NNPC’s Commercialization: Will Change of Ownership Guarantee Optimum Success?

By Hamid Adamu Muhammad, PhD

The announcement by the federal government on Tuesday to commit the NNPC to private operators is probably the FG’s biggest economic decision since President Buhari became president on May 29th, 2015. A quick question is does the transfer of ownership of the corporation mean economic salvation for the country? Would it mean the end of corruption in remitting crude oil sales proceeds to CBN (Remember, close to the end of his stewardship as governor of the CBN, Sanusi Lamido Sanusi complained that some 49.8 billion USD were not remitted to the apex bank)? Would it also mean that PMS and Diesel prices per litre will come down? Would it at the same time mean that the bidding process of NNPC will be won by the right operators and not shadow companies whose largest shares are owned by people in government and some high-profile traditional title holders…emirs, chiefs, Obas, Obis, etc? Answers to these questions would determine the meaning of commercializing or privatizing the NNPC to the life of the common man. Let me begin by stating that oil accounts for more than 80% of Nigeria’s foreign exchange earnings, meaning that all Nigerians are supposed to be affected by the decision to shift NNPC from a public corporation to a limited liability company. In other words, the Nigerian society is dispossessed of the decades of public investment in the NNPC which was now offered to the private sector.

Different categories of people received the news of commercializing the NNPC with varying perceptions. Common citizens of Nigeria who mostly live in villages feel they have no business with the country’s foreign reserve, the CBN the NNPC or similar other national public entities because they feel the entities belong to the sole ownership of the president, state governors, ministers and members of the National Assembly who do whatever they wish with them. So to this category of people, privatizing NNPC is perceived as nothing more than ‘government’ people selling the NNPC property to themselves… so nothing has changed. So they have no business with the president’s announcement early Tuesday, as nothing from the NNPC comes to them. Petty traders and small-scale businessmen may also belong here. The second category of people is government workers. This type of citizen has a split perception, half hopeful and half despondent. They feel if the process works out successfully, the government may have more capability of paying salary or even increasing it; and in case the process fails due to the typical Nigerian character, they are despondent because the biggest source for government’s financing of salary would be parching. This group of people feels they are somehow affected by what government gets from oil and gas sales proceed. The third category is the elite in government services like workers at DPR, NCC, Justices of Supreme Court, Federal Courts of Appeal, High Courts, etc., and members of ASUU, ASUP, etc. This is a category that feels a substantial share of whatever accrues to the government must also go to them because the category is highly educated; they are aware that removing the hand of the government from operating national oil corporations worked well in countries like Argentina and Canada, therefore the decision would work well for Nigeria. So you see the comments of this category of people all over the press.

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Established 45 years ago, the NNPC oversees Nigeria’s crude oil, gas and petrochemical resources, as a joint venture between Nigeria and oil multinationals. Largely the company engages in petroleum exploration and production owning the country’s four refineries. Nigeria is ranked the sixth largest oil producer in the world, and with the country’s blessing with low-sulphur content, top grade Brent Crude variety, crude oil was Nigeria’s manna from heaven. Experts are now suggesting that Nigeria is even more of a gas-producing country than an oil-dependent country.  True, substantial fortune and treasure practically flow under Nigeria’s soil.

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NNPC Mega Filling Station

In myriads of accounts on the potential success of the commercialization of the national oil company, the biggest reference point was that Nigeria succeeded in privatizing the country’s telecommunication sector and it succeeded, so why not the oil sector. In my estimation, this analogy suffers from the category mistake fallacy. In the privatization of telecoms, private operators brought sophisticated telecom machines including transmitters, laid fibre optic cables and everything was ok. But in the case of oil,  a natural resource belonging to all citizens was involved, so while the two scenarios look similar, they are not the same. In the case of the former, companies pay operating tax and others commissions, but in the case of the latter private interests buy the right to explore, mine and refine the oil resource that belongs to the state. As the country is carried away by the successes of commercializing national oil elsewhere, many do not consider the fact that Nigeria is much more similar to countries which did not commercialize their oil companies like Saudi Arabia and Qatar than to those who did. For example, in France, the government owns zero shares in ELF and Total, which are big oil companies in the world. Now Nigeria’s NNPC is involved in petroleum development is nowhere in the world except in Nigeria, even in Nigeria, it refines only 10% of the daily crude oil mined. The rest, 90%, is handled by foreign companies mostly based in Europe, which also operate in Saudi Arabia. In fact, it was discovered that privatization has bigger welfare effects on citizens than state-ownership in Europe, but not much has been empirically researched on the effects of ownership in the petroleum sector in African countries.

