Crisis ridden NNPC Battles multibillion dollar debt

To re-create self
For a country that depends on the oil and gas industry as its major source of in
come, the state owned Nigerian National Petroleum Corporation (NNPC) has definit
ely proved overtime its ability not to live up to desired expectations.
Also, for a conglomerate which is supposed to be a big time earner, the corporat
ion had resorted to rather being a big time spender and borrower.
It thus did not come as a surprise when the corporation stated harping on transf
ormation.
It announced with much unusual glee last week of talks already initiated with fo
reign investment banks on funding options, bearing in mind its proposed new role
as a commercially viable company rather than a cost center, if and when the Pet
roleum Industry Bill (PIB) is passed by the National Assembly.
The corporation disclosed that it had initiated talks with Standard Chartered, J
P Morgan, and Deutsche Bank “to explore financing options as it changes into a f
ully privatised commercial company” in the event the PIB comes into law.
The proposed industry reform bill seeks to transform the NNPC into a profit-maki
ng Nigerian National Petroleum Company Limited, a company that would no longer r
ely on the government for funding its operations.
The new NNPC Limited will be designed to operate like Saudi Arabia’s Aramco; Bra
zil’s Petrobras; Malaysia’s Petronas; all government-owned National Oil Companie
s (NOCs) that compete with International Oil Companies (IOCs) for oil and gas fi
elds both in their home countries and overseas.
The PIB also seeks to transform the existing Joint Ventures the NNPC holds with
Royal Dutch Shell, ExxonMobil, Chevron, Agip, and Total on onshore and offshore
acreages into an Incorporated Joint Ventures (IJVs), which will seek its own fin
ancing at the international market.
NNPC Group Managing Director, Mr. Mohammed Sanusi Barkindo, told bankers in Lond
on penultimate weekend that the corporation, which is currently hampered by Fede
ral Government (FG) funding shortfall of about $6 billion (£3.95 million) yearly
for its operations with joint venture (JV) partners, is determined to “transfor
m or liquidate."
The FG’s inability to provide its own funding to finance the JV has led to fundi
ng shortfalls on its projects in the country, he said. Following this developmen
t, the NNPC claimed it had to sign a Modified Carry Agreement (MCA) of $1.69 bil
lion with Shell Petroleum Development Company, (SPDC), Total and Nigeria Agip Oi
l Company (NAOC), to finance their JV upstream project in Gbarain-Ubie in Bayels
a state.
MCA is a financing agreement whereby the IOCs advance loan to NNPC for the purpo
se of executing upstream projects.
“There is no plan B. The FG has taken the decision at the highest level for NNPC
to reform and we are at an advanced stage in the legislative process,” Barkindo
told the bankers.
Barkindo, who led other top officials of NNPC, also met Goldman Sachs, law firm
Latham and Watkins, as well as two Nigerian banks – the United Bank for Africa (
UBA) and First Bank.
The meeting was “to assess the state of the capital markets and how NNPC will pr
epare to tap them” as soon as the PIB, “which underpins its transformation, has
become law”.
Barkindo told the investment community that the NNPC is “cash negative” and had
“only been sustained by sovereign guarantees provided by the FG.”
The bankers suggested a range of options such as an initial public offering (IPO
), project finance, pre-export finance, bond issuance, commodity-linked financin
g and the creation of a holding company to offer financial flexibility.
The bankers also anticipated that demand for NNPC bonds would be high and it cou
ld issue $500 million to $1 billion.
But a top official of the NNPC informed that “any IPO is unlikely to happen”, at
least, for the next five years.
“Our concern is to stabilise and to cut costs – so far we have saved N27 billion
 (£120 million) and we want to do a similar amount over the next five months. Th
is has been through better supply chain management and cutting on our losses thr
ough pipeline damage and theft,” said the official.
However, it is becoming increasingly difficult to convince the investment commun
ity to be part of the NNPC Limited as the FG will still control the majority sha
re.
Investors are therefore concerned that the ownership structure will not insulate
the government from controlling the proposed company.
Both the administration of former President Olusegun Obasanjo and the President
Umaru Musa Yar’Adua government felt that the current NNPC has lost focus as it p
lays conflicting roles of regulating the industry and managing the national asse
ts.
Obasanjo had initiated the landmark industry reform that would distribute these
roles to different autonomous agencies.
Though Shell had led other oil companies operating in the country to express res
ervations over certain provisions of the industry reform bill, the oil giant has
no plans to “pull out of Nigeria”.
In its efforts to reposition the oil and gas industry to meet the growing energy
need of the country, the management of the NNPC has also recently unveiled a co
mprehensive transformation initiative that is hoped to overhaul the industry.
Unveiling the 12-point transformation agenda (January 2010-June 2011) Barkindo,
noted that the transformation which would turn the corporation into a world-clas
s oil and gas company is crucial element of the FG’s overall reform agenda for t
he energy sector.
He noted that the 18-month transformation plan will make NNPC more economic viab
le through a robust partnership that allows flexibility in seeking investment ca
pital and full deregulation of the products in the domestic market.
