The Restructuring of the Nigerian National Petroleum Corporation (NNPC): Some Pertinent Observations

By

Abubakar Atiku Nuhu-Koko

aanuhukoko@yahoo.com

Friday, 31 August 2007

The Unbundling and re-branding of the Nigerian National Petroleum Corporation (NNPC) as announced by the Federal Executive Council (FEC) after its regular meeting of Wednesday, 29 August 2007, is another public policy change that may face a lot of public debates in the coming weeks. These debates are going to focus more on the legality, appropriateness and timelessness among other concerns regarding the new policy pronouncement. The debates will be more intense coming just after the now suspended controversial Naira Re-denomination policy announced by the Central Bank of Nigeria (CBN) on August 14, 2007, which generated a lot of confusion and misunderstanding within the federal government, the organised business and academic communities and the general public at large.

The measured restructuring of the NNPC and the re-organizations of the oil and gas sector governance and management structures, which the new administration of President Yar Adua justified as "in line with new National Oil and Gas Policy" is not a surprise though, to many energy policy watchers who have been monitoring the sector especially since 1999 to date. For example, from Tuesday, April 6 to Wednesday, April 7, 2004, representatives of civil society organisations, oil-bearing communities, academia and the media met in Lagos for a two-day consultative meeting on oil and gas sector policy review. The meeting was organised by the Environmental Rights Action/Friends of the Earth, Nigeria. The meeting resolved among others, to condemn the activity of the OGIC because of its exclusiveness and lack of wider consultation with the public; more especially the peoples of the oil-bearing communities whose lives and livelihoods are at stake and concerned civil society organisations were not represented on the Committee and nor have they been consulted so far in the process etc.

Therefore, a review of the journey leading to present policy action by the FEC is in order at the moment. To put the issue into historical perspective, the “New National Oil and Gas Policy” was designed, developed and approved/accepted by the defunct FEC of former president Olusegun Obasanjo’s administration. The policy was put in place under the watchful eyes of: Dr. Rilwanu Lukman, the then Special Adviser to President Obasanjo on petroleum and energy matters – and now, Honorary Special Adviser to President Umaru Musa Yar Adua on Energy and Strategic Matters, Vice President Atiku Abubakar and Dr. Raymond Daukoro who was also former Special Adviser on Petroleum and Minister of State for Petroleum Resources respectively during the period under review. This is to show how important the issue was and the type of calibre of people that handled it. However, for whichever reasons, the policy was not implemented during the life of president Obasanjo’s administration, the initiator of the reform effort. The journey to the Wednesday 29, August 2007 decision by the new FEC to restructure the NNPC started on April 25, 2000.[1]

The Obasanjo’s administration, on April 25, 2000 inaugurated the Oil and Gas Sector Reform Committee (OGRC) with the Vice President Alhaji Atiku Abubakar as Chairman. The duties of the Committee include 'legal and regulatory policy reform which entails reviewing the body of extant petroleum laws and establishing a statutory basis for comprehensive regulatory activity in the sector and balancing the interest of consumers, the environment and operators'. The OGRC was reportedly composed of 25 experts and had a British firm, Nextant Limited, as consultants. There was also the National Committee on Oil and Gas Policy (NCOGP) that was chaired by Dr Bright Okogu, a one time Chief Energy Economist at the Organisation for the Oil Exporting Countries (OPEC). Hence, the new oil and gas policy therefore, is a product of more than four years work by the National Committee on Oil and Gas Policy (NCOGP), Oil and Gas Reform Committee (OGRC) and the Oil and Gas Sector Reform Implementation Committee (OGIC) respectively.

The first draft report of the National Committee on Oil and Gas Policy chaired by Dr. Bright Okogu was presented to the then Vice President Atiku Abubakar on January 31, 2005 at the State House, Abuja.[2] At the presentation of the draft report, Vice President Atiku Abubakar stated that the Committee was set up by the National Economic Council (NEC) to:

1. Ease the bottlenecks observed in the oil and gas sector

2. Assess the issues and problems of the sector thoroughly

3. Make recommendations on an oil and gas policy, joint venture cash calls, the crude oil account operated by the NNPC and the issue of subsidy in the oil sector.

