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Nigeria appoints new head of NNPC to crack down on corruption

Nigeria’s president has made good on his promise to reform the energy sector with key appointments already announced, but the legislative workload ahead is daunting

Nigeria’s president Muhammadu Buhari has named a Harvard-educated lawyer as head of the notoriously corrupt state-owned Nigerian National Petroleum Corporation. Industry experts saw it as proof of Buhari’s determination to crack down on corruption and mismanagement in the country’s oil sector.

As oil minister in the 1970s, Buhari saw the birth of the behemoth. Now, as democratically-elected president, he is determined to drive out the graft within the oil industry, and restructure the 24,000-employee NNPC. During the election campaign he vowed to clean up the oil sector and the NNPC. He has also pledged to locate the billions of dollars in oil revenues that went missing from government coffers under the former president Goodluck Jonathan’s term in office

A month after his election, he fired the company’s board and management. The new group managing director is Ibe Kachikwu, a former executive vice chairman of ExxonMobil Nigeria.

One of his first jobs was to sack eight senior directors. Days later, the head of the crude oil marketing division, Gbenga Olu Komolafe, was re-assigned as the new group manager special duties, a statement from the NNPC said.

As part of the wider clean-up of the oil industry, Buhari in July ordered a review of oil-swap contracts and barred 113 vessels from loading oil and gas, about 250,000 b/d of Nigeria crude. Kachikwu has also called for a meeting with oil traders to account for the crude oil they lifted during Jonathan’s administration. More sackings are anticipated at the organisation which is likely to be carved into two entities – one for regulation and one for investment.

On 11 August, Buhari said that the prosecution of officials who have stolen national resources would begin in a matter of weeks. Speaking in Abuja, the president said his administration was irrevocably committed to doing all within its powers to break the vicious cycle of corruption, unemployment and low security in the country.

Report claims billions are lost

A report by the Natural Resource Governance Institute (NRGI) early in August called for an overhaul of the way Africa’s biggest producer sells its oil, in order to save billions of dollars in lost revenue. The 71-page report provided insights into the monumental corruption that has plagued the NNPC and those of its subsidiaries such as the Pipeline and Product Marketing Company, which sells crude to the country’s four refineries. But the ailing refineries are unable to process the bulk of the oil and over the years this allocation has been lost, NRGI said.

NNPC sells around 1m b/d, or almost half of the country’s total crude output. The other half is mostly sold to “unqualified intermediaries” who rake off significant margins for little of no added value to the deal. NRGI also said that over $32bn were lost owing to NNPC’s mismanagement of the Domestic Crude Allocation (DCA) which has become a “nexus of waste and revenue loss” from NNPC oil sales, and corruption-riddled oil-for-products swaps. The country’s four refineries only process around 100,000 b/d so NNPC ultimately re- routes most of the DCA oil into export sales or oil-for-products swaps. Payments enter separate NNPC accounts, which NNPC officials then “draw upon freely.”

Appointing an industry man

Industry experts say Kachikwu comes with good credentials. He has been executive chairman and general counsel for ExxonMobil’s Nigeria affiliate and oversight counsel ExxonMobil companies in Africa since 2009. “The appointment of a new general managing director for the NNPC indicates that Buhari’s focus is on the reforms of the NNPC,” Control Risk’s senior analyst Thomas Hansen said. Rather than focusing on implementing the long-stalled Petroleum Industry Bill, Hansen said Buhari’s immediate priority was to restructure the NNPC and to “quickly increase transparency in revenue management.”

This view has adherents. “Appointing a lawyer as opposed to an engineer is the single most important clue that Buhari wants to restructure the NNPC,” said Manji Cheto, vice president at consultancy Teneo Intelligence. “He has a positive reputation which is very different from a lot of the group managing directors of the NNPC and I think that in itself is quite positive. We have seen someone coming into office who has received broad domestic and international endorsement.”

Other analysts said the reform of the NNPC was long overdue. “You clearly have to have a head of the company in place to oversee this. It is still going to take time to get his feet under the table. Although I see he has immediately sacked a bunch of directors. But apart from that, the whole structure of the NNPC needs looking at in particular dividing it up into a regulatory arm and investment arm,” said Martin Roberts, lead analyst, Nigeria at IHS Country Risk. But the NNPC, now in its 38th year, has seen five group managing directors in the last five years, each coming with their own ideas, and Kachikwu faces a daunting task.