To say that the new commercialization process of the NNPC would not succeed is to be pessimistic. It may succeed actually if the country changes its ways of handling governance. For example, the recent Petroleum Industry Act 2021 provides for having a Regulatory Commission. Now if the commission can be incorruptible and the National Assembly committees exercising oversight on NNPC limited would also not collect bribes from operators, there would be light at the end of the tunnel. 

As a way of background to the entire issue, Oil Industry Bill was not the brainchild of President Buhari.  For more than two decades, the National Assembly juggled the idea. But under Buhari, the law was passed and now enacted. It provided a new framework for governance in the oil and gas sector. The law provides for the transformation of the NNPC into an independent, profit-making, commercial venture. Since its beginning, the NNPC runs as a cash cow for the Nigerian government, just as a public sector agency. It managed the country’s oil and gas resources, makes money, and transmits the same to the treasury (mainly for those in power). Every month, as routine, state governments go to Abuja to hold federation accounts allocation committee meetings (FAAC), and take their own shares of the proceeds of the sale of oil and other FG earnings.

 Earlier demands for the privatization of the NNPC had been highly politicised, which rendered the real issues obscure. For example, it was part of a campaign issue in the 2019 presidential elections.  The real issue that experts allude to is many oil-producing countries are now requiring capital boosters to sustain economic recovery and to build the infrastructure required to keep up the commercial viability and competitiveness of the oil sector. Given the high level of expertise, capital, and technology required to build and upgrade the infrastructure for oil production, refining and distribution, the government, with its attendant huge burden of responsibilities in a multitude of other sectors of the economy, cannot oversee and finance the NNPC. There are key roles the private sector entrepreneurs can play in cracking the competitiveness of the NNPC.

Ordinarily, the inauguration of the new NNPC Limited should be seen correctly by the people as a positive development. The justification for this transition can be seen in how the oil company performs badly against its peers. In the stir of the Russia-Ukraine war, Russia uses its oil and gas resources as one of its weapons against West Europe, which depended on it for close to 40% of its energy needs. Russia tactfully blocked the Nord Stream 1 pipeline for what it called routine maintenance and went ahead to seek payments in their Ruble currency, to starve Europe of energy resources, and soon afterwards, energy prices surged to the roof. Countries with high demand for energy but without oil, resources groan. While countries like Nigeria, rich in oil and gas should ideally be smiling:  But Nigeria has been caught in a web. Instead of turning the global crisis into a fortune, the country is busy blaming rising oil prices as bringing a curse to the nation. Citizens are not benefitting because the oil sector is so much underdeveloped that shakes in the global market mean nothing to the common man but woe. In the current global energy mix, the country pays an exorbitant price for its shortcomings and failures in managing its core resources, its mainstay in the global market.

It is NNPC’s responsibility to manage the economic fortune of the country coming from oil and gas, and bring profit. Aside from Nigeria, other countries also have similar fortune. Saudi Arabia, Russia, Qatar, UAE, Venezuela, Libya, Kuwait, the United States, Norway and a host of other countries, have oil and gas. While oil and gas resources have brought those countries prestige and glory, in Nigeria’s case common man refers to oil and gas as a curse.  In the 70s and 80s, from an oil-rich country, the resource turned out to be a cause of agony and pain for Nigeria. Ethnicity, politics, corruption and greed found an abode in the oil and gas sector.

Currently, the privatization of national oil companies (NOCs) becomes a global trend, and empirical evidence is there pointing that privatization has resulted in better performance of NOCs in many countries. Conversely, the face value of this evidence is not enough to reliably assume that Nigeria’s case will turn out to be the same. Unfortunately, though, we have no history of the NOC private practice to observe its effectiveness.

The competitive markets theory suggests free competition without government participation results in more efficiency and productivity. Much of the evidence reported that the efficiency of NOCs improved after privatization, though, other experts observe that a mere change of ownership is not a guarantee for such improved efficiency, it must be complemented by institutional and regulatory changes. This is where Nigeria is getting it wrong. As long as our system promotes individuals instead of institutions, privatization or commercialization of the NNPC would mean no change. Again, as long as the regulatory body will operate the Nigerian business-as-usual way, fortune from oil proceed will also continue to be a mirage.  Yet other experts are of the opinion that privately ran oil companies happen to be more workable than the public-owned ones. Despite the fact that this opinion was argued for decades, other experts are recently pointing out that it is not the change of ownership that leads to more efficiency but improved market conditions. In assessing the effectiveness of the privatization of national oil companies, there are multiple approaches. One is by the conscious study of a company’s performance before and after the privatization process. The problem with this method is that it assumes all other relating variables that may affect efficiency to be constant. A more helpful approach is the holistic one that studies the costs and benefits which result from the privatization exercise.

