Unbundling the NNPC Structure: Strengths and Weaknesses

On June 14, the state oil corporation on a new trajectory of transparency published its 2018 annual report. This was the first time in its 43 years of existence that it did such.

The significance of this event is one that removes the cloak of secrecy NNPC has worn over the years. It put the spotlight on the single entity that generates about half of the federal government revenue, and over ninety per cent of foreign exchange earnings.

Let us look under the hood of this behemoth. Then we’ll see what we can find and understand with the help of a SWOT analysis.

While oil exploration in Nigeria began in 1937, the Nigerian National Petroleum Corporation (NNPC) was not established until April 1, 1977.

The state oil corporation currently has a mandate in exploration and production, gas development, refining, distribution, petrochemicals, engineering and commercial investments, all in the oil industry.

NNPC activities basically involve, upstream and downstream operations, including:

  • Crude oil production (SBUs)
  • Supervision and management of government investment in the oil and gas industry
  • Conversion of crude oil/gas into refined petrochemical products (PMS, DPK, AGO, etc.)
  • Transportation and marketing of these products.

NNPC achieved the functions listed above through subsidiaries. These subsidiaries are made up of twelve strategic business units and the department of petroleum resources.

The twelve SBUs are:

  1. National Petroleum Investment Management Services (NPIMS)
  2. Nigerian Gas Company Limited (NGC)
  3. Nigerian Petroleum Development Company Limited (NPDC)
  4. National Engineering and Technical Company Limited (NETCO)… #SWOTSunday
  5. Integrated Data Services Limited (IDSL)
  6. Pipeline and Product Marketing Company (PPMC)
  7. Kaduna Refining and Petrochemical Company Limited (KRPC)
  8. Port Harcourt Refining Company Limited (PHRC)
  9. Warri Refining and Petrochemical Company Limited (WRPC)… #SWOTSunday
  10. Duke Oil
  11. Hydrocarbon Service Nigeria Limited (Hyson)
  12. Nigerian Liquefied Natural Gas Limited (NLNG).

NNPC Revenue Flow to the Federation Account

The Nigerian government generates revenue from the NNPC through the following sources:

  • Sale of government equity share of crude oil lifted by the NNPC
  • Exports of liquified petroleum gas
  • Sale of domestic gas
  • Royalties on petroleum operations
  • Taxes on petroleum operations.

Having given background information on the state oil company, let us see a SWOT analysis to properly understand the qualities of NNPC described above.

STRENGTHS

1. Largest Contributor to the federation account. The participation of NNPC in the oil and gas industry gives rise to significant revenues to the Nigerian government.

The sources of revenue include the sale of government equity share of crude oil (export and domestic), LPG exports and NLNG feedstock, domestic gas sales including royalties and taxes on petroleum operations.

The revenue gained by the NNPC accounts for 76% of federal government revenue and 40% of the entire country’s GDP.

2. A globally-demanded commodity as an underlying product. Crude oil is a global commodity that trades on both the spot market and via derivatives contract. It also serves as an investment tool as a speculative asset, as a portfolio diversifier, or as a hedge against related positions.

This diverse functionality makes oil the single most important commodity in the world as it is the primary source of energy production.

3. State-backing. NNPC being 100% state-owned enables it to take a lot more risks, without regulations being a challenge.

4. Joint Venture Agreements. These contractual agreements for oil exploration with international oil companies (IOCs), help the corporation to achieve its duties at lower costs.

The cost of exploration is on the IOC, while a large percentage of the profit oil is NNPC’s share. In 2013, 925,527 barrels/day of Nigerian crude oil was gotten through joint venture arrangements. #SWOTSunday

WEAKNESSES

1. Federal Character. The aim to achieve national spread in recruitment, asset locations and resource distributions have allowed for incompetence and irrational decisions. An example is the siting of a refinery in Kaduna where oil is not being explored.

