A Review of the Nigerian Energy Industry

Concerns grow over NNPC solvency

03 November 2015, Abuja – One of the categorical statements made by the Group Managing Director, Nigerian National Petroleum Corporation, NNPC, Dr. Emmanuel Ibe Kachikwu, about the finances of the Corporation is that given its assets base NNPC is not broke.

Dr.Emmanuel Ibe Kachikwu, NNPC GMD-480x500
Dr. Kachikwu

Kachikwu in direct response to whether the NNPC is broke said: “No, I don’t think we are broke. We can never be broke because our assets base is so strong. You know that about 60 percent of 1.2million barrels of oil a day, plus another almost 100 percent ownership of NPDC assets, plus oil on ground not even allocated, plus gas resources, we really could never be broke.”

Rather, he described what observers interpret as being broke to “a cash flow issue as opposed to asset resource. We are not broke, we’re going to manage our cash flow better, we are going to see what falls in to enable us to put more money into the economy and do the things that we need to do. We are going to be more efficient.”

However, based on data contained in the NNPC recently released financial statement for August 2015, stakeholders are prone to believe that the Corporation is at the risk of being bankrupt unless a drastic financial re-engineering is undertaken.

Although Kachikwu promised to open up the operation of the Corporation for public scrutiny, analysts have expressed concerns that the NNPC financial report did not capture previous years before 2015.

In keeping to his words, the NNPC promised to publish monthly financial statements, in addition to inviting transparency watchdogs like the Nigerian Extractive Industry Transparency Initiative, NEITI, and other agencies to witness the opening of bids for its contracts.

But analysts suspect that judging by the internal rot in the system before the advent of this administration, the eventual release of NNPC’s financials might even show that the Corporation is insolvent.

August report

The NNPC had in its Monthly Financial and Operations Report for August 2015, announced a loss of N378.49 billion in its operations for the first eight months of the year, from January to August 2015.

Some analysts, who spoke to Sweetcrude in confidence, wondered how the N378 billion deficits would be plugged and also expressed concern on the impact the deficit would have on Federal Government’s revenue and the Nigerian economy in general.

They argued that signs that the NNPC might be bankrupt emerged a couple of weeks back, when the Government and the NNPC announced that they intend to grant financial autonomy to their Joint Venture, JV operations, starting with about five of the JVs.

NNPC defended that the financial autonomy granted the JVs, will give them control over their budgets, and empowers them to source for funds and remit taxes, royalties and dividends to government similar to the Nigeria LNG Limited, NLNG model.


Financial analysis

But the NNPC financials have confirmed that it has over the years been operating an unprofitable and unsustainable business model. Even the report admitted as much, noting that some of its business units are not operating the most efficient business models that can position the Corporation for profitability.

Analysis of the NNPC’s financials showed that 82.24 per cent of its total dollar receipts from oil and gas sales from January to August 2015, were diverted to the funding of JV cash calls, leaving only 17.8 per cent of the proceeds for transfer to the Federation Account.

In particular, total dollar sales proceed receipts in the period was put at $3.423 billion; with $2.815 billion utilised for JV cash call funding and $607.827 million remitted to Federation Account Allocation Committee, FAAC.

This was in spite of an improvement in actual receipts compared to actual amount due. The report put the amount due from oil and gas sales proceeds at $3.12 billion, but the actual receipt was $3.423 billion, representing an excess of $303 million.

The improvement between actual amount due and actual receipts, according to the report, was engendered by gas export sales, as the actual receipts from the sale of Nigeria’s gas stood at $986.407 million, compared to the expected amount of $899.414 million.

In the area of crude oil export sales, the expected proceed was put at $2.220 billion, while actual receipt was $2.218 billion, representing a difference of $2.8 million.

The NNPC blamed the dwindling oil price for its low contribution to the Federation Account, saying that its receipts witnessed a sharp decline of over 67 per cent from September 2014, when the receipt was at its peak, to July 2015, with dire consequences to the Federation.

“This continued decline in oil price led to insufficient cash available to meet monthly JV Cash Calls obligations of about $615.8 million as appropriated by the National Assembly. To mitigate this effect, NNPC was compelled to sweep all the export receipt to JV Cash Call funding implying a zero remittance to Federation Account since the month of April 2015,” the report said.


