Nigeria: NNPC - Positioned for Improved Transparency

13 September 2021

In recent weeks, a lot of focus has been on the oil and gas industry. From the recent passage of the Petroleum Industry Act to the historic declaration of its first profit by the Nigerian National Petroleum Corporation, the sector has been, as expected, literally been on an overdrive. Emmanuel Addeh in this report examines the ground-breaking announcement of a net gain by the national oil company hitherto viewed as a loss-making organisation, as it charts a new pathway for its future survival.

The Nigerian National Petroleum Corporation (NNPC), the country's state oil corporation which was established on April 1, 1977 in addition to its exploration activities, has powers and operational interests in refining, petrochemicals and products transportation as well as marketing. In 1988, the NNPC was grouped into 12 strategic business units, covering the entire spectrum of oil industry operations: exploration and production, gas development, refining, distribution, petrochemicals, engineering, and commercial investments.

However, for the third time since its establishment 44 years ago, the NNPC under its Group Managing Director, Mallam Mele Kyari, last week officially released its Audited Financial Statement (AFS), the one for the year 2020.

With the development, the corporation joined other state-owned global oil concerns which publish the details of their operations as dictated by the law setting them up which among others has the capacity to boost investors' confidence and enhance business transparency.

But it probably did not come as a surprise to a number of Nigerians who still had some faith in the national behemoth, with its GMD, Kyari, having promised on several occasions that from this year, the NNPC will turn the corner and remain on the path of progress.

Earlier, precisely on August 26, President Muhammadu Buhari's had declared a Profit After Tax (PAT) of N287 billion for the financial year 2020, and further directed the NNPC ensure the prompt publication of its AFS in line with the requirements of the law.

While noting that the agency's losses were reduced from N803 billion in 2018 to N1.7 billion in year 2019, Media Adviser to the President, Mr. Femi Adesina, disclosed that the move was in fulfilment of an earlier pledge by the federal government to publicly announce the financial position of the NNPC.

In June and October respectively last year, the corporation made public its 2018 and 2019 AFS, noting in the documents that were released five months apart, that it had achieved a 99.7 per cent reduction in its loss profile from a whopping N803 billion in the previous year.

Buhari stated that to take the corporation to the next level, he had directed that all the financial statements of the organisation must be promptly released and congratulated the NNPC board for a job well done.

"I have further directed the NNPC to timely publish the audited financial statements in line with the requirements of the law and as follow-up to our commitment to ensuring transparency and accountability by public institutions.

"I congratulate the board, management and staff of the corporation and look forward to greater value creation for the Nigerian people," he said.

A New Beginning

The latest financial statement by the national oil company showed that aside the already announced gains which rose after a loss position of N1.7 billion in 2019 to a profit of N287 billion in 2020, NNPC's total current assets increased by 18.7 per cent compared to that of 2019 while its total current liabilities increased by 11.4 per cent within the same period.

In addition, the group's working capital remained below the line at N4.56trillion in 2020 as against N4.44 trillion in 2019, while the corporation's group revenue for the 2020 financial year stood at N3.718 trillion as against N4.634 trillion in 2019.

According to the national oil company, the decrease in the group's revenue could be attributed to the decline in production and price of crude oil due to global impact of Covid-19.

But while the directors of the NNPC assessed the group's future performance and financial position on an ongoing basis and said they had no reason to believe that the group will not be a going concern in the years ahead, the auditors however disagreed, pointing out that some of the indices in the AFS were a cause for concern.

The independent auditors, namely PriceWaterhouse Coopers (PwC), SIAO Partners and Muhtari Dangana & Co drew attention to a section of the document which indicated that the corporation's liabilities still outstrips its assets.

The auditors stressed that though the NNPC announced a profit of N287 billion, but the large discrepancy between assets and liabilities cast some uncertainty on the corporation's operations.

"We draw attention to note 42 of the consolidated and separate financial statements, which indicates that the group recorded a net profit of N287.2 billion (Corporation: N235.3 billion) during the year ended 31 December 2020 and, as at that date, the group's current liabilities exceeded its current assets by N4.6 trillion (Corporation: N729.1 billion).

"As stated in note 42, these events or conditions, along with other matters as set forth in note 42, indicate that a material uncertainty exists that may cast significant doubt on the group and corporation's ability to continue as a going concern. Our opinion is not modified in respect of this matter," they noted.

The newly released AFS also indicated that the NNPC recorded a profit before tax of N719 billion in 2020 compared with N93 billion loss in 2019, and a total comprehensive income of N655 billion compared to a loss of N20.1 billion last year.

The financial statement was signed by the Group Managing Director of the corporation and the Chief Financial Officer, Mallam Mele Kyari and Mr Umar Ajiya respectively and was dated September 3.

