Nigeria: NNPC's Drive for Improved Profitability

16 June 2020

Peter Uzoho writes on initiatives being embarked on by the Nigerian National Petroleum Corporation to achieve profitability and cushion the effect of crude oil volatility

This is not the best of time for economies and business entities. The effects of the coronavirus has shattered very many plans, aspirations and projections of business concerns globally.

The pandemic has thrown up an unprecedented whammy, and humans and businesses are currently struggling to survive.

Economies and livelihoods have been hit a great deal. The global oil market cum oil and gas industry just like every other market has witnessed monumental setback in history, no thanks to the heavy demand drop resulting to the crash of oil price.

However, as no business organisation is insulated from the shock, the Nigerian National Petroleum Corporation (NNPC) has recorded its own pains and losses and is currently strategising on how to pull through and mitigate risks both in short term and in long term, and to remain profitable.

Being Nigeria's cash cow and critical to the country's economic survival, the NNPC under the leadership of astute petroleum expert and its Group Managing Director, Mallam Mele Kolo Kyari, rather than resorting to moaning and lamentation at this time, is taking a number of measures to strengthen its revenue base and be in a better position to provide sufficient buffers to the government for the good of the Nigerian people.

As if he foresaw the crisis happening now when he was appointed in July last year, Kyari, immediately he was inaugurated as the 19th group managing director of the national oil company, launched his TAPE agenda, an acronym for Transparency, Accountability, and Performance Excellence, and charged all heads of NNPC subsidiaries to work hard to deliver value to the country.

Kyari had, during a town hall meeting with NNPC staff in Abuja in November last year, urged the corporation's workforce to redouble their efforts to ensure that the nation reaped bountifully from its vast hydrocarbon resources which the corporation has the mandate to superintend.

He specifically charged that it was imperative for the corporation to increase its level of efficiency, reduce cost and increase revenue across value chain of its businesses within the shortest possible period.

It was at that meeting he updated members of staff on the five-step approach for the corporation to attain global excellence via the TAPE agenda, which he listed as "Well defined processes benchmarked to World-class Oil & Gas company requirements, Right cost structure that guarantees value realization and profitability, Goals, priorities and performance guarantee, Suitable governance structure for strategic business units and Entrenching team work and collaboration with all key stakeholders."

Without doubt, the NNPC under Kyari is gradually attaining the goals set for itself as evidenced by milestones recorded so far.

However, through its active support which led to the removal of the wasteful subsidy on premium motor spirit (PMS) commonly known as petrol/fuel, few months ago, the revamping of some of its subsidiaries, venturing into non-core business areas as a way of diversifying its revenue sources, and entrenching efficiency across its businesses, the corporation is indeed on track in achieving its goal of improving profitability and increased value addition to the nation.

Revamping Subsidiaries

One of the ways the NNPC is pursuing its goal of achieving profitability is through the steps being taken to revive some of its strategic business units so that they can be able to generate more money to support the corporation.

Some of its subsidiaries which were previously not financially independent and incapable of even meeting their financial obligations have received major turnarounds and are making returns to the corporation.

For instance, NNPC's seismic company, the Integrated Data Services Limited (IDSL), located in Benin, and its engineering company, National Engineering and Technical Company (NETCO) situated in Lagos have all been revamped and are now recording significant progress in terms of profitability and sustainability.

"You see NNPC for example, we have a seismic company, IDSL, in Benin for example, which I was Managing Director of; it was a very small company six to seven years ago, but last year the company posted revenues in excess of $100 million. That's still not too much money, but in an environment where you are looking for every penny to run the national budget, it is critical," the Chief Operating Officer, Ventures and Business Development arm of NNPC, Mr. Roland Ewubare, had said in a recent televised interview.

He added: "We have an engineering company in Lagos called NETCO, that's the national engineering and technical company. NETCO historically couldn't pay staff salaries, but because of the work we have done in revamping all these businesses, NETCO only last year did over $150 million in revenues.

"Now, they are totally independent and paying their own salaries and are able to contribute and stream dividends into the NNPC and to the federation."

According to Ewubare, "there are different ideas and plans we have in place to diversify the income base of the corporation for the greater good of the nation and over the next few months you will see these things rolling out".

Diversification

However, in its effort to expand its revenue streams in order to be able to cushion the effect of volatility associated with the oil market, NNPC has also made entry into other business areas. From renewables to health, to real estate to logistics, among other business sectors, the corporation is signing off partnership deals with private operators in these areas of business to activate the initiatives.