Federation Account remittances

In the area of remittances to the Federation Account in naira from the proceeds of sale of domestic crude oil and gas, the amount expected from domestic crude oil sales was N1.164 trillion, but the actual receipts were N723.824 billion, while the NNPC remitted N774.467 billion to FAAC, including a N50.643 billion debt repayment to the Federal Government.

With the remittance of N774.467 billion to FAAC, in addition to total expenses and losses of N396.913 billion, which, broken down further revealed as follows:

?             N231.04 billion – subsidy for eight months period;

?             N69.406 billion – repairs and management cost;

?             -N4.17 billion – crude oil loss, and;

?             -N41.654 billion – petroleum products losses.

Adding the total expenses and losses of N396.913billion, plus total remittances to FAAC of N774.467 billion, which included N50.643 billion debt repayments to the Federal Government amounted to N1.121 trillion. But deducted from the domestic crude oil sales of N1.164 trillion, about N43 billion was unaccounted for by the NNPC.

It is important to note that the payments received between January and August 2015, were for crude oil and gas lifting from October 2014 to May 2015.


Recovering from financial woes

Based on the financial report, analysts argue that it would take quite some years for the NNPC to recover from its financial woes, given its huge indebtedness to its JV partners. They also noted that in view of NNPC’s revenue and expenditure pattern, the financial crises will get worse if oil prices remained low at the international market.

Reacting, analysts at FBN Capital disclosed that on the surface, NNPC’s performance is passable in the current oil price environment, especially if allowance is made for the Pipelines and Product Marketing Company, PPMC caveat of a N231 billion claimable subsidy due to it.

According to them, PPMC accounted for 76.1 per cent of year-to-date revenue of N1.17 trillion ($5.9bn); Nigerian Petroleum Development Company, NPDC, 14.9 per cent and the Nigerian Gas Company, NGC, 7.6 per cent.

But the contribution of the three refineries was just N535 million, although the budget for the year projected N792 billion based on assumptions that were not shared in the monthly report.

“In revenue terms on the profit and loss account, therefore, the Corporation is essentially a marketer rather than an upstream producer,” the analysts said.

Furthermore, FBN Capital also noted that the NNPC’s Corporate Headquarters in Abuja, was the largest loss maker in the period under review, as it posted a loss of N115 billion, compared with N123 billion in the budget (but the report did not indicate if the amount was anticipated profit or projected losses).

Also, the refineries were among the largest operational loss-making ventures, as rather than the anticipated profit of N20 billion projected in the budget, the refineries instead recorded huge losses of N49 billion.

According to FBN Capital, “The report’s summary of the Corporation’s dollar-denominated oil and gas businesses shows total year-to-date (YTD) proceeds of $3.42 billion, of which $2.81 billion was given over to joint-venture cash calls and the balance of $610 million paid into the Federation Account. The last of such payment was made in March (from February revenues).

“Arguably, it would be better if, for example, the existing refineries were privatised or allowed to wither away, NITEL-style. That price environment has been painful for the public finances.”

Also commenting on the results, Mr. Ejike Udeze, an analyst with Nextier Advisory, maintained that the huge operational losses in the NNPC financial report showed that there is need for the group to improve on its revenue generation to nullify the huge losses.

He said that this can be achieved if NNPC increases current domestic refining output and reduced dependence on imported products.

With the reduced global demand in crude oil, Udeze argued that the NNPC Group needed to balance the revenue inflow by increasing refining capacity as well as providing incentives for private sector involvement in crude oil refining.

He lamented that of the over 893 million litres of petroleum products supplied by the NNPC in July 2015, about 801 million litres or 89.7 per cent of the products were imported through the Offshore Processing Agreement, OPA. The balance of 83 million litres (9.3 per cent) was from the domestic refineries.

Besides, Udeze noted that Nigeria’s huge subsidy payments have proven to be unsustainable, adding that it will be more efficient for the Federal Government to channel this fund to other critical infrastructure, such as education, health, transportation, security, and a host of others.

