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Nigeria’s slow, steady walk towards profitable oil business

The Nigerian National Petroleum Corporation (NNPC) recently pulled back from the brink of serial deficit turnover that has lasted four decades. The path being towed is one other national oil companies like Saudi’s Aramco have mastered and using to sustain their economies even in drought. Stakeholders said sustaining the change in fortune, if not a flash in pan, will entail deeper reforms and accountability at the cash-cow.

 National Oil Companies (NOC) like NNPC play critical roles in being a custodian of a nation’s oil and gas resources and a resort for energy security. In most oil dependent economies, these companies not only play these key roles but serve as a revenue centre.

 In the face of emerging issues in the global economy, particularly the petroleum industry, most NOCs are going public and raising necessary funds for economic sustainability, becoming more like International Oil Companies (IOCs).

 Undoubtedly, the NNPC has played critical roles similar to other NOCs. But unlike others, the state oil firm has been incurring losses. To most stakeholders, this is not primarily because the company lacks what it takes to make profit but because the company is bogged by political interference, opacity, corruption and mismanagement.

 From an average N500 billion yearly loss to N803 billion in 2018 and a drastic reduction to N1.7 billion in 2019, before the N287 billion profit in 2020, the NNPC appears to be on the pathway to sustainability if it manages its loss-making refineries efficiently.   

In a development akin to a whiff of good fortune in a beleaguered entity, President Muhammadu Buhari disclosed few weeks ago that the national entity successfully upturned the 44-year loss-making history with a novel N287 billion profit.

 In some ways, this development on one hand rekindles hope and on the other hand, raised critical questions on the corporation as well as its commodity-dependent nation, which is faced with shrinking revenue and growing debt burden. 

In announcing that the NNPC made a N287 billion Profit after Tax (PAT) in the 2020 financial audit, Buhari, who is also the Minister of Petroleum Resources, noted that the development was a fulfillment of an earlier pledge by the Federal Government to publicly declare the financial position of the NNPC.

   The current Group Managing Director of the organisation, Mele Kyari, had earlier pledged that the company would become profitable. Recall that the group’s first audited financial statement for 2018 showed that it incurred losses close to N1 trillion. The losses in the 2019 audited report reduced toN1.7 billion.

 Coming on the hill of a new law, Petroleum Industry Act, which is expected to make NNPC a viable commercial entity, most stakeholders see no reason why the company would not sustain the current profitability albeit worried at the same time, pegging their worries on the managers of the firm and government’s position on the firm. 

In the latest financial outlook, the oil company’s total current assets moved up by 18.7 per cent. Its liabilities increased by 11.4 per cent while it had working capital standing below N4.56trillion. It was N4.44 trillion in 2019. Similarly, the group revenue hovers around N3.718 trillion as against N4.634 trillion in 2019, no thanks to the shocks of the COVID-19 pandemic. 

While many analysts insisted that sustaining profitability and addressing current impediments remain critical against the backdrop of the Petroleum Industry Act (PIA), which will in the next six months turn the NNPC to a limited liability company, the development could as well serve as a wake-up call on the imperative of delivering profits the way other viable state-owned oil firms do. 

Kyari, while explaining how the company arrived at profitability, said the company adopted some cost-cutting measures and became more efficient, after renegotiating contracts and bringing initial values down by about 30 per cent, while focusing on accountability, transparency and avoiding elusive projects. 

Disclosing that the process that paved the way for the profit started in 2015 with continuous implementation of strategies, Kyari added: “It is a continuous process. When I came on board, I learnt from what was on ground, and also brought in a new perspective, which was to ensure that we build on what had been done.”

 The GMD also added that the corporation on the heels of the COVID-19 pandemic introduced a technology that drastically cut travel cost through a reduction of in-person meetings and the general automation of processes that enhanced efficiency across the group’s businesses. 

Kyari who said, “we are going to listen to the Nigerian Stock Exchange as the PIA is very clear on what will happen to the NNPC ultimately,” added that the “law did not set timeframe, but it allowed for an opportunity for shares of this company to be sold to members of the public.

“There’s the possibility of doing this, and obviously because you have profit today doesn’t mean that you are ready for IPO. It is a very long and tedious process. But that’s very possible. To become profitable, we should be open to public investment, and I’m sure all of us will be looking forward to that,” he said.

 Over the years, misappropriation and misallocation of funds by the government have been a challenge for the NNPC, and this to some stakeholders affected the profitability of the national oil firm otherwise, the corporation would have continuously made profit.

