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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.
Oil mess
“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.
Refinery mismanagement
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.
Low production
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. -BusinessDay