The Committee Chairman, Dr Bright Okogu suggested that Government should continue to keep up with its cash call obligations as it has done in recent years, so as to ensure that the integrity of upstream assets is maintained and the target reserve level is attained.

The Committee also recommended to the Government not to sell its entire stake in the upstream sector in order to solve cash call payment problems and limit itself to royalty and tax collection. This, the Committee contended, would not be in the long-term interest of the country.

Other recommendations of the Committee include:

1. Commercialisation of the Nigerian National Petroleum Corporation (NNPC), which should be granted autonomy to enable it develop its own balance sheet

2. That Government sustains the drive for deregulation and makes efforts to channel savings from this policy to key social and infrastructural sectors of the economy

3. Refurbishing, commercialisation and privatisation of refineries

4. Encouragement of the establishment of private refineries

5. That Government should develop an effective communication strategy to sensitise the public on the rationale for subsidy withdrawal

6. That products like kerosene be subsidised but coloured to discourage diversion

7. That an integrated and seamless oil and gas policy is needed for the country to help eliminate ambiguities in the operation of the industry.

However, the OGIC was reconstituted on June 21, 2005 with the then Special Adviser to the President on Petroleum and Energy, Dr. Edmund Daukoru as the Chair.[3] The OGIC had the mandate to develop strategies for the implementation of the content of the Policy documents developed earlier by the defunct National Committee on Oil and Gas Policy.

Presidential Adviser on Petroleum and Energy, Dr Edmund Daukoru, while inaugurating the Committee said Government approved its setting up due to the importance of oil and gas to Nigeria’s economy, and the need to attract desired investment necessary for growth and development. This then establishes the motive for the review exercise.

In view of this, five sub-committees (under the OGIC) were established to look into the various aspects of the sector in order to carry out restructuring where necessary.
The sub-committees include:

 

A Drafting and Harmonisation Sub-committee was also constituted as part of efforts to tidy up the legal framework of the OGIC. Its members include:
1. Professor Yinka Omoregbe (Chairman)

2. Mrs Irene Chigbue, Director General of the Bureau of Public Enterprise (BPE)
3. Chief Sena Anthony, Group Legal Counsel, NNPC
4. Mr Kayode Oloketuyi.

The OGIC completed its assignment and submitted its report to the government. The Oil and Gas Policy that was developed examined the operations of the refineries, pipelines, depots and retail outlets. It recommended full deregulation of the sub-sector, as well as measures to revamp the operating agreements, contracts and Memoranda of Understanding governing the operations of the upstream oil and gas sector. Part of its content is the detailed enumeration of institutions that should emerge in the sub-sectors and their responsibilities.

The local content issue was extensively examined while recommendations were put forward for upgrading local and indigenous participation in the oil and gas reforms. The Policy stresses the need for a review, an amendment and the harmonisation of various existing laws that would ensure that all-encompassing petroleum legislation is developed to deal with all the major areas relating to the oil and gas industry. Health, safety and environment issues, including responsibilities of relevant stakeholders in the industry were listed, with recommendations made to ensure a mutually-beneficial relationship between the host communities, the oil and gas operators and the government.

The National Council on Privatisation (NCP) on 4 July 2005 endorsed the National Policy on Oil and Gas as a major step towards securing for the country maximum sustainable value from the strategic industry. The new policy proposes the replacement of the Nigerian National Petroleum Corporation (NNPC) with the following:

1. National Petroleum Directorate (NPD)

2. Petroleum Inspectorate Commission (PIC)

3. National Oil Company (NOC)

4.  National Petroleum Resource Centre (NPRC), and

5. Petroleum Product Distribution Authority (PPDA)
   
    

Again, historically speaking, until 1960, government participation in the oil industry was limited to the regulation and administration of fiscal policies. In 1971, Nigeria joined OPEC and in line with OPEC resolutions, the Nigerian National Oil Corporation (NNOC) was established, later becoming NNPC in 1977. The last time the NNPC received major restructuring was in 1988 when it was further enlarged and additional business units or subsidiaries were created and added to it. This giant parastatal, with all its subsidiary companies, controls and dominates all sectors of the oil and gas industry, both upstream and downstream since then.

