I heard someone say, “NNPC just changed its logo; nothing else has changed. It’s still a money-flowing entity taking orders through memos and phone calls from the Villa.” How is this company in 2024 planning to borrow $2bn to $2.5bn through reserve-based lending that will see it stake 35,000 barrels of crude oil (at the end of the moratorium) to an international oil trader (acting as a collector) for an offshore account bank for the reconciliation of an offshore debt service reserve account (DSRA)? It is unthinkable that a country struggling to get an optimally functional refinery, finally has one but the national conversation for two straight weeks is that the country’s largest commercial refinery is unable to get the crude oil feedstock it needs to ramp up capacity utilisation, because not only did NNPCL renege on the terms of the share purchase agreement it signed to acquire 20 percent shares in the commercial refinery in exchange for a cash equity that it paid and a feedstock equity that it failed to pay, it was instead giving 445,000 barrels of crude oil daily under the domestic crude oil supply obligations (DCSO) to non-existent refineries at a discounted price to the open market rates. How have key projects like the Nigeria-Morocco Gas Pipeline (NMGP) stalled or NEPL as an operator failed to raise its daily production above 150,000 barrels? Why has the multi-product pipeline, especially for gas, not gone up from the current 4,335 km to about 10,000 km for the purpose of providing high pressure transmission to pressure metering and reduction stations (PMRS)? The answers are in the fact that even if the company, based on the provisions of PIA, is now incorporated as a legal entity and is no longer a state corporation, NNPCL still takes orders from the Presidential Villa.
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The first and most important thing to do before we go into the details of what the oil and gas industry needs is to create a Chinese wall between the Villa and Towers by transferring the FGN’s shareholding in the entity to a beneficial owner like the Ministry of Finance incorporated (MOFI)—but that would also mean you have to amend the act that establishes MOFI. It is the work of an asset manager to consolidate all of the FGN’s assets in the oil and gas sectors on its register away from the nominee shareholding of NNPCL, especially in NLNG and West African Gas Pipeline Company (WAGPCO). This is important because, for example, if you think of the fact that NNPCL is considering the use of the dividends paid for the 2023/2024 financial year from NLNG to reconcile liabilities they claimed to have accrued for settling petrol subsidies, you’ll understand why it’s important for revenues to be centralised to an asset manager.
The next step will be for the asset manager to bring in external auditors to conduct a forensic audit that will determine the true state of its balance sheet, including all its assets—performing wells, abandoned wells, unregistered joint venture partnerships, and production sharing contract agreements—ahead of sourcing capital to support the projected production volumes. This is what will help bookrunners conduct a proper valuation of the company for the purposes of price discovery for a capital raise. Price discovery is important because it enables investment bankers to calculate the risk they are undertaking by assuming that if X amount of the company’s stock in an initial public offering is not sold, it will pay the difference. How much the company is raising will also determine if it’s going to be a primary listing on the NGX with a secondary listing on the LSEG, or much rather a dual listing in both Nigeria and a European bourse. An equity capital raise through an IPO is cheaper and better than typical reserve-based lending because it will finance capex for important upstream and midstream projects that will enable two things:
“The reason it’s crucial and important that NNPCL goes through the process of raising money from the equity capital markets is because the process will force the establishment of strong governance and internal controls that will effectively create a Chinese wall between the Presidential Villa and Towers.”
NNPCL pivots from unregistered joint ventures and production sharing contracts to incorporated joint ventures where it doesn’t have to rely on carried costs and carried interest in JV cash calls to become an operator.
Midstream infrastructure development for JV refinery projects, LPG plants, IPP for PPA to GENCO’s, high-pressure transmission pipes for domestic and export markets, petrochemical processing and blending, renewables for power generation, and enterprise manufacturing supply to FMCG’s.
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The reason it’s crucial and important that NNPCL goes through the process of raising money from the equity capital markets is because the process will force the establishment of strong governance and internal controls that will effectively create a Chinese wall between the Presidential Villa and Towers. The new shareholders will appoint a non-executive board of directors, management that is more reflective of the demands of the market than the nepotism of government appointments. For example, the capital raised will see an end to the culture of forward sale agreements that has seen NNPCL raise an astonishing $12bn in reserve-based loans with 250m barrels of crude oil pledged as collateral in a value exchange mismatch that only favours international creditors and their middlemen dealmakers.
Bringing in a board and management that reflect the market’s position will facilitate business process re-engineering to focus on its primary and most important business line—exploration and production for oil and gas. The new management and board will realise that its most central objectives from the get-go will be to:
– Enforce Section 65 of the PIA that transforms unregistered joint ventures (UJV) and production sharing contracts (PSC) to incorporated joint ventures (IJVC) as a means to improve governance and transparency amongst partners and transform the current model of carried costs and carried interest for CAPEX and OPEX that has historically delayed the payment of cash calls to the IOCs to a shared final investment decision for the most optimum project financing structure for capital costs.
-Retool the human resources of the company to focus more on becoming an effective operator.
– Work with the NUPRC and FIRS to develop a fiscal framework for deep offshore non-associated gas wells as a tool to double the current daily output from 4.5 billion standard cubic feet to 9 billion standard cubic feet. This fiscal framework is important because there will be no incentive for IOCs outside the NLNG framework to invest in NAG wells deep offshore without a clear fiscal framework on sharing formulas, gas pricing models, etc.
– Work with NMDPRA to develop a new national reference price that goes into calculating the domestic base price for domestic gas delivery obligations (DGDO) to gas-based industries according to Section 108 of the PIA.
– Commission FID for the development of the 121km Aba-Owerri-Enugu-Onitsha-Nnewi Gas pipeline that runs through the South-East to raise feedstock to GENCO’s, companies processing ammonium nitrate gas into UREA, using gas for the manufacturing of poly crystals, etc.
– Commission FID for the development of Phase 1 of the Nigeria-Morocco Gas Export Pipeline that is supposed to run through 13 countries in Sub-Saharan Africa through Morocco to Italy.
– Invest in floating LNG vessels deep offshore to deepen Nigeria’s gas commercialisation program.
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In the light of the recent directive of the federal executive council that mandates NNPCL to obey sections 109 of the PIA to supply Dangote Oil Refinery Company (DORC) with feedstock in naira under the domestic crude oil supply obligations, a smart plan for the government to implement as a means of maintaining a base price for PMS across Nigeria will be for NNPCL to use its 7.2 percent shareholding in the refinery as a value trade-off to pay off under-recovery subsidy, as well as a petroleum equalisation fund on the cost of distribution to key markets outside of Lagos.
I think in this current markets where headline inflation is 34.1 percent with food inflation (that makes up 52 percent of the CPI basket) currently at 40.8 percent and MPR at 26.75 percent, it’s important for the government to realise that providing the refinery with as much feedstock oil as it needs (that currently at 400,000 barrels per day or 61.5 percent capacity utilisation is seeing it import $960 million worth of feedstock from markets in the USA and Brazil), is important to backwardly integrate $28 billion worth of derivatives that forms its energy basket, supply the I&E markets with FX that will raise the net external reserve position, improve the country risk premium, strengthen the naira as a means to reduce the exchange rate induced inflation and get the economy back on track – but this will only happen if the changes start from the top, because like they say “A fish starts to rot from its head.”
Kelvin Ayebaefie Emmanuel is an Economist.
