The Problem facing Nigeria Petroleum Company

Nigeria boasts the largest economy on the African continent; her Gross Domestic Product, GDP, of US$573.652 billion in 2014, exceeded the next-largest, South Africa by more than 50%. With an output of about 2 million barrels per day (bpd), the country, a member of Organization of the Petroleum Exporting Countries, OPEC, also produced more crude oil than any African country in 2014. Nigeria has also been a destination for significant Foreign Direct Investment, FDI, particularly in the oil and gas sector. Oil majors Shell, ExxonMobil, Chevron, Total and Eni have invested billions of dollars in the country’s deep offshore projects. Petroleum resources provide more than 80% of the country’s export revenue; however, the slump in crude oil prices from over US$100 per barrel mid-2014 to less than US$40 per barrel at present, has severely affected her foreign exchange earnings. The country’s reserves have fallen by more than a quarter from January 2014 levels. According to Reuters, the fall in reserves was due in the main, to sale of dollars by the central bank in order to defend her currency, the naira, which was pressurized by falling oil prices. Nigeria’s growth in real GDP has also fallen, in sympathy with global crude oil prices, as has FDI. In 2014 for example, FDI ― of which the oil and gas sector takes a significant proportion ― fell by about 16% from the previous year, according to World Bank data, following slumping oil prices.

The impact has been palpable. Many state and local governments are having great difficulty paying salaries and meeting other recurrent expenditure obligations with little left for embarking on capital projects. The country’s recent banking and currency restrictions were attributed to banks’ inability to meet foreign exchange obligations.

The country’s president last week presented a budget of 6.08 trillion naira (about US$31 billion) for 2016 to the National Assembly. The proposed budget boasts a record increase in non-oil revenue streams. However, some analysts have been quick to point out that the country’s reference crude oil price has already fallen ― even if briefly ― below budgetary provisions and that even some of the proposed “non-oil” revenue streams depend on oil for viability.

With the current low oil price regime projected to endure, a strategic reassessment of the petroleum sector’s business modelis imperative.

Challenges

That reassessment must start with Nigerian National Petroleum Corporation, NNPC, the country’s state-owned oil company, which has for decades held the conflicting roles of industry player and regulator; and these while administering the country’s petroleum proceeds. The independent, non-profit advocacy, Natural Resources Governance Institute, NRGI, in a recent submission held that:

NNPC’s approach to oil sales suffers from high corruption risks and fails to maximize returns for the nation. These shortcomings also characterize NNPC as a whole. Over 38 years, the corporation has neither developed its own commercial or operational capacities, nor facilitated the growth of the sector through external investment. Instead, it has spun a legacy of inefficiency and mismanagement.

The company’s recently-appointed group managing director, Dr. Emmanuel Ibe Kachikwu who doubles as the minister of state for petroleum resources, is an industry veteran. Dr. Kachikwu, who until his appointment was Executive Vice Chairman ExxonMobil (Africa), has already committed to a rapid restructuring of not only the company but also the oil and gas sector as a whole.

Secondly, the lack of a proper energy policy vector has inhibited any meaningful value addition to Nigeria’s oil and gas sector. The Petroleum Industry Bill, PIB, designed to bring transparency as well as other global best practices and standards to her oil and gas sector has been languishing in the legislature since 2009. Several, often conflicting versions of the bill have been bandied about and uncertainties associated with the delayed passage has led to divestment by the majors with dire prospects for the country’s productivity.

Further, Petronas (Malaysia) and Petrobras (Brazil) are two state-controlled oil companies from emerging economies just as NNPC is. Petronas, formed in 1974, about three years before NNPC has grown to be one of the world’s largest integrated, international oil companies with more than 100 wholly-owned subsidiaries and business interests in more than 30 countries. Petrobras conducted a record share sale worth about US$72.8 billion in 2010 and, according to Bloomberg, immediately became the world’s fourth-largest company by market capitalization. Petrobras is currently a world leader in technology development for deep offshore and ultra-deep offshore oil production. Both Petronas (68) and Petrobras (28) are currently ranked on the Fortune Global 500 list for 2015. NNPC, in contrast has comparatively few external business interests and over the last decade accounted for less than 5% of Nigeria’s crude oil output; during that period, its aggregate refining capacity utilization was less than 30%. The company has scarcely been able to meet its joint venture financial obligations and its midstream and downstream infrastructures rest in various states of disrepair.

In addition, while the United States, the erstwhile principal importer of the country’s crude oil, was developing her domestic shale oil program, Nigeria made no effort to search for alternative export markets. The U.S has all but quit importation of Nigeria’s crude oil, the latter accounting for less than 1% of her imports in 2014. According to Argus, at least 10 cargoes of Nigeria’s reference crude remained unsold at the end of the first week of December. Such cargoes are often frittered away at sub-value prices, the nation worse for it. In contrast, Saudi Arabia for example, made a proactive downstream investment in Asia, a significant energy consumer, to maintain market share and sustain her economy in a slumping oil price regime.

A third and rather intractable challenge to Nigeria’s petroleum resources management is the issue of proper product pricing. 

About 75% to 80% of the country’s refined products consumption is imported, and at higher prices than if such products were refined locally. This snafu is an abnormality for a high-volume oil producer. A massive subsidy regime emplaced as a shield against the vagaries of international oil prices, and which has been a disincentive to downstream (refining and marketing) investment, completes the vicious circle.

The subsidy regime is not only unsustainable, it also fails to keep product prices at target levels. In 2011 for example, total product price subsidy amounted to US$8 billion according to the country’s Ministry of Finance records. That value was also about 118% of capital budget. Household kerosene, which is a common cooking fuel, often sells for about twice the subsidized price, and that, when the fuel is available. Subsidy has also meant that products are easily carted across Nigeria’s largely unprotected borders and sold at high premiums. Gasoline prices in neighboring countries such as Cameroon (US$1.07/liter), Benin (US$0.93/liter) and Niger (US$0.84/liter) for example, stand at more than double the value in Nigeria (US$0.42/liter).

Such activities constitute a large capital drain and contribute to shortfalls in national product supply. Forensic accountants estimate that payments for undelivered or round-tripped product cargoes account for up to 30% of total subsidy payout; and motorists often spend hours ― even days during festive seasons such as Christmas ― in gasoline queues which can be several kilometers long.

The necessity for subsidy removal is undeniable. However, the socio-economic shock from a one-step (immediate and total) removal is bound to cause more ills than it intended to cure. A phased and bench-marked approach would be a more effective application. Dr. Kachikwu has just announced that current product imports are not being subsidized. It is not clear however, if the whole subsidy program has been abrogated or if that was just a reflection of current global crude oil prices.