FINANCE - 19 SEP 2015

The Rebirth of the NNPC

The Rebirth of the NNPC
Emmanuel Ibe Kachikwu appointed by President Buhari as the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC)

From its inception in 1977, the Nigerian National Petroleum Corporation (NNPC) has been tasked with the function of regulating and supervising the oil and gas industry for the Nigerian government. Over time, this role has effectively left the NNPC with exclusive responsibility over the government’s participation in upstream, midstream and downstream ventures across Nigeria. While the NNPC’s success rate on its mandates are debatable, there is no doubt that the public enterprise has reached a critical juncture in its history. With the appointment of Dr. Emmanuel Ibe Kachikwu as Group Managing Director, there have been a number of policy announcements that are considerably noteworthy.

The first is the prospective removal of the damaging fuel subsidy that has plagued the downstream sector with waste and corruption for decades. The original rationale behind the subsidy on petroleum products was to prevent some of the cost of importing refined products from being passed on to the consumer. However, over time, government officials misused this well-intentioned policy to inflate budgets and distribute excess funds amongst themselves in an opaque and reckless manner. 

More importantly, the subsidy has failed to repress the price of imported petroleum products and is of benefit to only a few. Nonetheless, Dr. Kachikwu has explicitly stated that this current arrangement “creates distortions in the government’s revenue distribution in a way that is difficult for the government to control or sustain” and will hopefully be amended as the “removal of price control mechanisms will ensure the growth of the sub-sector”. This statement is largely consistent with Dr. Kachikwu's objective of restructuring the NNPC to abide by more efficient, transparent and profit-orientated goals.

Having said this, the decision to discontinue fuel subsidies is not one the NNPC can make and is more of a budgeting exercise for the executive branch of the Federal government to deal with (more specifically the, Ministry of Finance). While the current administration's stance on this policy remains unclear – given that there are currently no ministers to communicate this, mounting fiscal pressures might make it expedient. As the NNPC strives to block unnecessary leakages, it will be interesting to monitor the potential conflicts between Cabinet officials and NNPC directors, as the oil and gas behemoth evolves into a self-regulating public enterprise.

 

Secondly, the NNPC plans to split its downstream subsidiary, the Pipelines and Products Marketing Company (PPMC), into three parts. The first will be a pipelines company focused on the maintenance of over 5000 km of pipelines, the second a storage company that will maintain over 23 depots and the third a products marketing company. This demarcation of responsibility is expected to introduce accountability in each unit and unbundle responsibility that often gets lost within a convoluted bureaucratic structure. Other reforms in the downstream sector include a plan to restore refineries back to full production by the end of the year, that will result in an annual savings of around $1 billion as the nation moves towards ending fuel importation.

Dr. Kachikwu has already initiated a turnaround maintenance programme in the Port Harcourt Refinery, Eleme and has given the Warri Refinery a 90-day ultimatum to begin full production. Furthermore, the expected $3 million in daily savings from selling petrochemical products produced by the Kaduna Refinery and Petrochemical Company will be a true testament to the beginning of a new era in Nigeria’s fuel importation history if the company resumes production to 60%.

Not only does the NNPC have its eyes on expanding existing operations, but it also has intentions to recover previously over-deducted tax benefits from joint venture (JV) partners to the tune of over $7 billion. The NNPC has engaged an international accounting firm to determine the exact amount due to the government on the Strategic Alliance Contracts entered by the Nigerian Petroleum Development Company (NPDC), where up to $2.5 billion of government funds could be recovered.

 

Finally, the much anticipated Petroleum Industry Bill (PIB) that is poised to entrench all these reforms of the NNPC into law is likely to receive additional traction under the current administration. There have already been a total of 165 amendments to the draft PIB over the past few months as the NNPC liaises with major stakeholders. Dr. Kachikwu has explained that “the Petroleum Industry Bill has been pending before the National Assembly for the last seven years and requires extensive engagements with all stakeholders to iron out all grey areas.” The bill now sits in the Senate as the House of Reps passed it in June.

Although there will be a minimum waiting period of one year to get the PIB back on track and examine the existing issues, there is justified cause to believe this will not be in vain. Dr. Kachikwu also appears committed to addressing infrastructural issues associated with the oil and gas industry such as gas shortages for power supply, pipeline protection and maintaining the uninterrupted provision of petroleum products across the country. 

 

All in all, these announcements are mere signposts of what is to come and will only bear true significance once fully implemented. The NNPC, under the leadership of Dr. Kachikwu, a seasoned lawyer and oil and gas veteran, is well-positioned to capture the economic opportunities associated with developing and selling hydrocarbons in a resource rich country like Nigeria. One only hopes that these benefits are equitably distributed across society and are not squandered on the trivial and unproductive pursuits that have long since been associated with the NNPC.

 

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Pekun Bakare

Pekun Bakare

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