Last month, Nigerians were greeted with news that our state-owned oil company, the Nigeria National Petroleum Corporation (NNPC) was now "born-again" as NNPC Limited, a public limited liability company owned by the Nigerian state. The rebirth is part of broader reforms in Nigeria's oil and gas sector as provided in the Petroleum Industry Act (PIA), the long-overdue oil industry composite law which is finally going into force after being enacted by the President in August last year.
One of the merits of the NNPC reforms is the expectation that as a limited liability company, though wholly owned by the Nigerian state, it will be insulated from political interference and bureaucratic inefficiencies. A key challenge that has dogged the heels of the corporation over the years has been its dual role as both regulator and commercial player in the sector. The new company has been freed of that unfair and incestuous burden and is now a strictly commercial entity that will not rely on government funding and direct controls.
But beyond that functional change, will the reforms at the NNPC Limited go beyond skin deep or is it just a case of old wine in new bottle? What is expected of the new company under the PIA? Can the new NNPC Limited make the bold transformation from its predecessor's 45-year-old reputation as an inefficient, corrupt, deeply politicized, and habitually loss-making statutory corporation? Does the new company really have what it takes to be both profitable and relevant in an industry that is struggling with profitability and relevance in view of the global energy transition? Can the NNPC Limited shed its old skin of culpability with joint venture partners in the social, economic, and ecological devastation of petro-resourced communities? Given the cessation of statutory payments into the federation account and that the NNPC's oil sales constituted the largest revenue stream for the Nigerian government, how will the reforms affect the country's fiscal health?
First, there is the lingering fear that the new state-owned company will be bogged down by the same inefficiency and patronage that dogged its predecessor. The NNPC Limited is inheriting a workforce, management, and even organizational culture that was largely determined by discretion and corrupt incentives, rather than merit and rules. The board of the new company has also been put in place to fulfill mainly political imperatives, rather than any strategic human resource consideration. It is indeed a tall order to now expect a company saddled from the get-go with such a burden of inefficiency to compete profitably with peers that are operated by the industry's best.
Next let's look at profitability. We can't just wish away the NNPC's loss-making history in the eagerness to birth a profitable commercial firm. Year in, year out, the NNPC and its subsidiaries had been steeped in losses, until it posted an abracadabra profit for the first time in 44 years in its 2020 annual financial statement. This was rather controversial, given Covid-19 and the under-performance of businesses globally, especially in the oil and gas industry! Given this loss-making trend, it is understandable if we worry about the new venture's chances for bottom-line success, at a time when its industry is faced with dire prospects occasioned by the global energy transition. In 2020, the corporation also published its annual financial statements for the first time in its history until then. Before then, opacity was the watchword! With the announcement that the company will be ready for public offer by June 2023, is it safe to expect that investor confidence will be quickly earned by "magically" emplacing the right systems and processes to drive efficiency and profitability?
NNPC Limited will also need to address the operational crisis and lethargy that has for so long dogged the defunct corporation's subsidiaries. Take the refineries, for instance, that have remained comatose, refining nothing year-in year-out, while workers and management cart home stupendous salaries for being idle. Or the corporation's perpetual cash call debts. Or the scandal after scandal that have rocked oil swap deals and the importation of refined products. Or even the highly corrupt fuel subsidy regime that has currently outpaced government capital spending. Granted, under the PIA some of these matters have now escaped the remit of NNPC Limited, but their shadow will cast a pall on the new company for some time yet.
Ahead of its privatization, the Corporation had in 2021 become a supporting company of the Extractive Industries Transparency Initiative (EITI), committing to greater transparency. But real transparency and accountability to its shareholders and stakeholders will require going beyond just disclosing hitherto opaque transaction records as it has already begun doing. Section 83(3) of the PIA, for instance, expects the company to maintain a publicly accessible register of contracts, licenses or leases in enters into with other firms. Also Section 59 (5) of the Act indicates that the Board of the new company will be subject to the Companies and Allied Matters Act (CAMA) 2020, which means that post-public offer shareholders will be subjected to beneficial ownership disclosure requirements of CAMA 2020. There will also be need, from the get go, to come clean on which assets have been carried forward into the new company and which have been left behind with the Nigerian government according to the establishing law. These are really high bars and we watch to see how the NNPC Limited scales them. Pushing that transparency envelope further, the new company will have to start disclosing, at every step, exactly how profitable it is to plunge scarce "investor" resources into new capital projects in a sector that is increasingly becoming a risky bet in view of the energy transition.
