Friday, 21 September 2012


Towards Greater Nigerian Resource Control
By Bayo Ogunmupe
BY greater Nigerian Resource Control, I mean that the Executive Council of the Federation of Nigeria should exercise stricter control over Nigeria’s mineral resources, particularly oil. The Nigerian National Petroleum Corporation (NNPC) is Nigeria’s main oil corporation that serves the interest of Nigeria’s Federal Government in the oil industry. Founded in 1977 by a merger of the Nigerian National Oil Corporation (NNOC) and the Petroleum department of the Ministry of Mines and Power. The NNPC by law was set up to manage the Joint Venture (JV) partnership between the Federal Government (FG) and multi-national oil companies prospecting for oil in Nigeria. Some of such oil companies include Royal Shell, Chevron, Exxon, Mobil, Agip, Total, Elf and Texaco.
  Apart from performing regulatory functions, the NNPC also serves as the platform for Federal Government’s participation in the oil industry. However, the NNPC is essentially a royalty collector. Otherwise, the corporation’s role in the oil industry is peripheral. The core duty, which the corporation is to perform is lacking. This is unlike its counterparts in the other oil producing countries that are fully active in the upstream, midstream and downstream sectors of the oil industry, thereby helping to build a strong economy and leveraging their people.
  Indeed, the NNPC should be an active player in the oil industry. It ought to be actively involved in oil exploration, refining and marketing. Also, the NNPC should lead in producing the needed technical expertise for Nigeria’s oil industry. The NNPC failed to do much because it was originally created to collect rent from foreign oil producers without involving Nigerians as stakeholders in the oil industry.
  The NNPC lacks the technical expertise needed in the oil industry. If the joint venture partners were to leave the industry today, the Nigerian oil industry will grind to a halt, because there are no homemade alternatives. However, if we compared NNPC with Petrobrasy, the Brazilian national oil corporation, that will give us insight into the missing link in the NNPC operations. This comparison will give us the means by which NNPC could be reformed to serve a more beneficial purpose to the Nigerian economy.
  The Beginnings of Oil
  Shell-BP Petroleum Development Company pioneered prospecting for oil in Nigeria. After 30 years of concerted effort, in 1958, oil was discovered in commercial quantity at Oloibiri in present day Bayelsa State. By 1959, the Nigerian colonial government introduced the first regulations governing petroleum taxation. Under the regulation, profits made from oil were to be shared equally at 50-50 between the government and the respective oil companies. That arrangement was expedient at the time since the colonial administration was almost out of office in a matter of months. Arguably, it was not meant to serve as the framework for sharing oil revenue in independent Nigeria.
  On October 1, 1960, Nigeria gained independence from Britain; British flag the Union Jack was lowered and the reins of government were handed over to the new Nigerian authorities. In the same vein, the management of the oil industry was transferred to the government. It was indeed at that time that Nigeria should have fashioned out a patriotic framework for exploiting the oil resources and the sharing of revenue. That was the time the government should have called on interested Nigerians to be stakeholders. Unfortunately, that was not done. Nigeria’s founding fathers failed to do what was expedient but settled for royalty collection. Consequently, Nigerians were denied stake in the oil today.
  The oil profit sharing formula of 50-50 between the government and the oil companies should have been changed to give Nigerians equity share and participation like in Brazil, where oil was seen as belonging to Brazil and its people right from the beginning in 1953. The philosophy adopted in Brazil was, “The Oil is Ours.” Brazilians were made major stakeholders in the oil industry without foreign participation until 1997.
  But the critical vision was not conceived in Nigeria. Without creating room for Nigerians to be core investors right from the start, the Nigerian government assumed the role of a passive royalty collector while the foreign oil companies have the upper hand. Thus, it was government that edged itself and Nigerians out of the core activities in the industry and also denied Nigerians the opportunity to be stakeholders.
  This trend has persisted till today. Nigerians only hear about oil and at best act on the periphery. Local content is not an important issue. Worse still, government officials and politicians corner whatever revenue accrues to the country for selfish enrichment. Corruption is rife. Thus, rather than bringing about the much needed development, oil has brought poverty and misery to the overwhelming majority of Nigerians. Fifty years of oil exploitation has led to ecological disaster in the Niger Delta. The situation would have been different if Nigerians were major stakeholders in the industry. The ugly state of affairs needs to be changed for the oil to benefit Nigerians.
Formation of the NNPC
  Between 1958 when oil was discovered and 1970, there was no national body responsible for managing oil in Nigeria. The Western oil companies were fully in control of the industry and only paid royalty to government.