Barkindo announced the establishment of 11 new institutions that would further w
ork for a more efficient and competitive oil and gas industry. One of the new in
stitutions include NNPC Limited which would focus more on developing a commercia
l enterprise out of the old non-sustaining structure. It also includes NTLC, NPD
, NPI, NAMIRA, among others.
Former Minister of Petroleum Resources, Rilwanu Lukman also restated the urgent
need to transform the NNPC into a commercially viable company, disclosing that
the corporation currently runs at a loss of more than N200 billion, with conting
ent liabilities of more than N146 billion and $277 million annually.
“The first phase of the transformation will require us to stablise NNPC’s finan
cials and operations.
“The company is currently running at a loss of more than N200 billion, with cont
ingent liabilities of more than N146 billion and $277 million. If the trend is n
ot reversed, the corporation as you know it today, will cease to exist,” he warn
ed.
He noted that the key challenges facing the industry today are providing reliabl
e product supplies within the country, being good stewards of the country’s reso
urces, and building a commercially viable petroleum sector.
Barkindo disclosed that due to the poor state of the refineries last year, the F
G recorded a loss of over N25 billion in revenues.
He said the first phase of the transformation will take 18 months, adding that a
t the end, the corporation is expected to stabilise its finances and operations
before moving to two other phases.
The last two phases, he said, will take two to ten years to execute, after which
NNPC will be expected to become a competent NOC, which will favourably compete
with other NOCs and IOCs across the world.
He listed several reasons for the transformation from its current cost-centre to
a profit-centre, highlighting what the company and country have lost over the y
ears as result of operational and organisational defects.
He said the refineries, which have not been working over the years as a result o
f pipeline vandalisation and lack of maintenance, did not only cost the country
revenue generation but led to product scarcity.
The situation, he noted, led to increased importation of petrol from 50 to 100 p
er cent at a cost of N800 billion subsidy per annum from about N700 billion.
He said that as at end of last year, capacity utilisation of the refineries stoo
d at only 13 per cent.
He said the Kaduna and Warri refineries had resumed operations
The gross ineptitude of NNPC and its persistent insolvency was first uncovered b
y the Nigeria Extractive Industries Transparency Initiative, (NEITI) last year,
when it disclosed some areas of leakage in the oil and gas industry.
The areas, according to NEITI, included underpaid royalty and taxes; non-remitt
ance by the NNPC of what it received from sale of domestic crude; underpayment t
o the Niger Delta Development Commission, (NDDC) by the oil companies and poor r
ecord keeping by NDDC in relation to its receipts from the oil companies.
Others are differences in lifted volumes of crude between the terminal operators
and the companies making the lifting, and poor record-keeping by the regulators
.
NEITI estimated that the NNPC owed the Federation Account the sum of N654 billio
n; though NNPC claims it owed N651.583 billion, but added that the sum of N222.3
87 billion was being withheld as part of subsidy payments due to it from the FG.
NEITI added that the auditors were right in asking the NNPC to first pay what it
is owing before demanding payment for what it is owed, stressing “It should als
o pay N3.242 billion over and above the total sum that the NNPC claimed to be ow
ing the federation account.”
The problematic indebtedness of the corporation again came to fore recently when
four principal officers of the Senate - the Majority Leader, Teslim Folarin; Mi
nority Leader, Ma aji Lawan; Deputy Majority Leader, Victor Ndoma-Egba; the Depu
ty Minority Leader, Olorunnimbe Mamora and the Chairman of the Senate Committee
on the Upstream Petroleum Sector, Lee Maeba, who has been having a running battl
e with prominent officials in the country s lucrative sector - with nine other m
embers signed a document calling for an extensive inquiry into the monies that h
ave come into the coffers of the NNPC, in the last two years.
They also want the National Assembly to know how the monies that came in were sp
ent within the same period.
But the document, it was gathered, suddenly became a source of quiet anger and i
n-fighting among the signatories, one of whom latter moved to scuttle the invest
igation.
It was gathered that there was a shouting match because one of the signatories c
onfronted a principal officer and accused him of submitting to the overtures of
a senior staff of the NNPC and reneging on the agreement to investigate the corp
oration. A fellow senator who witnessed the altercation in the coffee room of th
e Senate Chambers disclosed this to National Daily.
"The matter was made worse because it was alleged that this NNPC staff had gone
around boasting that he had done his assignment to ensure the matter was not bro
ught before us," he revealed.
Most of the progressive senators were later left wondering whether the top offic
ial of NNPC made good his boasting by "reaching out to lobby one of the Senate s
principal officers," who many of his colleagues have "often had issues with”.
The senator confided further that, "But we learnt that the Senate President has
doused all suspicions against the principal officer, and explained that he autho
rised the standing down of the reading of the document calling for investigation
s of NNPC because he wanted the knotty controversy surrounding the submission of
the 2010 budget to be thrashed out before we take on any other serious matter."