HIGH PERFORMING NATIONAL OIL COMPANIES, THE PETROLEUM INDUSTRY GOVERNANCE BILL & THE URGENT NEED TO REFORM NNPC
Two reports published shortly before the COVID-19 lockdown paint a stark picture of NNPC as a sub-optimally governed and remarkably inefficient commercial enterprise that is also neither transparent nor accountable.
The first report by the Nigeria Natural Resource Charter (NNRC) is the 2019 Benchmark Exercise Report (BER 2019). The BER 2019 assesses Nigeria against a set of 12 Precepts that benchmark performance in the stewardship of petroleum resources. Precept 6 benchmarks the performance of a national oil company. It simply says: Nationally owned companies should be accountable, with well-defined mandates and an objective of commercial efficiency. NNPC scored red, meaning it performed poorly, for the 4th consecutive report, against this Precept. Unlike NNPC’s Precept 6 performances under previous BERs, BER 2019 observed limited improvements in some areas such as greater autonomy from government for NNPC to meet some of its Joint Venture funding obligations.
It does appear that since BER 2019 was released, NNPC has published audited accounts of its Strategic Business Units (SBUs), including the loss making refineries for 2018, on its website (https://www.nnpcgroup.com/pages/afs.aspx). This is a significant positive milestone. However, there appear to be no audited accounts for the Central Headquarters (CHQ), where the Crude Oil Marketing Department (COMD) is located, which according to the NNPC Monthly Financial and Operational Report for December 2018 accounted for N158.64 billion or nearly 45% of the total losses of N355.62 billion incurred by all NNPC SBUs and CSUs. Moreover, the issue of sustainability identified in BER 2019 is still a live concern.
While the above are laudable improvements in reporting performance, a second publication, a policy brief titled “NNPC: The burden of Africa’s Oil and Gas Giant” by #FixOurOil and BUDGiT – a civil society organisation devoted to fiscal and budgetary transparency – gave a more blunt assessment of NNPC’s actual financial and operational performance: “NNPC has been overwhelmed by commercial inefficiencies, scandals and a reputational damage that has lingered for nearly four decades” from the 1980 Crude Oil Sales Tribunal (Irikefe Panel), that investigated some $2billion worth of earned equity crude that Nigeria failed to lift, to the 2017 NEITI request to probe the $15.8 billion of NLNG dividends traced to NNPC’s accounts that weren’t remitted to the Federation. The report blames political interference, unreasonable demands of staff unions, a defective operating model, saboteurs and oil thieves thwarting the best efforts of some of “NNPC’s leadership… to improve the corporation’s commercial efficiency”
The net result is a heavily indebted NNPC that one former minister of state for finance said as far back as 2010 “is insolvent as current liabilities exceed current assets” by N745 billion. Six years later, as a leaked memo revealed, NNPC had total audited liabilities that stood at N7.5 trillion as of 31st December 2016. While it demonstrates NNPC conducted audits, it sadly did not and has not published these audited reports that suggest a staggering 10-fold increase in the 6-year period of record oil prices. How NNPC racked up crippling debt during a time of plenty is beyond baffling. In that memo, NNPC sought permission to apply NLNG dividends to meet petrol import obligations, putting the government, as an IMF Publication warned, “on the hook for debts the NOC has incurred” because NNPC is too big to fail.
Beyond debts as a measure of NOC efficiency, other crude measures can be found in an NOC’s (a) revenues and profitability, (b) its Refineries capacity utilisation or how efficiently it runs its refineries. A third measure (c) reserves and reserve replacement ratios is not considered here. Measuring NNPC’s performance on revenues against Petrobras (of Brazil), and refinery capacity utilisation against Equinor, illustrates how inefficient NNPC is.
Comparing revenue and profit performance for the two years 2015 and 2018 makes for revealing contrasts between NNPC and Petrobras. Not least because Petrobras was in the throes of its most searing failure of governance as exposed by a bribery scandal dubbed “Operation Car Wash” during this period. A scandal that ultimately contributed to a Petrobras CEO going to jail, Brazil’s president Dilma Rousseff’s impeachment and removal, and Brazil’s former President Lula Da’Silva’s conviction and imprisonment.