In a study, a sample of 211 companies from different sectors from 42 countries indicated that privatization is a mechanism for improved efficiency of a company’s performance  Argentina demonstrated the positive effects of privatization of the Yacimientos Petroliferos Fiscales (YPF) in 1993 on the entire oil industry and other related sectors 

As earlier stated, one cannot extrapolate the outcome of privatization in the telecom or power sector to oil and gas. sector. This would require a specific look at the NNPC’s privatization and applying the lessons and experiences from other privatizations.

NNPC faces myriads of factors that must force it to leave government hands. These issues made it predictable long ago to privatize in order to guarantee stability and efficiency of the Nigerian oil and gas sector. Experts have summarized these issues as:

Incessant Importation of Petroleum Products: In spite of the plenty of petroleum commodities in the country, Nigeria’s largest import is of petroleum products, which increases the supply but at the same time, it has to do with foreign exchange in favour of other countries, it reduces the value of the Naira in the market. According to the Central Bank, from 2013 to 2017, Nigeria spent around $36.4 billion on imports of petroleum products. Nigeria’s Minister of State for Petroleum was once quoted, “Nigeria allocates an average of $28billion of her foreign exchange earnings yearly to import about 92 per cent of the petrol consumed locally”, and, worse still, the National Bureau of Statistics reported, N2.289 trillion was expended in 2018 alone on importation of refined petrol into Nigeria.

 Inadequate Local Refining Capacity: The NNPC has not provided adequate refining capacity in the country, which is the reason a greater proportion of Nigeria’s petroleum products have to be imported. All these tragedies are because NNPC is wholly a government-owned entity.

 Low Production and Many Marginal Fields: As a result of inefficiency in NNPC, Nigeria produces less than 2 million barrels of oil per day, which is far less than the potential output. Plenty of oil fields are forsaken due to a lack of innovation and competition. Again new discovery of oil in Bauchi has become a subject made opaque by the government, for whatever reason.  Journalists are not allowed to visit the exploration sites and update the public.

Mismanagement and Interference: NNPC is one of the inefficient government institutions, with so much political interference, corruption, ambiguities, nepotism and low performance according to experts. Because it is government property, NNPC is being overly mismanaged, nobody operating the company cares even if it operates at loss or inefficiently because no private ownership interests are involved

 Corruption: Every day there have been allegations of fraudulent scams cornering funds from sales of crude oil and vague accounting of importations of petroleum products. There are allegations that some sacred cows were being paid billions of Naira by the NNPC for importing nothing. Most government corruption originates from the activities that relate to the management of the oil and gas proceeds. Due to the complexity of the petroleum sector, corruption became endemic since most figures are difficult to verify, while some officials hide under that to abuse public trust.

Debts: As of 2016 NNPC’s cash call debts hit $7 billion. NNPC owes private oil companies billions of dollars as outstanding Joint Ventures cash calls. The situation would not have been this bad if NNPC were a private company.

Low Performance: Most of the oil and gas production in Nigeria is conducted by foreign private oil companies, Shell, Chevron, ExxonMobil, Total, etc. NNPC produces a fraction of the national petroleum output, and yet we see every day billions of Naira are spent on maintenance and other recurrent.  The Nigerian Petroleum Development Company (NPDC), the upstream subsidiary of the NNPC, for example, as of 2019 produced only 200, 000 barrels of oil per day, which is barely10% of the nation’s daily oil production as mentioned earlier.

 NNPC has consistently failed to render sufficient refining capacity in Nigeria, and, in spite of its N13 trillion annual revenue generating capacity, it was only able to generate N2 trillion, which is recycled into importing petroleum products.

NNPC is not profit-driven; it is rather shrouded in the vested interests of high-profile people in government or close to the government. With NNPC privatization, the Nigerian government stands a  good chance to raise enough revenue through initial public offering and taxation to fund capital projects and development, and build a new economy. It is recommended that during the privatization of the NNPC, the share offering should be open to any interested capable Nigerian group or individual, before extending the offer to foreigners. The NNPC and its assets should be valued fairly, and then subsequently listed in the Nigerian Stock Exchange Market or other Capital Markets on the international scene. Public officials should not be allowed to either directly or indirectly acquire shares of the NNPC to avoid conflict of interest.

Above all, public officials at all levels must be patriotic about managing governance and national resources; only when Nigerians especially opportune leaders change their mindset about the running country, changing ownership of NNPC would only mean the old wine in a new bottle.

Adamu Muhammad Hamid can be contacted via [email protected]

The views expressed in this article are the author’s and do not necessarily reflect WikkiTimes’ editorial stance.


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