  The precursor of today’s NNPC was the Nigerian National Oil Corporation, which was established by Decree No. 18 of 1971. Its mandate was “to participate in all aspects of petroleum including exploration, production, refining, marketing, transportation and distribution.” The corporation was also charged with the task of “training indigenous workers; managing oil lease over large areas of the country; encouraging indigenous participation in the development of infrastructure for the industry; managing refineries; participating in marketing and ensuring price uniformity across the domestic market; developing national tanker fleet; constructing pipelines and investigating allied industries such as fertilizers.
  Following alleged operational failures and poor accounting procedures, among others, the NNOC was reconstituted as the NNPC by Decree No. 33 of 1977. Like its predecessor, the NNPC started essentially as a holding company. It inherited the assets and liabilities of the NNOC. It had a board structure similar to that of the NNOC. The same inefficiency that plagued the NNOC caught up with the NNPC early in its life. The accounting procedures and record keeping were ineffective and this has persisted till today.
  In line with the indigenization Decree of 1979, the NNPC’s equity holdings in the oil major’s operations was raised to 60 per cent. The companies were Elf, Agip, Mobil, Texaco, Gulf and Pan Ocean. Similarly, the NNPC’s stake in Shell venture was raised to 80 per cent after BP lost its 20 per cent stake following disagreements with the Nigerian government over apartheid South Africa.
  From then on, the NNPC was riddled with accusation of gross mismanagement and misappropriation of funds. That prompted the then President Shehu Shagari in 1980 to make a national broadcast and establish the Crude Oil Sales Tribunal that uncovered the gross mismanagement in the corporation. Ever since, the NNPC has not been able to rise above board to manage the nation’s oil industry efficiently to benefit Nigerians. The bug that afflicts government owned companies caught up with it and it remains inefficient.
Reform and Commercialisation
  The outcome of the Crude Oil Sales Tribunal in 1980 was a series of reforms that were meant to decentralize the NNPC and instill more commercial approach into its operations. Thus, in 1988, the corporation was split into several subsidiaries that presently constitute its operational structure. The subsidiaries are:
  • National Petroleum Investment Management Services (NAPIMS)
  • Nigerian Petroleum Development Company (NPDC)
  • The Nigerian Gas Company (NGC).
  • The Products and Pipelines Marketing Company (PPMC)
  • Integrated Data Services Limited (IDSL)
  • Nigerian LNG Limited (NLNG)
  • National Engineering and Technical Company Limited (NETCO)
  • Hydrocarbon Services Nigeria Limited (HYSON)
  • Warri Refinery and Petrochemical Co. Limited (WRPC)
  • Kaduna Refinery and Petrochemical co. Limited (KRPC)
  • Port Harcourt Refining Co. Limited (PHRC)
  • Eleme Petrolechemicals Co. Limited (EPCL)
  It is important to note that some of these companies are not wholly owned by the NNPC but operate as joint venture concerns like the NLNG. Similarly, there are moves to privatize the refineries but which have not yet materialized. The operations of the other companies are in lip and bounds. There are hardly any of the companies managed by the NNPC that operates optimally as a profit-making venture.
  For instance, none of the four refineries is operating at full installed capacity, even after billions have been spent on Turn Around Maintenance (TAM). The result is that virtually all the petroleum products used in the country are imported. The NNPC has grossly failed to leverage the Nigerian economy as an oil-producing nation, which has in turn truncated development. According to a 2005 statistics, the NNPC made $2.6 billion in sales. This is grossly below the standard expected of its after three decades of operation. The problem, however, is that there is no accurate statistics on the quantity of oil produced, exported or sold. Also, there is no record of the quantity of oil stolen through illegal bunkering.
  By depending on 60 per cent royalty payment from the oil majors without attempting to grow into a profitable company, the country has never benefited from its abundant oil resources. This explains the need to recreate the NNPC such that it could operate profitably as a growing concern that would leverage the economy.
The Petrobras Model
  Petrobras-sa is Brazil’s giant multinational oil company. Founded in 1953, it is semi-public with the Brazilian government owing 55.7 per share while Brazilian people privately own the rest. Its motto, “The Petroleum is Ours,” underscores Brazil’s vision to be fully in control of its oil and gas resources without foreign involvement. The privately owned shares are traded on BM&F Bovespa, where they’re part of the Ibovespa index. Thus, between 1953 and 1997, a period of 44 years, Petrobras was the sole legal monopoly in Brazil’s oil market.
  Unlike the NNPC, Petrobras is rated as the largest company in Latin America by market capitalization and revenue with a 2008 sales of $118.3 billion. Compare this with NNPC’s sales of $2.6 billion in 2005. Petrobras controls significant oil and energy assets in 18 countries in Africa, North America, South America, Europe and Asia. The company’s holdings worldwide altogether amount to a total asset of $133.5 billion. The company is rated as the 63rd largest company in the world according to Fortune 500 Companies.