"In NNPC, what we want to do is to create an energy company, not just an oil and gas company. And that's why we are moving into renewable energy," Ewubare stated.

He further said: "We have initiatives around solar that's paying off. We have biofuel agreements with various state governments. We are trying to activate those programmes more rapidly. Within NNPC itself, we have a bunch of non-core businesses.

"NNPC is one of the biggest landlords in this country. Here in Lagos, just behind Chevron, we have 90,000 hectares of land in a country where there's a housing deficit, we are happy to collaborate with private developers to develop these assets.

"We have land in Port Harcourt, Kaduna and everywhere. We have hospitals and clinics all across the country. In a country where many of our citizens fly out on a daily basis to go seek medical attention abroad, if we are able to create centres of medical excellence here, then all that foreign exchange will be saved for the country.

"And the ease of care will be better, since you do have your family here. So, we do have a bunch of non-core directorates. What we are trying to do now is to expand the businesses but primarily in collaboration with the private sector whose core business is around these areas.

"Because we are oil men, not running hospitals. So, if we have a medical type company that wants to collaborate with us, we will be happy to talk to them."

He added: "Same for those in housing estate business, they are welcome. We talked about cost; about 30 per cent of our costs are on logistics. We are now having a conversation with some of the biggest logistics providing companies in Nigeria to have NNPC partner in their businesses.

"All kinds of initiatives we have that are currently at incubation level. When they mature fully, the Nigerian nation will see the benefit of it and you and I as shareholders of NNPC will also get the benefits of it."

Production Cost Reduction

Realising that it would be unrealistic for the corporation to attain its profitability goal when it continues suffering losses as a result of high cost of crude oil production, the NNPC GMD had expressed his resolve to end the regime of high oil production cost. Kyari said the situation at the moment demands change of strategy, explaining that it would be profitable to produce at oil assets with cheaper cost of production.

The NNPC henchman had also set the end of 2021 as deadline for the attainment of $10 per barrel production cost benchmark. He said the corporation would rally its partners to follow suit as it is no longer bearable to see companies producing even as high as $90 per barrel.

"Nigeria will cut production costs to $10 per barrel by the end of 2021.Costs have been too high for too long, he said, pledging that costs would fall or production stopped.

"Some companies are producing at $90 per barrel. This is unacceptable and industry must work together to bring this down. There are no subsidies for the upstream, if it is not economic it must shut down," Kyari said.

He emphasised the need for industry operators to focus on projects that generate more cash, produce more resources - and at cheaper costs, citing the adoption of new technologies as one way of doing things cheaper.

Kyari added that the impact of coronavirus was a "blessing in disguise" for Nigeria, noting that while prices had suffered, they will come back but the pandemic has offered a chance for a reset.

He said talks with contractors had been fruitful and that they had been given the option of agreeing to cuts of 20-30 per cent on prices and that most had accepted the reset.

Subsidy Removal

In response to the hash economic reality presented by the fall in oil price, the NNPC in collaboration with the federal government removed the subsidy which was being paid on imported petroleum products in the country.

The move ended the sole importer status of the corporation and eventually opened the door for private marketers to return to petrol importation activity.

Petroleum subsidy had been a major controversial issue in the Nigerian polity and had led to huge losses amounting to billions of Naira that would have been used to fix a number of the nation's social infrastructure.

Justifying the subsidy removal, Kyari had said it was part of the cost cutting measures put in place by the corporation to support the federal government.

He said the subsidy was only serving the interest of the elite rather than the interest of the poor and less-privileged that it was supposed to serve.

According to him, "this will serve the ordinary people. It will make their leadership at every level accountable, it will also enable particularly Mr. President deliver on his objective to making sure that infrastructure projects are delivered -roads, hospitals, educational institutions are all put on the table and bring that distortion out of our entire economic framework. There is a clear distortion. Whenever you are subsidising consumption you are creating a problem."

Kyari also said by ending the subsidy on petroleum products, the corporation had also ended the subsidising of the product for even some African countries as they were equally markets for the subsidised petrol.

"And as a matter of fact, many people may not know that you can find Nigerian petroleum even as far as in Sudan, in Central Africa Republic and in many other countries around us. So we have just become a market for all and we are literally subsiding West Africa," he explained.

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