their share of EPC for capital-intensive projects further exacerbates the situation.
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You’ll understand why the last time there was a deep offshore FID commissioned in Nigeria was exactly ten (10) years ago, in 2014, and why today in Nigeria the rig count is currently at thirty-four (34). Quite a number of people have asked why, in the STEEPLE analysis for project viability, DORC did not consider investing in marginal fields to produce a minor percentage of what he requires daily in feedstock as a means of semi-vertically integrating his business model. The answer lies in the fact that not only does the refinery require crude oil feedstock with varying degrees of API that will produce a mix of transportation and non-transportation fuels, it will take him at least a decade of investments in billions of US dollars to come close to producing the amount of feedstock he will require for input.
What can be done practically today to start the process of reversing this negative trend and not only ultimately guarantee Nigeria’s energy security but also stabilise the foreign exchange demand of the economy?
The President needs to summon the political will to subject NNPCL to a forensic audit to determine the true position of its balance sheet.
The President needs to embolden the FGN’s asset manager, the Ministry of Finance (MOFI), to take over beneficial ownership of NNPCL.
MOFI needs to engage a business transformation consultant to reduce the subsidiaries of NNPCL from the current fifteen (15) to the relevant six (6): i) NNPC E&P Limited, ii) NNPC Gas & Power Company Limited, iii) NNPC Gas Company (Infrastructure and Marketing as Departments), iv) NNPC New Energy Limited, v) NNPC Shipping Limited, vi) NNPC Refinery Chemical Limited, and then downsize or rightsize (as a tool to reduce its operational expenses from its share of 30 percent of revenue for all JVs and PSCs).
The Ministry of Finance Company needs to engage the Ministry of Petroleum to commence the process of having the NUPRC enforce Section 65 of the PIA of 2021, which mandates NNPCL to transform its upstream business model from unregistered joint ventures and production sharing models to an incorporated joint venture company model like the NLNG but for oil, as a way to increase optimisation, profits, and transparency.
The Ministry of Finance, Inc., needs to hire investment bankers for book-running, valuation, security underwriting, and issuance of shares for NNPC’s IPO as a means to raise capital to finance viable and meaningful capital projects.
The failure of NNPCL to meet up with terms and conditions signed in an SPA with DORC in 2022, which has seen a drawdown of its shareholding from 20 percent to 7.2 percent, for a company that, at 85 percent capacity utilisation, will return about $28 billion per annum in revenues to its shareholders, is not a strategic business decision like the spokesperson of the SOE described it; it’s a blunder of epic proportion and a generational miss that any experienced investor will mourn for his entire career. It’s even more disturbing that Nigerians, who are stakeholders in the commonwealth, are getting to find out because the spokesperson of the SOE reacted to an official press release from DORC stating the current position of its shareholding structure.
Kelvin Ayebaefie Emmanuel is an Economist.
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