For Petrobras itself, the consequences were severe. In 2018, it settled on a fine of $1.7 billion with American authorities for Foreign Corrupt Practices Act violations. In 2015 it was forced to publish an audit report declaring it paid $2.1 billion in bribes, and also had to set aside US$17 billion in contingencies. Yet by 2018, it generated US$95 billion in revenues and posted US$7 billion in profit. NNPC by contrast generated, according to its Monthly Operational and Financial Performance Report some $16 billion in revenues and posted profits, at prevailing exchange rates, of $0.27 billion ($270 million). In the absence of consolidated audited accounts, it would be speculative to attempt to aggregate and harmonise the separate audited reports of SBUs and CSU. Especially, as they appear not to include audited reports of CHQ.
Comparing Equinor and NNPC’s Refinery Capacity utilisation shows that Equinor’s three refineries averaged 92.8% capacity utilisation in 2018, to NNPCs three refineries of 11.21%. A 2015 comparison of average refinery capacity utilisation in the USA of 90.98% and Nigeria of 4.88% is even worse. Unless NNPC’s refineries can operate at 90% capacity they will continue to lose money.
Unlike Equinor and Petrobras, which are mixed ownership NOCs with government and private shareholders, Petronas and (to all intents and purposes) Saudi Aramco are wholly government owned like NNPC. Private shareholders in both Petrobras and Equinor are entitled to nominate their own directors onto the board. In the case of Equinor, there is even a board member to represent staff. Petronas, Saudi Aramco and NNPC don’t have such constraints on board appointments. However, both Petronas and Saudi Aramco value diversity of expertise on their leadership teams or boards. In particular 5 of the current 11-member board of Saudi Aramco are independent directors. Two of the five are; Sir Mark Moody a former CEO of Shell, and Mr Mark Weinberger former chairman and CEO of EY the global accounting firm.
By contrast NNPC’s board has always been a bone of contention as can be seen from board tenure and GMD turnover. The average tenure of a Petronas CEO is 6 years. The average tenure of a Saudi Aramco CEO is 9 years. NNPC by contrast has had 20 GMDs in 42 years, an average tenure of 2 years. It is no wonder that in a study surveying over 2000 NNPC staff members, Dr. Olive Egbuta observed that staff viewed GMDs as political appointees. With staff viewing their chief executive as a politician they can hardly be faulted for not operating as if they worked in a commercial enterprise.
The GMD is one of three government officials mandated by law on NNPC’s nine-member board, including the minister, the law designates as chairman unless an Alternate Chairman is appointed. Neither Saudi Aramco nor Petronas have the minister as a board member. It is unclear from the announcement whether the Alternate Chairman appointed in 2019, Mr Thomas A. John, remains in that position with the Minister on the board making 10 members. Since the Board was tasked with reducing costs, it would pay handsomely to have the expertise Aramco has on its board in a time like this. Of a potential pool of 10 board members, only 2 appear to have 15 years or more management experience in petroleum operations or cost management expertise. None compare to the experience or expertise of Saudi Aramco’s board.
By publishing audited accounts of its subsidiaries for 2018, NNPC is laying a positive marker in the march for greater transparency and accountability. Hopefully, these practices will survive this GMD and this administration to become ingrained in NNPC’s culture. It is also hoped that the audit is expanded to include CHQ and the opaque practices of the Crude Oil Marketing Department. In light of the dire economic situation in Nigeria, we cannot be shy about bold new endeavours.
Reforming NNPC therefore requires new thinking and new strategies. It starts with the recognition that NNPC is not and was never designed, from the beginning, to be a commercially driven enterprise. Had it been so those 42 years ago, it would have been capitalised, granted more operational autonomy and burdened with fewer regulatory functions in the NNPC Act. Its board would reflect that of a commercial enterprise, even if government owned like Saudi Aramco, with fewer ‘political appointees’. This defect can only be remedied by passing a new law – the Petroleum Industry Bill, which goes to great lengths to separate commercial from regulatory, and asset management functions, leaving the national oil company to focus on what it does best, find and produce petroleum.
However, passing the PIB will never be enough on its own. Implementation requires ensuring that the habits and culture of the past do not infect the new organisation. This means putting in place a board of the most proficient hands with the skill sets needed to turn our strategic national assets into productive wealth to drive and diversify our economy. This also means keeping an eye on the future of energy by having effective energy transition strategies to make sure that we do not become prisoners to our past.
Najim Animashaun
Partner at Gulf of Guinea Consulting in Abuja
