2020 Petroleum Industry Governance Bill and the Urgent Need to Reform- NNPC.
Implementation requires ensuring that the habits and culture of the past do not infect the new organization. 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.
Some reports where published shortly before the COVID-19 pandemic lockdown paint a stark picture of the Nigerian National Petroleum Corporation (NNPC) as a sub-optimally governed and remarkably inefficient commercial enterprise, which 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 fourth 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 this is a significant positive milestone.
However, there appears to be no audited account 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 per cent of the total losses of N355.62 billion naira incurred by all NNPC SBUs and CSUs. Moreover, the issue of sustainability identified in BER 2019 is still a live concern.
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 December 31, 2016. While it demonstrates that NNPC conducted audits, it sadly did not and has not published these audited reports that suggest a staggering 10-fold increase in the six-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.
…NNPC’s board has always been a bone of contention as can be seen from the board tenure and GMD turnover. The average tenure of a PETRONAS CEO is six years. The average tenure of a Saudi Aramco CEO is nine years. NNPC, in contrast, has had 20 GMDs in 42 years, at an average tenure of two years each. It is no wonder that…a study surveying…observed that staff viewed GMDs as political appointees.
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 utilization 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 that of Petrobras (of Brazil), and refinery capacity utilization against that of Equinor, illustrates how inefficient NNPC is.
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 that it paid 2.1 billion dollar in bribes, and also had to set aside US 17 billion dollar in contingencies.
Yet by 2018, it generated 95 billion US dollar in revenues and posted US$7 billion in profit. NNPC, in 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.
Reforming NNPC…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 capitalized, granted more operational autonomy and burdened with fewer regulatory functions in the NNPC Act.
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 endeavors.
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 organization. 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.