He added that Government should also invest more on the turnaround maintenance, TAM, of the refineries in order to improve their capacity utilisation.

He further urged NNPC to divest about 25 per cent of its joint venture petroleum assets, as this will help it maximise profit and unlock resources that can be invested in infrastructure development.

For the NNPC to rebound from this financial quagmire, Udeze called for the revamping of the Corporation in order to curb corruption, enhance public private partnership, community relations and increased emphasis on revenue growth.

He said: “There is a need to curb corruption in the oil sector especially in the NNPC, in order for the country to fully maximise the profits from the sector.

“Nigeria currently meets less than 10 per cent of its daily petroleum products domestic need. The NNPC can partner with private investors to participate more in crude oil refining and reduce the over 89 per cent dependence on imports to zero, which will in turn reduce the amount spent on imports.

“The NNPC needs to partner with all host communities (Kaduna, Port Harcourt, Warri, and Gombe) in order to develop strategies to effectively secure its pipelines. The oil losses due to pipeline vandalism do not only affect the NNPC’s revenue but equally affects the ecosystem of the regions.

“It would be interesting to see an increased revenue amount when the next report is released. The tumbling oil prices have slashed Nigeria’s revenue and our economy may have a silver lining. The NNPC Financial and Operating report (August 2015) showed a decrease in crude oil export from 6.6 million barrels in January, to about 1.9 million barrels in July; hence, in order to increase the revenue of NNPC, it must reduce the amount spent on petroleum products import.”


Auditors’ perspective

Previously, PriceWaterHouseCoopers, PwC, had noted that the NNPC operated an unsustainable model, judging from its pattern of remittances to the Federation Account and its other business activities.

PwC, in its Investigative Forensic Audit into the Allegations of Unremitted Funds into the Federation Accounts by the NNPC, had recommended that the NNPC model of operation be urgently reviewed and restructured, as the current model which has been in operation since the creation of the Corporation cannot be sustained.

It said: “The current NNPC business model in relation to the usage of the domestic crude is inadequate as can be seen from the foregoing. The business model that informed the creation of NNPC is a subsidy minded model.

“This model is responsible for several of the weaknesses and lapses that have already been outlined and the net effect is an erosion of value to the Federation.

“Furthermore, the accounting and reconciliation system for crude oil revenues used by all Government agencies appears to be inaccurate and weak. We noted significant discrepancies in data from different sources. The lack of independent audit and reconciliation led to over reliance on data produced from NNPC which may not necessarily be accurate.

“This matter is further compounded by the lack of independence within NNPC as the business has conflicting interests of being a stand-alone self-funding entity and also the main source of revenue to the Federation account.”


Entities within the Group

The financial woes of the NNPC were occasioned by the unimpressive financial performance of majority of the NNPC subsidiaries in the eight-month period, especially the refineries and retail subsidiaries.

Particularly, Kaduna, Port Harcourt and Warri refineries posted a combined loss of N48.92 billion, while NNPC Retail and PPMC recorded a combined loss of N275.16 billion. Broken down the report revealed:


The losers                                                           The winners

NNPC Retail   -N3.679 billion;                      Nigerian Petroleum

Development Company –  +N50.995 billion

PPMC –  -N278.837 billion;                           Integrated Data Services Limited –      +N2.934 billion

Kaduna Refinery –  -N21.90 billion;                            Nigerian Petroleum Development Company –  +N50.995 billion

Port Harcourt Refinery –  -N15.1 billion,  Nigeria Engineering and Technical Company Limited –  +N544 million, and;

Warri Refinery –  -N12.62 billion                 Nigerian Gas Company – +N19.239 billion.


While commending the Kachikwu-led management on its boldness to publish its finances for eight months ending August 2015, analysts urge the management to also release the rest of the NNPC financial statements from 1999 to 2014.

The move will help analysts determine the true financial health of the Corporation, since the NNPC boss insists that it is not broke, even as he has promised to invite the auditors to do a thorough job on the accounts.

They are also hopeful that the current reforms in the Corporation will bring about a positive turn in its financial fortunes and help it bounce back to profitability and credibility.

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