The new governance and management structures that were approved by the FEC on Wednesday 29, August 2007 to replace the NNPC looks like this:

Establishment and Composition of the National Council on Energy (NCE)

New Management Structure

The above new governance and management structures replace the behemoth NNPC and its subsidiary companies and the federal ministry of energy and power. The creation of the High profile National Council on Energy chaired by the President and assisted by the Vice President, selected cabinet ministers and other top ranking officials from the Presidency and others, is an interesting and commendable innovation and initiative. However, the following observations on its composition and leadership make up are worth pointing out:

1. The leadership of the Council should have been assigned to the Vice President of the country. This will free Mr President from being tied down with the weighty demands of micromanagement of the sector and concentrate his attention and energy on the big picture of the national economy holistically and the nation’s foreign affairs concerns and needs amongst others.

2. The composition of the Council need to be expanded to include the States in the membership. This is because energy and power issues transcend federal jurisdiction, interests and concerns per se. One of the reasons why the nation is facing lingering problems in these sectors has to do with the total exclusion of the States and local governments on matters relating to energy and power development and supply. We have a situation whereby policies and matters concerning energy and power, which affects the daily lives of every citizen, are left to the whims and caprices of a few un-elected bureaucrats at the NNPC and the Power Holding Company of Nigeria (PHCN) who are more concerned with the material benefits derivable from holding lucrative contract-awarding and revenue collection positions in these sectors.

3. Therefore, since there are no Commissioners of energy and power at the States level, Mr President needs to consider incorporating all the Deputy Governors of the States as members of the Council. By doing this, decision made at the Council will be richer and representative; reflecting the different geopolitical areas of the country in terms of their energy and power needs and other related concerns. Moreover, the Deputy Governors will be productively engaged in policy matters which hitherto, they have been practically minimally involved at the State level, and absolutely excluded at the national level. I believe it is worth given this proposition a trial.

4. Still on the issue of membership composition of the Council, another important observation is that the major Scientific, Technical and Managerial/Regulatory bodies, institutions and agencies have been excluded from the Council membership. For example, it is worth it to have public bodies in these sectors such as the Energy Commission of Nigeria (ECN), the Nigerian Electricity Regulatory Commission (NERC) and the Nigerian Nuclear Regulatory Commission (NNRC) need to be incorporated in the NCE to serve as scientific, technical, and regulatory advisors to the Council and assigned with specific duties and responsibilities related to their statutory mandates and competencies. This will greatly enhance the efficacy and productivity of the Council. Moreover, they are professional and competent bodies that can be tasked to produce results or else get fired.

5. Last, but by no means the least, is the absence of representation of the private sector (both local and foreign) in the membership of the Council. This seems to be a serious omission which may not be deliberate. Since the present administration also subscribes to the private market-driven economic model and philosophy and as an off-shoot of the immediate preceding administration of former president Obasanjo, it behoves upon it to carry along the major private sector players in the energy and power industry. For example, representatives of the Nigerian organised private sector and multinational energy companies operating independently and or in joint venture partnerships with public and private companies need to be included in the Council membership. They have great roles to play in breaking the government quasi-monopoly in the domestic energy and power industry and markets.

On the new model of management introduced to replace the NNPC, without any prejudice to the good works of the OGIC and the diligent decisions made by the FEC based on the recommendations of the OGIC reports, the following observations can equally be made:

1.        The Ministry of Energy and Power should have been retained and not abolished for several important reasons. One of such important reasons is that some of the extant statuses not yet repealed, have specific requirements for the existence of a Ministry for policymaking, organisation and management of the energy and power resources of the country. There are other reasons but for space constraints, they are not elaborated here.

