Inside NNPC Oil Sales A Case for Reform in Nigeria

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Inside NNPC Oil Sales: A Case for Reform in NigeriaSolving NNPC’s underlying problemsAs we suggested at the beginning of this report, maximizing full returns fromNNPC oil sales will depend on pursuing two trajectories of reform—the urgent fixesmentioned above, and a broader agenda of NNPC restructuring. Many of the worstperformance problems found with NNPC’s current sales system are byproducts oflarger, longstanding, well known challenges that have eluded reform for many years,including through the chronic delays that prevented the passage of the PIB. By stallingsector reform, NNPC bosses have created a legal, operational and political limbo thatinfluential officials in and outside of the corporation exploit in the service of narrow,short-term interests. Weak accountability means that bad management decisions,possibly criminal conduct included, have gone largely unpunished.The dramatic rise of oil prices in the late 2000s made it easier for NNPC to “muddlethrough,” with extra cash flow masking the inadequacy of various short-term fixes.This, in turn, further delayed action on addressing the larger, structural problems.Many of the stop-gap measures were introduced to fight fires, or re-route oil saleearnings. Over time, top officials have expanded, reworked and manipulated some ofthem in order to distribute patronage benefits. But now, faced with lower oil pricesand sales premiums, rising industry costs, a growing list of suspect NNPC deals andwithholdings, and drained government coffers, the government should undertakesystemic reform, rather than creating another round of ill-suited coping mechanisms.Below we recommend a number of fundamental fixes to Nigeria’s oil sector governance.This list is certainly not exhaustive; we focus here on those issues that relate specificallyto oil sales. For instance, we do not discuss the role of NAPIMS, the NNPC subsidiary incharge of negotiating and enforcing contracts, the operations of which are fraught withinefficiency and conflicts of interest. Also, this agenda does not require omnibus sectorlegislation, such as the Petroleum Industry Bill. In fact, the far-reaching nature of thebill attracted too much political baggage, and the timeline of its implementation wouldhave far exceeded the political horizons of any leader. Taking up the agenda in workablesegments is the way to achieve results.The dramatic rise ofoil prices in the late2000s made it easierfor NNPC to “muddlethrough,” with extracash flow masking theinadequacy of variousshort-term fixes.Taking up the agendain workable segmentsis the way to achieveresults.64
Inside NNPC Oil Sales: A Case for Reform in NigeriaDevelop a plan for funding NNPC JV cash calls.The cash call system is fundamentally broken. For more than decade, NNPC has lackedthe capital it needs to grow its asset base or meet upstream operating costs. This is partlybecause the federal government has not funded it adequately through the annual budgetprocess, partly because funds have been diverted for other purposes. The corporationhas amassed growing, multibillion dollar cash call debts, many of which it settles yearslate, if at all (figure 15). 194 The resulting funding crisis set NNPC on the path of inventingmakeshift methods for funding its obligations, both to the JVs and more generally.YearTotal JV budget($ billion)NNPC’s share,estimated at58 percent($ billion)Actually paidby NNPC($ billion)Debt tooperators($ billion)2006 8.1 4.7 4.1 0.62007 9.7 5.6 4.3 1.3Figure 15: JV cash calls,budgeted versus paid,2006-2012Sources: Author estimates based ondata from PRSTF Report p.78; NEITI2012 Audit Report p.1032008 12.4 7.2 4.9 2.32009 14.8 8.6 5.4 3.22010 17.7 10.3 6.2 4.12011 17.2 9.9 5.2 4.72012 18.0 10.4 6.9 3.5Costs to Nigeria have already been high, from the actual interest payments associatedwith this lending to the lost revenues as field maintenance and investment are neglected.A functioning corporate finance model is a strong predictor of NOC performance.Companies that lack reliable access to enough revenue to cover their operational costslose significant profits as a result. 195 Over the last decade, JV funding issues have meantdelayed projects and lower production and revenue receipts for Nigeria.To bridge some of the financing gaps, NNPC has entered into a series of makeshiftarrangements in which opacity, complexity and governance risks are relatively high:Over the last decade,JV funding issueshave meant delayedprojects and lowerproduction andrevenue receipts forNigeria.• Third party project financing deals• Carry agreements and modified carry agreements (MCAs)• IOC bridge loans 196• The SAAs discussed on pages 40 to 41.Roughly a third of JV production now happens under these alternative financearrangements (figure 16). As a group, these deals come with unclear costs and shrink thetotal volumes of crude oil that NNPC has to sell. 197194 In 2012, for instance, NNPC paid JV operators $1.253 billion in cash call arrears dating back to 2002-2009.NEITI, 2012 Oil and Gas Audit Audit Report p.104.195 NRGI, Nine Recommendations (op.cit.), p.9.196 For explanation of these deals, see NEITI, 2012 Oil and Gas Audit Report p.77f.197 NEITI found, for instance, that despite the increase in crude oil production during 2009-2011 by 4.8%2006-2008, NNPC’s share of total exports declined by 15.5% within the audit period in comparison to thelast audit cycle. NEITI attributed this partly to NNPC’s use of its equity crude oil entitlements to fund JVoperations through alternative funding arrangements. NEITI, Remediation Plan Part B, item 2.1.65
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