Tunde Rahman
3 September 2007
Lagos — The recent plan to restructure the Nigerian National Petroleum Corporation (NNPC) may bring Nigeria a step closer to reducing corruption in and pave the way for a mega state-owned oil company along the lines of those in Saudi Arabia, Indonesia and Brazil.
The talk about corruption in the management of oil in Nigeria, Africa's largest oil producer and sixth largest oil exporter in the World has been commonplace. In its thirty years of existence, NNPC has been plagued by allegations of corruption that range from politically motivated arbitrary awards of oil blocks and contracts, and often intentional mismanagement of the nation's four oil refineries, and a lack of transparency in the nation's crude accounts.
Analysts say that the restructuring may allow the newly created Nigerian Petroleum Company (Napcom) to gain better access to capital markets, since it would function more as a state-owned oil company rather than as an overarching government agency. Being accountable to international investors and bankers would also mean that the company would be required to keep more accurate and complete records of its activities. However, by far the most important development would be the scrapping of cash calls paid yearly by the Federal Government to meet its share of the cost of production in its joint ventures, a development which could save Nigeria an average of $5 billion annually. Last year, of the budgeted $4.8 billion for cash calls, NNPC could only pay $3.2 billion and the shortfall was sourced through "alternate financing." It is expected that the new NAPCOM in raising finance against its assets would be far more prudent and efficient in resource management and deployment
President Umaru Yar'Adua's senior advisers made up of Rilwanu Lukman, Emmanuel Egbogah and Odein Ajumogobia are believed to be in favour of modeling the new national oil company on a Saudi Aramco-type structure, "said Sebastian Spio-Garbrah, an analyst at the New York-based Eurasia Group. "Whether this means that the government may consider buying out its joint-venture partners the way Saudi Arabia did in 1980 is not yet clear."
About 95 percent of NNPC's projects are funded through joint ventures.
Saudi Aramco, now the largest oil company in the world, was created in 1933 when the Saudi government signed an agreement to allow Standard Oil of California to explore for oil. In the 1970s, the government acquired a 25 percent stake in the company which was then known as Aramco and increased it to 100 percent by 1980. Saudi Aramco turned itself into a global player that owns a fleet of tankers and invests in refineries and distribution projects in other countries. THISDAY checks reveal that the Yar'Adua administration is still looking at a number of options in either buying out its Joint Venture Partners or reducing its equity holding in joint ventures altogether in a manner that will benefit critical stakeholders. The challenge will be in unbundling NNPC into production, down stream and assets holding companies as most of its finances are intertwined. First, they would need a cross debt matrix to determine who is owing what and to whom such that the unbundling if its to succeed will have to be a thorough, painstaking exercise that may need expertise with global reach.
Some critics of the new plan say that it may be a way for the Yar'Adua administration to tighten its grip on Nigeria's oil sector, which accounts for 85 percent of foreign exchange earnings and 60 percent of government revenue. For the time being, Yar'Adua, like his predecessor Olusegun Obasanjo, has sought to keep control of the country's cash cow by keeping the energy portfolio.
The new model, which splinters NNPC into five units, is likely to increase pressure on foreign operators, especially those that signed lucrative deepwater production-sharing contracts with the government during the 1990s.
"Whether the new national oil company seeks to become the dominant player in Nigeria's oil patch or becomes just another competitor to Shell, Exxon, Total and Chevron in the Niger Delta, the net effect of its presence may very well be tougher terms for foreign operators, but also a more transparent bidding process and regulatory environment," Spio-Garbrah said in an analyst note.
Under the new plan, Napcom's finance will be separate from the government's and the company will also oversee its own funding through the financial markets. "Recapitalizing will make us more competitive," said an NNPC official.
Yar'Adua has pledged to reform the energy sector and observers note that the reforms proposed last week have been under consideration for the past seven years. The promise to reform NNPC was among those included by the Nigerian government in its May 2007 report to the International Monetary Fund on performance under Nigeria's policy support instrument (PSI).
Plans for restructuring were first announced in 2000 by the Oil and Gas Reform Committee. Former president Olusegun Obasanjo rejected the findings, according to Thomas Pearmain, an analyst with Global Insights, a U.S.-based firm that provides economic and political analysis.