Also, the ongoing divestment drive among International Oil Companies (IOCs) throws a different kind of complication into the mix. The new NNPC Limited still carries the moral burdens of its predecessor's joint venture participation in wreaking havoc on the lands, lives, and livelihoods of oil-producing communities over the last seventy years. The Act, after all, transfers the assets and liabilities of the NNPC to NNPC Limited, or where that fails, to the government. The new NNPC, or at least its majority owner (the federal government), cannot, therefore, escape corporate accountability for the economic, social, and ecological liabilities that these hurriedly divesting companies are leaving behind in the Niger Delta. They are in it together!
In any case, by failing to offer preferential shares to extraction-affected communities, the PIA made it clear that it was starting off the new NNPC Limited on a premise that further compounds the exclusion of these communities and the contempt for the legacy issues they have been grappling with for decades. Furthermore, NNPC Limited's shareholding structure rubbishes the principle of federalism and dis-empowers the sub-national governments (especially oil-producing states) by placing ownership of the new company in the federal government rather than the government of the federation. The same for its Board, which does not have autonomous nominees of the state governments on it. Going forward, we can expect to see agitations for these issues to be addressed, perhaps through review of the PIA.
The new company will also need to take the energy transition more seriously. The defunct corporation's Renewable Energy Division only feebly acknowledged this global switch through its controversial biofuels programme. Rather than an emissions reduction target or a plan to decrease oil and gas production volumes in the foreseeable future, what the new NNPC has inherited is a commitment to ramping up production and further investments in fossil fuel exploration efforts, including in frontier basins where such investments are most likely not viable. In fact, the corporation's management which has transmuted to the management of the new NNPC Limited was actually at the forefront of a campaign for Nigeria to be excused from the energy transition! When a company sees that its primary markets are finding alternatives to its primary products, it makes strategic, even if difficult, decisions. Will the new NNPC Limited see the business case for embracing clean energy or will it continue in the myopia of its predecessor that saw the reduction of its carbon footprint as a mere inconvenience? One is tempted to say, time will tell, but there's really no time!
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Finally, the big elephant in the room: Under the PIA, the new company ceases to make monthly payments to the federation account, which implies a massive reduction in revenues available for sharing among the three tiers of government. While the company will still have to pay dividends, taxes and eighty percent of its profit after tax to its owners (for now, solely the federal government), these payments will only level out in the medium to long term. In the short term, however, the national purse, already grappling with a revenue crisis, is in for a big fiscal shock. Debt service consumed over 100% of the nation's revenue in the first four months of 2022, an amount that exceeds the capital expenditure budget for the entire year. The sudden cessation of NNPC remittances will have deleterious implications for sub-nationals, especially oil producing states whose appetite for derivation payments has been enlarged over time.
So while we expect the new state-owned oil company to step up to the plate on its corporate governance, profitability, accountability, and even its business relevance in the current global context, fundamental to its independence and success will be how Nigeria's government navigates the huge revenue implications of this transformation and the fallout for the broader economy. At the crux of this challenge is the question of what the future holds for the NNPC Limited itself, and by extension, Nigeria's fossil-based economy, as the climate crisis worsens and oil and gas assets increasingly become stranded. Central to the foregoing, the re-branded national oil company will, alongside the IOCs, have to deal with an inevitable wave of conflict and fragility as many stranded communities suddenly come to terms with the reality of their betrayal by the fossil fuel establishment. Beyond the euphoria of a name change, these are the bigger existential questions the new company will need to grapple with in the years, nay months, ahead!
Tijah Bolton-Akpan is a co-founder of Policy Alert
