NNPC: The trouble with Nigeria’s cash cow

Written by Daily Trust Sunday, 23 May 2010

ShareWeighed down by inefficiency, massive corruption, non-profitability and violence in the Niger Delta, the gigantic Nigerian National Petroleum Corporation (NNPC), is frustrated by policy inconsistency and abrupt changes in leadership

Still overwhelmed by excitement over his appointment as the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC) in 2009, the GMD, Dr Mohammed Sanusi Barkindo, took all the top management staff of the corporation to Tinapa Business Resort in Cross River State. The officials were subjected to lectures by resource persons on how to transform the NNPC from a debt-ridden, government-dependent, derided and non-performing agency in a record time of 100 days. The management staff did not just listen to the experts, they designed a masterplan and a strategic framework for the implementation of their vision within the given period. The top managers returned from Calabar with all the enthusiasm to deliver the goods. They had been energized but the unexpected happened! Many of them read in the newspapers the next week that they had either been retired, redeployed or removed from their positions.

The above incident signaled, not only the insecurity of jobs at the NNPC, but also the kind of amoebic strategies being employed to reposition the corporation. But this is not just restricted to the heads of departments. Since 2007 to date, the agency has had four Group Managing Directors. Professor Adeola Adenikinju, Vice President of the Nigerian Association for Energy Economics (NAEE), said the frequent changes is affecting the relationship of the NNPC with its foreign partners that they are doing business with.

“When you are changing without stating clearly the reasons for the changes, it usually creates suspicions and panic within the industry. There are no reasons for the changes:   Is it based on fraud or poor performance?  The officials just wake up and find out that they are no longer in their positions. Today, the GMD is removed and tomorrow, another big officer is removed. That does not portend well for an organisation like the NNPC which wants to compete with other international organisations.”

He urged government to remove its hands from the administration of the Corporation, saying that the earlier, the better for them. “That is the tradition in other national oil companies. In fact, some of the national oil companies in other countries established before the NNPC are now doing better than the NNPC.”

According to him, government needs to give autonomy to the national oil company. “Let them have autonomy over the selection, appointment and firing of the non-performing hands,” he added.

The professor observed that under this atmosphere, no international finance company will be willing to give the NNPC any loan. Even if they give, the interest must be very high because of the uncertainty involved.

Mr George-Hill Anthony, the National Chairman of the Coalition for Accountability and Transparency in Extractive Industry, Forestry and Fisheries  in Nigeria (CATEIFEN) – a civil society coalition, who commented on the recent changes,  said though the changes are in the right direction, “we are worried that Mr President didn’t bring a new hand that will change how things are happing in the Corporation.” All the group managing directors are those who have risen through the ranks in the NNPC.

According to him, there is the possibility that an insider will be protected by insiders, but an external person will find it difficult to build a cabal around him that will stop him from doing the right thing. “So, it will be better if somebody from the outside is posted to the NNPC to handle its affairs.”

Mr Bala Usham, an industry commentator, said the changes will do a lot of damage to the operations of the Corporation.  “The changes can kill the NNPC, it’s too much. Other serious national oil companies like PetroNas of Malaysia and Petro Brass of Brazil, have an independent management style that makes it difficult for politicians to interfere with them in such a manner. And that is why they are doing well. It is really sad and government must stop that if they really want us to go far.”

But contrary to Mr Usham’s view, an Energy and Environmental Safety Consultant and former General Manager of the NLNG and the NNPC, Joe Odocha, says the change in the leadership does not mean anything to the Corporation and the industry in general.

“If the programmes are well designed and planned, your own is just to ask the experts to implement them. I give an example.

Ladan didn’t start the Local Content Bill, but it was during his tenure that it was unveiled.  It is a matter of continuity. That is how government is.

He said the president has the final say. He has the right to hire and fire. “What you should understand is that the president is free to appoint and to remove, but where you have a succession plan, it is a different issue. And the NNPC doesn’t have such succession plans.”

In spite of these arguments, workers and officials at the corporation are not comfortable with the frequent changes. “The changes make it difficult to concentrate on our mandates,” said one of the union leaders who doesn’t want to be named.

According to him, changes come with “a lot of disruptions and new policies. In the last few years, we have seen different people with different visions; all of them unaccomplished. We really need to have a tenure system in the NNPC, like the Independent National Electoral Commission (INEC), the Central Bank of Nigeria (CBN) and others. That is the only solution. This is not the right way to handle such a strategic position as the GMD.”

NNPC: New faces, new policies

Just like the group managing directors, most projects and programmes in the NNPC are mostly unripe. Before they mature, the initiators are asked to give way for others. Different heads with different programmes. Engr. Funsho Kupolokun introduced Project PACE as part of his NNPC transformation plan. PACE is an acronym for Positioning, Aligning, Creating and Enabling.

The objective was to ensure that the NNPC evolved as a high-performing National Oil Company. Project PACE also focused on delivering and sustaining best practices in assets and hydrocarbon management within the Corporation, but till the end of his tenure in 2007, almost all the objectives of the PACE remained a mere dream.