"The changes to the country's oil sector announced by President Yar'Adua appear to be far reaching and are much needed," Pearmain wrote in a report. "The root and branch reform is exactly the type of overhaul the petroleum sector needs."Nigeria is the largest producer of crude, the 11th largest producer of crude oil in the world and the sixth-biggest producer in the Organization of Petroleum Exporting Countries.
A successful reform of Nigeria's energy sector would bolster the international confidence in the Yar'Adua administration. The European Union last week expressed "no confidence" in the April 2007 presidential election.
The new model, which includes an independent regulator, a downstream unit and an assets holding company, is recognition of the failure of NNPC, according to some analysts.
Though NNPC controls about 1.4 million barrels a day of production, the government is consistently in arrears in funding joint venture projects. Subsidizing domestic petrol prices and maintaining a very "opaque" accounting system also squeezed the coffers, analysts said.
Still, critics cast doubt on whether the newly created National Energy Council will be able to complete the large-scale changes by the proposed Feb. 2008 deadline.
One consequence of the new set up may be widespread job losses, the threat of which drove national labour unions to stage a four-day strike in June that halted commerce and shut down petrol stations. Yar'Adua eventually ceded to most of the demands of the unions. Another showdown may be likely if massive jobs cuts, which observers say are needed to stem corruption, are undertaken.
The main challenge will be to ensure that the new Napcom won't replicate the flaws of old NNPC. The state companies of Venezuela, Brazil and Indonesia do what NNPC was originally intended to do: add value to the State. NNPC instead fed into a culture of corruption that has made public administration in Nigeria so difficult.
To foreigners seeking to do business here, the "oil industry" and "corruption" are terms often inextricably linked. As recently as 2003, Nigeria ranked 132 out of 133 countries in the Berlin-based Transparency International's annual corruption perception index. Last year, the country catapulted to 142 out of 163 nations, due largely to reforms led by former Finance Minister Ngozi Okonjo-Iweala.
The operating environment in Nigeria has had dire consequences for many oil-services firms, particularly those in the U.S. that must comply with the Foreign Corrupt Practices Act. And, until recently, companies in Europe were able to tax deduct bribes paid to Nigerian officials.
Transocean Inc., the world's largest offshore driller, Willbros, GlobalSantaFe Corp., Tidewater Inc., Noble Corp., Halliburton and Baker Hughes have all been recent targets of U.S. Justice Department probes in connection with corruption in Nigeria.
U.S.-based companies are beginning to seek British, Australian and other non-U.S. managing directors to avoid the risk of U.S. nationals having to face criminal charges for violating the Foreign Corrupt Services Act when they return home from Nigeria. Last month, Jason Steph, a 37 year-old former employee of Willbros, was charged with conspiracy to pay $6 million in bribes to help his company secure pipeline business from NNPC.
Workers of some foreign-based oil services have complained that the operating environment in Nigeria makes it virtually impossible to do business without being in violation of some aspects of Foreign Corrupt Practices Act. That, combined with a frustration about the government's failure to curb the kidnapping of several hundred expatriate and Nigerian nationals over the past year, have led to frustration with regard to doing business in Nigeria.
Another challenge for the new structure will be overhauling the nation's four ailing refineries which NNPC new CEO, Abubakar Yar'Adua (no relation of President Yar'Adua) has staked his future on. The government failed to privatise the Kaduna and Warri refineries after Bluestar consortium, led by Aliko Dangote and Femi Otedola, pulled out following widespread criticisms by labour and others that due process wasn't followed.
The 2006 Hart Group report, part of the Nigerian Extractive Industry Transparency Initiative, showed that NNPC "could not explain" how refineries in 1999 and 2000 received more crude than was sent from oil terminals. And critics have long maintained the refineries have been intentionally mismanaged to ensure that government cronies receive huge import contracts at the expense of the quality of life of average Nigerian.
Yar'Adua may soon widen his reforms to include a plan to monetise the nation's gas resources as well as declare a state of emergency on the power sector, Pearmain said.
The final challenge will be whether the new structure can bring about some resolution in the Niger Delta a plan which President Yar'Adua is still keeping close to his chest in his ongoing dialogue with militant groups. The U.S. Energy Information Administration estimates that more that $16 billion in revenue has been lost since the end of 2005, due to shut in production.
"Oil and corruption have been so synonymous," one analyst said. Observers will watch to see whether the new structure will be able to eliminate the stench of corruption from the industry. That is a task President Yar'Adua must accomplish.
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