However, despite their misgivings, the auditors said records show an improvement from prior year based on several group improvement efforts put in place by management, including elimination of the cost drivers responsible for the accumulation of the shortfalls in settling domestic crude obligation to Federation Account.

The auditors further acknowledged the introduction of the Price Modulator mechanism in the Petroleum Products Pricing Regulatory Agency (PPPRA) template designed to eliminate the major cause of the losses as well as minimising the breaches to pipeline networks.

Under the Petroleum Industry Act (PIA), they projected that the NNPC when given the autonomy, will operate profitably, noting that the recapitalisation of the corporation will enable the resolution of all outstanding related party payables and receivables to enable NNPC start on a clean slate.

During the year, the NNPC said it donated a total sum of N3.6 billion and N9 million respectively to various charitable organisations, higher education institutions and other organisation, while no donation was made to any political party.

Kyari: How feat was achieved

The management and board of the NNPC attributed the N287 billion profit in its audited statement to the adoption of cost-cutting measures, hitting at least 30 per cent reduction in the last two years.

Speaking at the headquarters of the company in Abuja, Kyari stated that the national oil company had adopted drastic changes in the way its business was conducted before now.

Joined by board members of the corporation, he explained that the efforts of the corporation to embrace transparency and accountability encouraged by President Muhammadu Buhari, had started paying off.

The GMD said he attempted to bring in a new perspective in the running of the national oil company and built on what he met, ensuring more efficiency by automating the company's processes and systems as well as choosing wisely what to invest in.

Added to those factors, the NNPC boss stated that the corporation had also been focusing on people's issues since happy workers will ultimately deliver on the objectives of the company.

"The first principle of course is elimination, that is, you don't buy what you don't need. And we simply stopped buying what we didn't need. Also, during the particular fiscal year 2020, whoever we engaged on all our contracts, we insisted on cutting costs by at least 30 per cent.

"This worked and we were able to pull down most of our procurement costs by 30 per cent. We saw the opportunity to be much more efficient by automating our systems and processes and that made us faster and also ultimately it reduced so much of logistics costs that ordinarily would have been additional costs to our business," he noted.

He admitted that although there's more work to be done, he remained proud of his team at the corporation, maintaining that history had been made by the NNPC.

According to him, NNPC has now turned the corner from being a loss-making business that will look to improve on its performance especially under the Petroleum Industry Act (PIA).

"This is a very proud moment for us, because to our shareholders we're no longer declaring losses. As a matter of fact, just like last year as we moved from loss level of N803 billion in 2018, we reduced it to N1.7 billion in 2019.

"And in the 2020 fiscal year, we're making profit after tax of N287 billion. This is no doubt a huge progress, but by no means sufficient," he said.

On the changes made by the corporation, he said: "There are very drastic changes to the way we do our business. One is to cut costs, to be more efficient, and also to ensure that this company is transparent and accountable to the Nigerian people."

Directors' fees, entertainment expenses, others slashed

As part of the attempts to restructure the organisation's spending, the NNPC slashed the various fees collected by directors of the national oil company from N606 million in 2019 to N214 million in 2020.

Typically, directors' fees entail compensation for services as a member of the board of directors of the company, excluding reimbursement of expenses or other non-regular forms of compensation.

In all, the audited statement showed that in certain areas, the corporation did remarkably well in its avowed cost-cutting efforts during the year under review, while other administrative cost centres, gulped a substantial portion of the NNPC's finances.

Following the economic downturn occasioned by the Covid-19 pandemic last year which led to the fall in oil prices, the NNPC said it was embarking on internal restructuring of its operations, including shaving off unnecessary spending as well as automation of its processes.

"The corporation saved a lot of cost through contract renegotiation by up to 30 per cent on the heels of the Covid-19 pandemic, introduction of technology that drastically cut travel cost through reduction in in-person meetings and the general automation of processes that enhanced efficiency across the group's businesses," Group Managing Director of the NNPC, Mallam Mele Kyari, said last week.

Under general administrative expenses, although the NNPC paid N6.2 billion for rent and rates as opposed to N5 billion in 2019, but repairs and maintenance costs reduced from N38 billion to N26.6 billion, security expenses were N12.6 billion and N12.3 billion respectively for 2019 and 2020, while directors fees reduced from N606 million to N214 million, a slump of about 62 per cent.

The NNPC board is led by the Minister of State, Petroleum Resources, Chief Timipre Sylva, who doubles as the alternate chairman, assisted by Senator Magnus Abe, Dr. Tajudeen Umaru, Dr. Steven Dike, Mrs Lami Ahmed, Chief Pius Akinyelure, Mallam Mohammed Lawal and Secretary of the Board, Mrs. Hadiza Commassie as well as the permanent secretary, ministry of finance.

