Monday, February 13, 2012

Are there any economic benefits of restructuring the Nigerian National Petroleum Corporation

By Ishaya Paul Amaza
One of the effects of the aftermath of the 1st World War was the involvement of national governments in the operations of the petroleum sector through the formation of national oil companies, nationalisation or the acquisition of shares in existing oil and companies (Omoregbe, 2001, page 96). Prior to the time, petroleum operations were the exclusive preserve of private oil corporations who unilaterally made decisions affecting the development, production and the prices of crude oil (Turner, 1980, page 24 – 25).

The creation and establishment of the national oil companies (NOC) was done for various reasons, but it reflected the national objectives and policies of the various countries. Most of these objectives were to ensure security of supply especially in the wake of the Second World War, promote the growth of the domestic oil market and to make profits as well. (Omoregbe, 2001)
Notwithstanding, the introduction of state-owned oil companies, over 90% of the production, refining and marketing of crude oil in the world with the exception of the communist countries were controlled by major international oil companies in the mid-fifties (Seymour, 1980, page1). The companies also controlled more than 85% of the crude oil transportation. During this period, crude oil was priced through the use of posted prices as a representation of the open market value, but due to their dominant position in the industry, the oil companies were able to set crude prices at below the market prices through the use of inter-affiliate transactions (Seymour, 1980).
In the late 1950s, the major oil companies unilaterally engaged in a series of price reductions of crude oil which greatly led to a loss of income of the oil-producing countries by as much as 15% (Seymour, page 19). In reaction, some of the countries came together to form an organisation, the Organisation of Petroleum Exporting Countries (OPEC) to harmonise their policies and form a cartel against the major companies in order to maintain a steady price of crude oil. To achieve its aims and objectives, OPEC urged its members to form national oil companies which would be a vehicle in having meaningful control over its petroleum resources (Omoregbe, page 93).
Nigeria discovered its first commercial oil reserve in 1956 and has gone ahead to be one of the leading exporters of crude oil in the world and 2nd largest in Africa with the crude exports accounting for as much as 95% of its export earnings and 65% of government revenues (Energy Information Administration (EIA), July 2010). It joined the OPEC in 1971 and as a precondition to its membership, it created a national oil company in response to OPEC policies and declarations.
Historical evolution of the NNPC
Nigeria gained its independence from the United Kingdom in 1960. Up till 1959, only British oil companies had the rights to explore for petroleum in Nigeria under the Petroleum Ordinance of 1889 and the Mineral Regulation (Oil) Ordinance of 1907 (Omoregbe, page 16). Consequently, Shell D’Arcy Petroleum Company became the sole concessionaire with a licence covering the entire country until 1959 when its rights were reduced. Soon afterwards, other major oil companies such as Mobil and Gulf were granted licences and began operations in Nigeria (Mohammed-Jallo, 1989, page 6).
Post-Independence and the Nigerian National Oil Corporation (NNOC)
Even after Nigeria gained its independence in 1960, the oil industry was exclusively in the hands of the major private oil companies notwithstanding the fact that crude exports was already becoming a major revenue earner for the country. The government body responsible for the petroleum industry was the Hydrocarbon Division within the Ministry of Mines and Power with staff strength of only five senior officers and three trainee engineers (Mohammed-Jalo, page 31).
Nigeria eventually sought to join OPEC and in accordance with OPEC’s Declaratory Statement on Petroleum Policy in Member Countries,[1] where it enjoined its members to exercise permanent sovereignty over their petroleum resources and to be in a position to directly exploit the resources to derive the maximum benefit, it created the Nigerian National Oil Company in 1971.[2] It also enacted the Petroleum Act of 1969 under which the government was vested with the ownership and control of the entire oil and gas resource in the country and its continental shelf (Olisa, 1981, page 91).
The areas not covered by existing licenses were transferred to the NNOC which was mandated to undertake all activities in the oil industry. The government also re-negotiated and obtained participation interests in the private oil companies already operating in the country which were transferred to the NNOC. Furthermore, the government stopped granting concessions to any other oil company to operate, except those willing to participate as contractors or partners with the NNOC (Omoregbe, page 18).
However, although the NNOC was the alter ego of the Nigerian government, it operated as a pure commercial company without any statutory duties to control the operations of the industry. The Hydrocarbon Division in the Mines and Power Ministry was upgraded to a full ministry in charge of petroleum resources which had overall supervisory and regulatory powers over the petroleum sector (Olisa, page 91).
The Nigerian National Petroleum Company (NNPC)
As the petroleum industry in Nigeria strengthened in view of the OPEC increase in oil prices in 1973, the government felt the need to integrate its two separate entities responsible for petroleum activities to ensure that they were charged with direct activity in oil operations and the regulation of the industry respectively (Waya, 1996, page 20). In 1977, the government enacted an Act that dissolved the NNOC and established the Nigerian National Petroleum Corporation (NNPC) which was to combine the operational and commercial functions of the now defunct NNOC and the regulatory functions of the Ministry for Petroleum Resources (Omoregbe, page 99). All assets, funds, interests, duties, obligations and liabilities held by the two bodies were automatically vested.
The NNPC was empowered to participate in all levels of the petroleum industry in both the upstream and downstream sectors, to enter into petroleum agreements on behalf of the government and generally carrying out duties that would enhance the industry and develop the oil and gas resources in Nigeria.[3] The regulatory and non-commercial arm of the NNPC, the Petroleum Inspectorate was responsible for granting permits and licences to all other players in all sectors of the petroleum industry. It also enforced the various laws governing the industry and made its own regulations for the oil companies. It had a semi-autonomous status and was answerable only to the Chairman of the NNPC (Olisa, page 92).