Engineer Abubakar L. Yar’adua who just stayed for a little above one year, came with the intention to revive oil exploitation dream in the inland basin, particularly that of Chad and Anambra basins. Engineer Yar’adua said at different fora that his mission was to diversify oil exploration activities in the country through more discoveries of oil outside the delta basin. It was during his time that he ordered a fresh seismic study with more sophisticated technology. Before he vacated the office, he said NNPC was about to resume oil search in the Lake Chad Basin while he further indicated that between $300 million and $500 million would be needed to carry out the seismic data analysis of the area. But soon after he left, the tempo went down.

Like EngineerYar’adua, his successor, Mohammed S. Barkindo, tagged his reform programme as ‘Transformation Project.’ He made so much noise about it. At a point, he even said, “we either transform or wind up”. He stated during the launch of the programme that, “we need to push ahead on this transformation from the cost centre that we have today. The key objective is to turn the corporation into a profit centre, maximize the number of existing subsidiaries that can transform into profit centres, minimising the number of cost centres, particularly at the corporate headquarters and improving their levels of effectiveness and efficiency service delivery. A number of cost centres at the corporate headquarters will remain, but the efficiency of their service will have to be radically improved”.

His ambition was that the NNPC would not only be transformed from a cost centre into a profit centre, but will also migrate into the class of the most successful international oil companies. Barkindo was also keen on the implementation of the Petroleum Industry Bill, despite the objections and fears by the international oil companies against some of the provisions of the Bill when it becomes law.

He also made so much efforts to execute the gas masterplan for the country, but all these reforms remained in the pipeline. Barkindo was also able to convince the International Financiers in London to fund the Corporation as soon as the new law is passed.  Now that he has left, no one knows the fate of the deal. Though Malam Shehu Ladan vowed to continue with the transformation started by Barkindo, his short tenure of only six weeks in office affected his ambition.

Ladan, though had a very short tenure in office, was able to sign one of the biggest loan deals ever in the history of the corporation. The $23 billion deal was between the NNPC and the China State Construction Engineering Corporation Ltd for the construction of the three new greenfield refineries and a petrochemical plant in the country. Ladan said at the signing of the Memorandum of Understanding (MoU), that the NNPC aimed at accelerating the construction of the new refineries to stem the growth of imported fuel that costs the nation over $10 billion annually.

The deal is still on, but the removal of the GMD without any reasons sent a very wrong signal to the Chinese people who will finance the projects.

He also unveiled the Local Content Act which implementation he didn’t commence before he vacated the office. Other projects that fall victim of the frequent changes in the corporation and their ministers include the deregulation policy which has been in the pipeline for more than 10 years, but has not seen the light of day. Also, each group managing director came and went with different views on what the status of the nation’s refineries will be.

Engineer Kupolokun privatized the refinery/petrochemical plants with some domestic facilities being made available for third parties. By the time Engineer Yar’adua assumed power, he opposed the privatisation of the refineries and was able to convince the presidency and the National Assembly to get the refineries back. He later planned recapitalization of the refineries, hoping to source money from the capital market. The mission failed because he left office. Barkindo’s perspective was different. His own was to make the refineries independent from the operations of the NNPC headquarters. The refineries will source money, plan their operations and make returns to the shareholders. But he left without actualising such dream. He said the NNPC will even have more refineries as it becomes a fully national oil company.  Even before the PIB become an Act, observers were skeptical about its implementation. Of course, after the exit of Barkindo as GMD and Rilwanu Lukman as Minister of Petroleum, there were serious fears that the bill will not see the light of day.

Allegations of corruption, inefficiency at the NNPC

Stakeholders believe that the NNPC is riddled with corruption. This, they say, is responsible for the authorities’ resistance to any attempt to probe the corporation. “Barkindo was invited by the National Assembly thrice or so, to explain certain things about the finances of the NNPC. He refused to go. Why did he do that? Those before him had also turned down moves to scrutinize NNPC’s books, though it is in the public domain that the corporation is a conduit pipe for governments in power to feather their political nests. Right now, there have been controversies bordering on what exactly the country’s oil and gas earnings are and somebody is talking about transformation in the NNPC. I think the government should cleanse the corporation of bad eggs before transforming it to the so-called commercial entity,” an oil expert, Samson Adebayo, told Sunday Trust.

But a former Managing Director of the NNPC, Chamberline Oyibo, told our correspondent that one of the major problems of the nation’s oil and gas sector is the lack of requisite funding.

According to him, this situation has caused delays in the operations of the NNPC, thereby stifling performance. He also said the sector is bedeviled by violence in the oil producing Niger Delta area.

“At a time, Nigeria lost almost one million barrels of crude oil daily due to the violence in the area. This kind of thing is not good for the industry. It is a disincentive to the sector. And I am happy that the development has been taken care of by the amnesty deal of the federal government as well as the revitalization of the Niger Delta Development Commission[NDDC]’’.