2.        The consolidation of the NNPC into five basic organisational, operational and business units may create some organisational and efficiency distortions, which if not properly reconfigured and or corrected, may undermine the whole objectives of the reforms and restructurings done. For instance, the new National Oil Company (NOC), which will be empowered and envisaged to carry out responsibilities that are in tandem with such other companies in other parts of the world take-off with minimal delay and cost only if it is going to emerge for example, from the existing Nigerian Petroleum Development Company (NPDC) – which is the only flagship oil exploration, development and production company that was 100 per cent owned by the NNPC.

3.        Therefore, the NPDC should have been re-branded and re-modelled into a true independent self sustaining national oil company. This means that the NPDC should be made to assume the status of the OGIC’s recommended new NOC rather than starting a new NOC from the scratch. For instance, the NPDC can be merged and integrated with a number of the existing subsidiary companies of the NNPC such as: Integrated Data Services Limited (IDSL), National Engineering and Technical Company Limited (NETCO) and Hydrocarbon Services Nigeria Limited (HYSON), among others.

4.        Also, there is no any NOC or major oil company for that matter, which is complete without the associated vertically integrated downstream assets such as oil refineries, pipelines, etc. Therefore, the new NOC should also own and or acquire these downstream assets in order to make it a complete oil firm in the true sense of it. For this very reason, the following existing downstream assets belonging to the NNPC: Warri Refinery and Petrochemical Company Limited (WRPC), Kaduna Refinery and Petrochemical Company Limited (KRPC), Port Harcourt Refining Company Limited (PHRC), Eleme Petrochemicals Company Limited (EPCL) should all be made to continue to serve as part of the vertically integrated and consolidated downstream operational and business assets and units of the new national oil company.

5.        Furthermore, instead of creating a new petroleum products distribution agency by the name Petroleum Products Distribution Authority (PPDA), the existing petroleum Products and Pipelines Marketing Company (PPMC) should be allowed to continue to serve as an integral component of the new NOC. The PPMC already manages the existing networks of products pipelines, metering and pumping stations and storage depots nationwide. These infrastructures are used by the PPMC to transport, store, distribute and market petroleum products nationwide. Therefore, the PPMC should continue to provide such services to the new NOC and other players in the market. The creation of PPDA is therefore difficult to comprehend.

6.        If these suggested consolidations and integrations are done, then a strong national oil company can emerge and grow to the level similar to what is obtained in other countries – such as Venezuela (PDVSA), Mexico (PEMEX), Indonesia (PERTAMINA), Malaysia (PETRONAS), Russia (GAZPROM), Brazil (PETROBRAS), amongst others. There will therefore be no need to accept the recommendation of privatisation of the existing refineries and other associated downstream assets and infrastructures. Privatising them will instantly create a dilemma for the new national oil company; which if not carefully handled may lead to the strangulation of the nascent company.

7.        Another observation is the re-naming of the Department of Petroleum Resources (DPR) which has been renamed Petroleum Inspectorate Commission (PIC). In conformity with the widely used international nomenclature in the industry, the new name should have been: Oil and Gas Regulatory Commission (OGRC). This will take care of both petroleum and gas related regulatory matters without the need of creating another separate regulatory agency for the gas sector at present and or if need be in the future, splitting it into two separate regulatory commissions for efficient regulation of each of the sectors.