Structural Organisation of the NNPC
The vesting of both commercial and regulatory powers on the NNPC turned it into a behemoth company with a number of subsidiaries. The size of the company made it to be inefficiently run and over the years it had undergone a number of re-organisations. In the early 1980s, the Ministry of Petroleum of Energy was re-established and in 1988, the Petroleum Inspectorate was detached from the NNPC and merged with the ministry and renamed the Department for Petroleum Resources (DPR) (Omoregbe, page 102).
The DPR was given the responsibility for the overall supervision and regulation of the entire petroleum industry including the NNPC, which was still 100% government-owned. It retained its powers of issuing licenses and permits.
The NNPC continued its role as a full commercial company but it was divided into six divisions which were exploration and productions, refining and petrochemicals, engineering and technical, finance and accounts, corporate services, and commercial investment divisions (Ayoku, 2002, page 21). In addition, it also had eleven subsidiary companies comprising of 4 refineries, 2 gas companies, a pipeline company, and others providing services to the oil industry (Omoregbe, page 103). Over the years, the structure of the NNPC expanded, with two more divisions being created and its subsidiary and associate companies increasing in number to eighteen.[4]
Operational Problems of the NNPC
The NNPC is a vertically integrated, wholly-owned government corporation that for a long period of time operated as a monopoly with no other oil company having the same level of integration in the country. It is managed by a board of directors that are all appointed by the government to manage the entire company and it exercises the government’s absolute right to the ownership and control of the petroleum resources with its aggregate stake in the various facets of the industry put at 60% (Agoro, 2002, page 75).
Despite the efforts to commercialise the NNPC, its organisational structure groups its subsidiary companies and internal departments together under a division which makes it operate more as a government parastatal than a limited liability company (Omoregbe, page 106). The revenue it generates goes directly to the government who in turn funds the corporation through budgetary allocations.[5] The members of the board of the NNPC are appointed by the government, often on political grounds and in most cases board members exceed their stipulated number as provided in the enacting law, with up to eighteen persons being appointed at one time (Omoregbe, page 103)
This has turned the corporation into a bloated government bureaucracy that operates often on the inconsistent policies of the government and it has made it unresponsive to market demands (Ayoku, page 25). This in turn has made the NNPC to be plagued with many debilitating factors such as ‘financial and management corruption, lack of probity and accountability, lack of technological knowledge and general inefficiency’ (Ayoku, page 25). It has also been characterized by acute shortage of funds which has made it difficult for it to finance its various joint venture obligations with various oil companies, which incidentally has been the most viable revenue earner for the corporation and by the extension, the government.[6] The resultant effect is the inability of the NNPC to fulfil all the duties it was set-up to achieve and it has failed to optimize its potentials to grow unto a regional or global oil company.
Restructuring the Nigerian National Petroleum Corporation
In September 2008, the government of Nigeria presented a bill that was aimed at reforming its entire petroleum sector- the Petroleum Industry Bill (PIB) and making the national oil company more efficient.[7] The bill which is yet to be passed into law provides for the restructuring of the NNPC in the following ways;
a. The Nigerian National Petroleum Corporation would be dissolved and in its place a new national company would be incorporated to be known as the Nigerian National Oil Company Limited.[8] The new company would be wholly owned by the government but would make provisions for divestiture of any amount of shares in the company to the public after two years of existence. The new company shall also take over all the assets, liabilities, obligations, bonds and interests of the NNPC
b. The subsidiary companies that were established to carry out the separate tasks of refining, policy regulation and asset management would be re-constituted as independent companies. The role of the NNPC limited would be strictly commercial
c. The Nigerian National Petroleum Company limited would be set up as an independent company to be governed by a board whose appointment would be transparent and according to that state guidelines in the articles of association of the company. It shall no longer be subject to the budgetary allocation from the government and will be free to raise money for itself from the capital market and its operational cash flow.
Whilst trying to figure out a possible resolution to the fundamental issues facing the Nigerian National Petroleum Company (NNPC), Ishaya has through comparative analysis of the structure of various NOCs attempted to examine the economic benefits of a possible restructuring of the Nigerian NOC. This is the first part of this educative read. Comments and observations will be most welcome.

[1] Resolution XVI.90 of the 16th OPEC Conference held in Vienna, Austria, 24th – 25th June 1968
[2] The same year it was admitted as a member of OPEC
[3] Section 5, Nigerian National Petroleum Act, Chapter 320, Laws of the Federation of Nigeria, 1990
[4] Source: The NNPC website (last visited 4th May, 2011)
[5] Keynote address by the Minister for Petroleum Resources, Dr. Rilwanu Lukman on the proposed Petroleum Industry Bill, delivered at Abuja, Nigeria on the 16th July 2009
[6] Information gotten from informal conversation with Mr. Kenneth Ayi Green, business analyst at the Nigerian National Petroleum Corporation Headquarters, Abuja on the 2nd March, 2011
[7] Public Affairs Section of the NNPC, available on (last visited 5th May, 2011)
[8] Chapter 6, Section 136 of the Petroleum Industry Bill

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