  Before 2001, Petrobras operated the world’s largest oil platform known as the Petrobras 36 Oil Platform, which unfortunately sank on March 15, 2001 after an explosion. But in 2007, the company inaugurated the Petrobras 52 Oil Platform to replace the damaged one. The Platform is the largest in South America and the third largest in the world. Petrobras is also a major sponsor of environmental conservation projects in Brazil. The company is involved in whale conservation projects and in the production of bio-diesel, using the H-Bio process.
  After many years of impressive performance in exploration, production, refining and transportation, two new bodies, the Petroleum’s National Agency (ANP) and the National Council of Energy Policies were created to regulate and supervise the sector activities. This followed agitation by foreign and national companies over Petrobras’ monopoly of the market. Before the new turn of events, however, Petrobras had already made a mark and helped to place Brazil among the emerging economies of the world.
Charting Future Course for the NNPC
  From the early days of the oil industry in Nigeria, there has been no enduring framework for exploiting the oil and channeling the accrued revenue to the benefit of the country. Besides, the country has dealt with one conflict or the other in form of civil unrest, political instability, border disputes, corruption at the highest level and poor governance. The remote cause of the civil war, for instance, was oil. With the splitting of the country into states, discontent has increased. Since 1999, agitations by sections of the country over marginalization and control of resources have led to militancy in the Niger Delta.
  At the same time, the Federal Government has been promising to introduce changes in the NNPC but action to get that done has been slow. There is presently the Petroleum Industry Bill (PIB) that is at the National Assembly that is said to contain far-reaching changes but which is being politicized. It is not known how far the bill would be tinkered with or how soon it would be passed into law given the mounting conveyance over it. Even at that, there is no guarantee that the interest of Nigerian people has been protected.
  Over the years, military dictators have largely supervised Nigeria’s oil industry. That explains why the sector has been mismanaged. But since 1999, when the current democratic politics was inaugurated with President Olusegun Obasanjo, government has been working to reorganize the oil and gas industry, with emphasis placed on natural gas development.
  Before now, most of the country’s gas has been wasted through flaring, a grossly environmentally unfriendly process. The decision to terminate gas flaring and increase revenue through gas export led to the setting up of the Nigeria Liquefied Natural gas (LNG) Plant in Bonny in 2003. The NNPC is also working on the West African Gas Pipeline project, which would supply gas to Togo, Benin, and Ghana.
  Since 2005, there have been plans to privatize certain segments of the oil and gas industry with focus on the four refineries. At the same time, government is pushing for deregulation of fuel prices. It is not clear how deregulation would affect business and how the market would respond to it.
  While there are indications that the NNPC is on the path to a positive bright future given the reforms on ground, issues dealing with civil unrest and dissatisfaction remain grave in Nigeria’s oil and gas sector. Also, Nigerians are not given stake in the sector. The reforms proposed have done nothing to make Nigerians part owners of the oil like in Brazil. This is the gap that needs to be filled.
  At this point, the Federal Government should consider adapting the Petrobras model into the NNPC to make its operations and services beneficial to Nigerians. The following recommendations should be considered for adoption:
  • The Federal Government should re-define ownership of the country’s oil and gas resources and who should benefit from it given Nigeria’s underdevelopment and mass poverty. Presently, Nigerians have no share in the oil and benefit nothing from it. Foreigners and their Nigerian collaborators in government and top political offices share the oil proceeds.
  • Once the ownership is re-defined to include Nigerians, the law setting up the NNPC should be amended accordingly. The National Assembly should enact a law similar to the indigenization Decree of 1979, which would increase the equity holding of Nigeria to at least 80 per cent. Out of this, Nigerians should be given 40 per cent share holding while the NNPC retains 40 per cent.
  • The NNPC should be made a growing business concern with public ownership. With Nigerians owning 40 per cent equity share in the corporation, its operations would change as a commercial business concern and not as a government-owned company that doesn't work.
  • The NNPC shares should be quoted and traded on the floor of the Nigerian stock exchange. In this way, the corporation would be required by law to operate transparently like other publicly quoted companies. Its books of accounts would be audited and made public like any other publicly quoted company. Lack of transparency and accountability has been a major problem of the NNPC.
  • Finally, the NNPC should engage in core oil and gas operations. It should be involved in all aspects of petroleum industry including exploration, production, refining, marketing, transportation and distribution as contained in its original mandate. The NNPC should divest itself the status of being a passive non-performing royalty collector and operate as a full-scale business concern to leverage Nigerians and engender national development.

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