8.        The restructuring in the governance, institutional and management structures in the petroleum sector need to consider repealing the Act establishing the Petroleum Products Pricing Regulatory Agency (PPPRA). The PPPRA is another agency that does most of the functions statutory assigned to the DPR under the DPR Act and to some extent, the Petroleum Equalisation (Management Board) Fund (PEF) under the PEF Act respectively. The PPPRA was established by former president Obasanjo in 2003 and its continuing existence cannot be justified under the new restructured arrangements. The Petroleum Products Price Support Fund administered by the PPPRA can be domiciled elsewhere in the new arrangements, preferably to be administered by the Oil and Gas Unit of the Federal Ministry of Finance. Government will make a lot of savings and reduce duplication of efforts if the PPPRA Act is repealed and its functions transferred to other appropriate existing agencies as mentioned above.

9.        Is the Gas Sector Stupid? – it is puzzling and ironical to observe that right from the works of the initial Oil and Gas Sector Reform Committee (OGRC), all through to the works of the other Committees that worked on the government’s reform agenda for the Oil and Gas Sector, including the OGIC and the policy pronouncement made by the FEC on Wednesday August 29, 2007, the gas sector has not been accorded strong emphasis in the new policy and institutional arrangements. For example, under the new structure and organisation outlined by the FEC pronouncement, the only provision for the gas sector is just contained under the National Oil and Gas Assets Holding Company (NOGAHC)!

10.    This biased against the gas sector has historical genesis though. Therefore it is not very surprising to watchers of the industry to see it treated as such. But this should not be the case. This is because gas is going to be the key player in the global energy consumption soon. For example, Russia’s state-owned gas company, Gazprom is the largest energy firm in the world today. The reason being that the Russians treat their gas resources with the same investment zeal like the oil resources. Moreover, the existing oil Nigerian gas policy promised to end gas flaring by 2008, cutting Nigeria’s gas flaring by 10bn cubic metres over the 12-year period, a reduction of a third. This, according to the Financial Times (FT) of London, will be the biggest reduction of any country (FT, Friday August 31 2007, page 5).

11.    The same edition of the FT of London reported that Nigeria is second after Russia among the countries with the highest levels of gas flaring, although officially reported figures showed Nigeria as having the highest level of flaring. Furthermore, the same FT of London reports that the monetary value of the gas flared by oil-producing countries and companies is worth $40bn at the 2006 US prices, equivalent to 5.5 per cent of the world’s total production of natural gas. There is therefore an urgent need for Nigeria to consider developing a comprehensive gas policy that will meet the domestic and international gas markets needs and at the same time, eliminate gas flaring that contributes to global greenhouse gas emissions.

12.    Therefore, the gas sector needs to be given adequate attention under the new arrangement put forward by the FEC. For example, the Nigerian Gas Company (NGC) Ltd and the Nigerian Liquefied Natural Gas Company (NLNG) Ltd can be consolidated into one gas Production Company to pursue the nation’s Gas policy in line with the new national oil and gas policy. The electricity power sector is embarrassingly failing to meet Nigeria’s electricity generation requirements largely because of lack of sufficient gas supply to the nation’s gas-fired thermal electricity power generating plants.

13.    The OGIC report also touches on the need to establish a National Petroleum Research Centre. This laudable recommendation can easily be accommodated within the existing institutions of higher learning in Nigeria. For example, the Petroleum Technology Development Fund (PTDF) has established an elaborate network of Professorial Chairs in more than eight Nigerian universities to undertake specific research and development (R&D) for the oil and gas industry. Furthermore, the PTDF has been mandated to upgrade the Petroleum Training Institute (PTI) locate at Effurum into a world class petroleum and gas university; with clear emphasis on oil and gas scientific and engineering R&D, among other related programmes.

14.    In addition, the PTDF also has to date, sponsored of over 500 qualified Nigerians to study at master’s degree level in various oil and gas fields in overseas universities. Over 100 Nigerians are also undergoing PhD level studies overseas under the PTDF flagship Overseas Sponsored Scholars (OSS) scheme. Therefore, the recommended Petroleum Resource Centre can be accommodated amongst the existing PTDF partner Nigerian Universities, including the Nigerian College of Petroleum Studies (NCPS) owned by the NNPC located in Kaduna, Kaduna State.