 Unlike other national oil companies, undue political interference and illegal deductions of money had been reported of the NNPC. These activities, mainly a political move, included payment of unrelated operational activities like funding of arms and politically related activities.

   In the past, NNPC had been made to pay monies to finance arms purchases or transfer funds to security agencies or illegal deductions of money to finance elections or some other sundry expenditures totally unrelated to NNPC businesses. While had repeatedly defended the President of not interfering in the company, this presumably, may be the reason for the current stride.

 An energy expert, Prof. Wunmi Iledare, who said that there were indications that the profit investment ratio is greater than zero, stressed that going forward, there is need to define the key performance indicators (KPIs) for its subsidiaries.

 In previous financial performances, subsidiaries such as the headquarters, refineries and others posed grave losses that marred the outlook of performing entities. The corporation had earlier said that some subsidiaries may go if they remain cost centres. 

“I sincerely congratulate GMD Kyari for turning things around in two years, from losses to profit despite business challenges and political mines,” Iledare, who is the Chair, Ghana National Petroleum Corporation, Petroleum Commerce Research, at the University of Cape Coast Oil & Gas Studies, stated.

 He added: “The way forward is to define the KPIs for the management team of the sub-business units, and continue to make cost efficiency an important component of strategy for profitability.”

 Iledare is also banking on the PIA to address challenges facing the company, especially if the legislation assented to by Buhari is properly implemented to support, and sustain the current momentum.

 An oil and gas lawyer, Emeka Okwuosa, who expressed shock over the profit recorded by the NNPC stressed that there was need to ascertain whether best practices were observed before arriving at the profit.

 “I still don’t believe it is yet uhuru for the NNPC. But let’s hope it continues and the profits better applied to meet the huge infrastructural deficit, which will lead to increased employment opportunities, improved healthcare, good road infrastructure etc,” he said.

   According to him, since the PIA is now in place, the NNPC will become more commercially competitive, and must become a more profitable entity with transparency and accountability as core values.

 Okwousa said: “The financial profitability that we are witnessing is good riddance and further shows that the days of NNPC operating as an opaque behemoth, and a loss-making machine is gone. The passing of the PIB will further enhance this new financial discipline. We now hope that the funds are applied for the benefit of the teeming suffering masses,” he stated. 

On his part, Chairman and Chief Executive Officer, International Energy Services Limited, Dr. Diran Fawibe, said: “The owners of a company like the NNPC determine whether the company would make profit or not in the way and manner that they manage it. The question we should ask is, could it be that NNPC made profits in the previous 43 years?

 “Over the years, we knew that there were lots of expenditures, lots of deductions in the finances of the NNPC that ordinarily should not have been made. These things have gone on for many years. If this expenditures and deductions are written back into the books of the NNPC, definitely there will be profit. It is a sad commentary that a corporation like the NNPC did not make profit for 43 years.”

 Fawibe said the only reason why the corporation made profit was the way it is now being managed, adding that other viable national oil companies didn’t do anything different apart from being efficient, accountable and transparent.

 Describing the performance as commendable, the Executive Director, Civil Society Legislative Advocacy Centre (CISLAC), Auwal Musa Rafsanjani, added that it was also a positive outcome of the global pressure and domestic public outcry for improved transparency and accountability in public sector governance, particularly in the extractive industry, “so it is a small victory for both the government and civil society.”

   According to him, the profit is, however, not sufficient considering the actual revenue potential of the company, which as rightly put by the GMD, is expected to be a trillion naira profit company.

 With the fiscal position of the economy and the growing political tension, Rafsanjani said that the government needs increased public trust and investors’ confidence, adding that the current achievement on the public side suggests not only responsiveness by the government to increased calls by civil society for improved transparency and accountability in extractive sector governance, but tangible outcomes as a result of those calls.

 “With data rapidly becoming more available across the extractive industry, civil society, researchers, and journalists have responded by finding new ways of examining natural resource revenues, locations, production statistics and corporate filings, drawing on data, which hitherto, was only available to companies involved, or locked up in databases of proprietary data providers,” he stated.

 He added that benefits from tax and royalties should provide some succour as opposed to the current and previous arrangement where it has been nothing short of a loss-making entity renowned for anomalies, undue political interference, and shades of burden. 

“What then remains important is the intensified and sustained advocacy for effective implementation of public disclosure and more open data reforms that promote and entrench a culture of transparency and accountability in the extractive sector governance, from generation to allocation, and to utilisation for public benefit,” Rafsanjani said.

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