Speaking also, the President of the Trade Union Congress (TUC), Peter Esele, said the good of the sector lies in deregulation. He, however, highlighted pre-conditions for deregulation thus:

a)     Government should establish a mechanism to ensure that our importers obtain refinery gate prices and not spot or middlemen prices.

b)  Jetty draft that constrains vessel size should be eliminated by dredging so that the unit cost of landed products can be reduced to efficient minimum by the use of large import vessels.

c)     The pipeline and depot integrity must be fully restored to reduce, if not eliminate, to avoid  the excessive movement of products across the country by road tankers that damage the roads and create rent taking in product distribution across the country.

d)   The pipelines and depots have to be unbundled and open access granted to all importers of products.

e)  The refineries in the country must be made to work optimally. This will reduce our waste and also make the country benefit from the value added of refined crude.

f)    Most importantly, energy security is important to a nation. Consequently, government must discourage the use of an armada of ships on the high seas at extravagant demurrage fees as the nation’s strategic reserve.

Esele argued that if deregulation must succeed, government must do first things first. The key first things are to carry out an audit of the historical imports and the related subsidy, name and shame the cartel of fraudsters masquerading as importers and create an enabling environment for deregulation. If life must be better for the generality of Nigerians, we must be a nation that learns from past difficulties and mistakes and continuously ensure that our processes are improved upon. Unfortunately, this is not the case as we never learn, nor do we improve on our systems and processes.’’

How to run a successful National Oil Company

Alberto Cisneros Lavaller, an international oil expert who consulted for Malaysia, explained on his website that most national oil companies under the government’s umbrella area bunch of inefficiencies and lack competitiveness while corruption are easily covered up. But the modern NOCs have distinguished themselves from cost centres to profitability and expansion due to the dedicated management style.

Lavaller said Petrobras, a semi-public corporation, is accountable to the Brazilian populace. The company’s by-laws establish norms and regulations, spelling out how it is controlled by Brazil’s federal government. Thus, Petrobras has to show transparency to its employees, other corporations, suppliers, clients and competitors. The company reports its performance, not only on oil- and gas-related issues, but also on those related to social, administrative and environmental ones.

The consultant said Petrobras’ stock ownership is as follows: 32 percent is owned by the federal government, 40 percent by private owners and the balance by Brazil’s National Bank of Social and Economic Development, the Social Labor Fund and other minority shareholders. However, the voting rights on those shares break down differently: the federal government has almost 56 percent of the voting shares, private owners hold 30 percent and the balance is held by the partners mentioned.

Before the Oil Law was passed in 1997, the company’s directors were appointed by Brazil’s president. Therefore, the link between the federal government and Petrobras was very close, with many strings attached. But with the Oil Law, the company’s governance structure changed. Now, the company is overseen by a board of directors headed by Dilma Vana Rouseff, who is the chief of staff to Brazil’s president, Luiz Inácio Lula da Silva. That board includes Brazil’s energy and economy ministers, as well as the president of Petrobras and investor representatives. The board of directors then appoints the members of Petrobras’s executive board – the majority of whom are either current or retired employees – which handles the day-to-day operations of the company.

Since this change in governance, the corporation has been run with utmost professionalism and with profitability and responsibility as its main goals. The company’s president, Jose Sergio Gabrielli, reports directly to Brazil’s minister of energy and mines. Petrobras’s organizational model must be approved by its administrative council. But the good news is that the state control, however, does not hinder Petrobras’s commercial management.

The Petronas of Malaysia, too, has an interesting reputation because it is recognised as a highly competent and effective NOC. This reputation is also linked to the management style adopted by the company, although the management of Petronas has a close relationship between the government and the company, that does not affect its policies. The company has a board with a chairman. The chairman is selected by the Prime Minister and has considerable personal power and usually has a very long tenure. The former, recently deceased, chairman was Azizan Zainul Abidin; he held the position from 1988 to 2004. That is about 16 years in office. He headed Petronas in its years of domestic and international expansion.

In Saudi Aramco Falih, a nearly 30-year-old company veteran who is executive vice president of operations, was appointed January 1, 2009.  Falih replaced Abdallah Jumah, who has decided to retire after serving for 14-years as president and CEO of the oil company. Now Saudi Aramco is the top national oil company with the highest reserves.

At the moment, NNPC is technically insolvent. In 2008, the company had a negative balance of N326 bn. “Technically, we are insolvent. Without your support and sovereign guarantees, we can as well wind up. This is not sustainable and this across the value chain. We are, therefore, cash negative on stand alone basis and the downstream continues to account for a major chunk of these losses.” These were the words of the former Group Managing Director of the NNPC, Mohammed S. Barkindo, shortly before he was sacked.

Meanwhile, Petrobras third quarter profits for 2009 was $4.2 billion. It exported an average of 724,000 barrels of oil per day, an increase of 10 percent that made it a net exporter of oil. And Petronas 2009 net income in the year ended March 31, was $15 billion. That is how to run a successful national oil company.