15.    With increasing re-awakenings of resource nationalism from the Angola to Russia and from Turkmenistan to Venezuela, ultimately it is up to the government to determine how the finite energy resources of the country are to be harnessed and managed. For example, the Russian authorities have in the recent times began the process of renationalising its energy endowments and assets, which were earlier auctioned in flawed privatisations that were conducted under circumstances now seen as against Russia’s national interests. Even some of the joint venture partnerships arranged between Russia’s state-owned oil and gas companies and foreign multinational oil and gas companies have been upturned recently. For example, the global oil and gas giant, Shell has been forced by the Russian authorities to hand over to Gazprom (the Russian State-owned energy company) the operation of its controversial Sakhalin-2 liquefied natural gas project in Russia.

16.    Therefore, without prejudice to what the FEC has decided on the implementation of the recommendations contained in the reports submitted by the OGIC, I would also suggest that President Yar Adua to have a look at the Norwegian model of exploitation, development and management of oil and gas resources and revenues derived from them. For example, the Norwegian model of a national oil company, Statoil, is one of the very successful models that Nigeria can emulate given the necessary and correct enabling environment. Furthermore, the activities of the Nigerian Extractive Industries Transparency Initiative (NEITI) will bolster the work of the Council and the lesson from Norway in particular, should be an inspiration to the FEC and the Council.

17.    It is an undisputable fact that Norway sets the standard by which all other sovereign nations that command and control oil and gas resources by the state are judged, providing benchmarks for the transparent and accountable management of massive assets in a manner that does not distort the normal working of markets – and which generates decent returns (FT, Friday August 31 2007, page 5). For instance, it is on record that in the 1970s, the Norwegian citizens were close to the bottom of international rankings for per capita wealth at about $4,000, but today they are at the top with $35,000 (FT, Friday August 31 2007, page 5)!

18.    Furthermore, the Norwegians sets the benchmarks for the transparent and accountable management of the vast oil and gas assets and the revenues generated from exports of these products in a manner that does not create corruption and the typical “resource curse and Dutch disease syndromes” afflicting most of the oil and gas rich developing countries. Therefore, Norway could be one of the nations that the National Council on Energy can turn to for inspiration. For example, in terms of transparency and accountability, the way in which Norway manages its oil wealth is second to none. The task of managing its oil wealth falls to the Government Pension Fund Global (formerly known as the Government Petroleum Fund). It was set up by the government in 1990 and manages about $320bn (FT, Friday August 31 2007, page 5). Thus, the National Council on Energy can learn from Oslo’s oil and gas policy and institutional set up and clean and open approach to and revenue and asset management.

19.    In conclusion, the next thing President Umaru Musa Yar Adua needs to do to actualise his vision for the vexed issues of massive policy and market failures in the nation’s energy and power sectors is to carry the public along. For example, all the necessary points of law and constitutionalism regarding the new changes envisaged by the government need to be adequately and properly resolved in order to move forward. Furthermore, the issue of adequate representation of the States and other relevant stakeholders by way of inclusion in the membership of the National Council on Energy need to be given serious consideration. This is to further widen the democratic space of consultation and cultivating national political support for the administration’s initiatives.

20.    In addition, in order bolster energy and power industries and markets competitions respectively, there is the need to put in place policy frame work that will make it very attractive for local and foreign companies and investors to be actively involved in the domestic energy and power markets. For example, the new arrangement pronounced by the government further consolidates the single-dominant-player model rather than introducing multiple-player model in the domestic energy and power industry and markets. Therefore, the Council needs to put in place an aggressive energy and power liberalisation policy in partnership with the State governments, local and foreign private energy and power companies and investors. This will entail full ownership unbundling as the most effective way to expand capacity, improve service delivery quality and efficiency and ensure healthy competition. What the nation deserves is that consumers can choose their energy supplier and at reasonable and fair prices. Therefore the Council needs to provide strong measures to ensure effective and real competition backed by relevant legislative oversights and regulatory controls, amongst others.