2. Ineffective Refineries: Out of the 12 subsidiaries of the NNPC, three of them are refineries, with a capacity of 445,00 barrels per day but Nigeria’s per capita refining capacity is 0.002 bpd/capita. Recently, the corporation has announced the shutdown of these refineries, as a result of ineffectiveness.

3. Legal complexities: Public laws that govern the operations of NNPC are mostly ambiguous and thus provide provision for mismanagement, take the petroleum industry bill as an example.

4. Opaque Administration. NNPC’s management has a history of resisting outside scrutiny. The NNPC reveals little about its finances and operations, yet more than half of public revenues flow through it.

OPPORTUNITIES

1. Natural Gas. This environmentally and cost effective energy choice is yet to be explored fully by Nigeria. The NNPC should make serious investments to give appropriate attention to the full gas value chain in the supply system.There should be increased commitment to reduce the impact of gas flaring.

The NNPC has an opportunity to develop policies to create a dynamic pricing system, fund gas development projects to enhance gas utilisation while providing an enabling environment for private participation.

2. Reforms and Deregulation. The current state of the NNPC is inefficient in service deliveries and ineffective at promoting society’s welfare objectives, and as such provides an opportunity to enhance the sustainability of petroleum wealth and its impact on all stakeholders.

The goal is to reposition NNPC on a profit-oriented trajectory. One with operational and strategic autonomy at a level comparable to successful national oil corporations (NOCs) like Petronas, Equinor ASA, and Saudi Aramco.

At the heart of reforms of the oil and gas industry and by extension, NNPC, is the Petroleum Industry Bill (PIB) which has been in the pipeline for almost 2 decades.

While progress has been made in terms of the Petroleum Industry Governance Bill (PIGB), the passage of the other 3 components of this bill is yet to see the light of the day.

The reformation of NNPC is important so that space would be opened up for massive investments and increased value addition for the country.

3. Going Public. NNPC can explore the option of going public like its Saudi Arabia counterpart, Saudi Aramco. Going public as a state oil corporation will help it solidify its efforts to achieve solid corporate governance as it fulfills the requirements to be listed on an exchange.

4. Human Capital Development. If NNPC decides to embark on reforms in its recruitment process and structure. It will have access to a massive pool of qualified candidates for employment with a view to adding value to NNPC as their employer.

THREATS

1. Renewable Energy. The strong wave of renewable energy travelling around the globe is challenging traditional carbon-based energy sources and disrupting business models.

NNPC’s business model is fundamentally established on fossil energy, in which demand for it will begin to dwindle in coming years as the adoption of renewable energy sources accelerates across the globe.

2. Insecurity. NNPC’s infrastructure across Nigeria is exposed to different forms of vandalism causing temporary disruptions in its activities and reduced efficiency of its operations.
Insecurity to NNPC’s facilities leads to decline in production levels, and consequently negatively impact the nation’s revenue.

3. Volatile Oil Prices. Crude oil, as a globally demanded commodity, exhibits volatile price movements.
The volatility of oil prices is tied to the in-elasticity of supply and demand to price changes in the short run. It takes a long time to develop new supply sources, and consumers have a high switching cost to other energy sources. These conditions explain the volatile oil prices exhibited globally.

As such, NNPC’s exposure to these shocks affects its capacity to deliver decent revenue, and as a result, profits to ensure its continued development and improved efficiency.

4. Competitor Countries. Countries with crude oil deposits and better law and governance in their oil sector in Africa serve as a threat to NNPC’s development as a state oil corporation.

It is estimated that Nigeria’s oil sector with NNPC at its centre, loses $15 million annually due to dampened investor confidence.

Investors looking to make an investment in the oil sector will decide to look elsewhere with better governance and legislative development of their oil sector.

The transformation of NNPC and the consequential development of the oil sector in Nigeria is hinged on addressing the threats and weaknesses discussed here and taking advantage of the strengths and opportunities availed to NNPC, the major driver of growth in Nigeria’s oil sector. =



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