For general and administrative charges, the NNPC's bank charges increased from N370 million in 2019 to N845 million in 2020, exchange loss was N72 million, advertisement and publicity gulped N5.3 billion, up from N1.2 billion in 2019.

In addition, employee benefits expenses cost increased from N357 billion to N397 billion, donations rose from N279 million to N3.63 billion, audit fees rose from N1.040 to N1.07 billion, while entertainment expenses was slashed from N8.3 billion to N1.6 billon in the 2020 financial year.

Between 2019 and 2020, legal and professional fees paid by the corporation reduced from N30 billion to N24 billion while printing and stationery came down from N1.6 billion to N976 million.

Staff training and recruitment cost slumped from N12.8 billion to N7.5 billion in the year under review and what the corporation termed management and facilitation fees increased from N1.3 billion to N5.6 billion.

However, the document revealed that transport and travelling gulped N13.5 billion in 2019 and N14.2 billion in 2020, a year marked by travel restrictions as countries embarked on lockdown due to the pandemic, even as postages and telephone expenses which consumed N8.5 billion in 2019, dropped to N5.6 billion in 2020.

Office running cost jumped from N11 million to N83 million, while under the subheading other expenses, which included Nigerian content expenses, business development expenses , decoration and beautification expenses, the amount spent was reduced from N53.2 billion to N26.6 billion.

Similarly, the NNPC paid N94 billion as pensions in 2020, up from N90 billion in 2019 and gratuity costs decreased from N51 billion to N46 billion in 2020. Cumulatively, the NNPC spent N678.171 on general and administrative expenses, a reduction from N695.949 in 2019.

In terms of monies from contracts, revenue from crude oil sales was N828 billion in 2020 as opposed to N1.0 trillion in 2019; revenue from petroleum product sales was N2.2 trillion in 2020, from a high of N2.9 trillion in 2019, sales of natural gas increased from N489 billion in 2019 to N524 billion in 2020 while monies from services rendered decreased from N144 billion to N89 billion in 2019 and 2020 respectively.

In all, group revenues from the above items for the group, decreased from N4.6 trillion in 2019 to N3.7 trillion in 2020, according to the document.

Corporation forecasts additional N300bn Profit in 2021

A few days after declaring a PAT of N287 billion in its audited account for 2020, the corporation said it was projecting a further net gain in excess of N300 billion by the end of 2021.

Group Executive Director, Finance and Accounts of the corporation, Mr. Umar Ajiya, who spoke on Arise Television, THISDAY's broadcast arm, explained that the national oil company had been able to reverse its impairment losses from previous years.

Ajiya explained that the NNPC was turning the corner, with current financial obligations being met as and when due, without default, adding that although there was a "write-back", the process of restoring to profit provisions for bad or doubtful debts previously made against profits, the write-back was not responsible for its 2020 profit.

"We already achieved N147 billion by May and by end of June, we were nearing N200 billion. So, other things being equal, by our year end outlook, we should be far above N300 billion.

"And for sure, by the end of the year we should be able to surpass our 2020 performance, which will go a long way to reducing the accumulated losses of the group and at the same improve liquidity position such that the working capital is no longer in deficit," he stated.

He noted that although the accounts of the corporation had been audited in the past, the audits were done some years in arrears, but were only being released to the public in the last three years since the corporation is now a member of the Extractive Industries Transparency Initiative (EITI).

Ajiya stated that a combination of aggressive debt recovery, cost optimisation, renegotiation of all contracts, rescheduling of debts, exiting joint ventures that did not bring value as well as non-interference from President Muhammadu Buhari and Vice President Yemi Osinbajo helped return the NNPC to the path of recovery.

However, he noted the federation continues to owe gas-to-power debts of N285 billion, admitting that the write-backs that had to do with impaired revenues or incomes that were not initially recognised, including $1.57 billion had been refunded to the NNPC.

He listed other cost-cutting measures as automation of business processes, reduction of paper work, improvement in efficiency as well as reduction in cost of travels, general elimination of wastages and optimisation of staff.

"We had thousands of staff in the refineries which we had shut down but those engineers have now been moved to other businesses where they can add value, so that way cost is also optimised.

"There were so many initiatives within the system that were geared towards improving the profitability. The profit of N287 billion, one could say it's small, but you recall that 2020 was a Covid year and we were faced with three variables, price collapse, demand which also collapsed, but we had to do something about cost," he explained.

The NNPC official maintained that shutting down refineries was a cost saving measure to reduce the challenge of crude oil disruption, saying that in some instances pumping 1 million barrels into the refineries could yield half the expected product.

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