“Because NNPC governance had deteriorated so dramatically, Kachikwu has many opportunities to make very meaningful improvement,” said NRGI’s head of governance, Alexandra Gillies, who co-wrote the Nigeria report. For example, he could replace the current swap agreements with ones that deliver fair value to the country. He could account for the revenues from oil blocks controlled by NNPC subsidiaries, she said.

In its report, the NRGI found that NNPC’s upstream subsidiary, the Nigerian Petroleum Development Company failed to make report the proceeds to the treasury once it has sold oil from its blocks. NPDC produced 80,243 b/d in 2013.

“He could publish basic financial data, such as what appears in the annual reports issued by most oil companies as a matter of habit. All of this and more could easily be done by the end of the year, while the administration choose what kind of broader reform agenda to pursue,” said Gillies.

Gillies said the key for Kachikwu and a new oil minister will be to tackle the “urgent leakages” with a few months, while also developing a sound plan for restructuring the NNPC. “The years of delays surrounding the Petroleum Industry Bill have shown how talking about large-scale reform can come at the expense of getting anything else done,” Gillies added.

Previous governments have done little to reform the NNPC and industry experts lauded the appointment of a private-sector based professional to drive the reorganisation of the company. “I think he brings the ExxonMobil standards of compliance and operational excellence to the NNPC, which according to all audit reports we’ve seen on it, has no real standards,” said Ecobank’s head of research, Africa, Dolapo Oni.

'The uncertainty of the bill is not comfortable for investors and stakeholders in the industry. The government should let us know what they intend to do about the bill and the process it will use to fast-track its passage into law'

Oni expects Kachikwu to play a key role in harmonizing the majors’ stance on the PIB, the omnibus legislation that seeks to rewrite the fiscal terms of the industry with the government’s objectives.

As a former top executive at a major, he understands what the IOCs want; but as a representative of the government he has to seek what’s best for Nigeria too. So I expect him to bring a balance to the discussion around fiscal terms for gas and deep water, Oni said.

The 72-year old Buhari is not expected to name his new cabinet until September, and instead of an oil minister he will manage the portfolio through the presidency for at least 18 months. But this could hinder his efforts to stamp out graft elsewhere.

“I have no predictions on whether Buhari will keep the oil ministry for himself. There is so much to be done, that having a capable minister who can devote all his time to reform would be preferable,” said Gillies. Oil companies were not available to comment on Kachikwu’s appointment.

PIB re-think

The long-stalled PIB aims to unify Nigeria’s 16 petroleum laws but it has also proposed higher taxes and royalty rates, chilling investment.

It proposes a 20% tax on offshore projects and 50% on those onshore, terms the companies such as Shell, ExxonMobil and other majors have contested, given the risk of operations in Nigeria. Consultants PwC estimate $50bn more would otherwise have gone into Nigeria’s oil and gas sector.

In its Africa Oil and Gas Review for 2015, it said IOCs were pulling out, and international financiers may also look at funding other capital projects and shift more investment into “new frontier” countries that have fledgling oil and gas industries. Other disagreements among industry stakeholder are higher payments to restive communities in oil-producing areas and unbundling the NNPC.

Buhari is now expected to scrap the draft PIB in favour of the 2007 version; or to split it up into more manageable section.

“There is talk that they will start from scratch on the PIB. I don’t exactly know what they mean by that…. I think they are going to look at some of the issues again in particular the allocation of oil money to the producing states. That is one of the ways that Buhari is going to try and appease his critics in the Niger Delta who are obviously now very much part of the opposition. If he could allocate a greater share of the oil revenue to those states that would go some way of heading off any likely recurrence of militancy,” Roberts said.

But Roberts said an overhaul of the NNPC was the primary goal as the company is so tied up with regulation.

Critics have also called for a sell-down of the government’s majority stake in the joint venture contracts with the IOCs that account for a third of Nigeria’s daily output – and senior oil players in the industry like this idea. Nigeria’s joint venture structure is an average of 55% for the NNPC and 45% for the IOCs. But despite its bigger share, NNPC often defaults on funding, forcing IOCs to scale back on exploration projects, preventing reserves replacement.

Critics also say the petroleum ministry retains too many powers, including over fiscal terms and still has the discretion to award licenses, potentially perpetuating a political patronage system that has left oil cronies rich while poverty levels rise.

Senior oil workers’ union Pengassan called 11 August for urgent action. “The uncertainty of the bill is not comfortable for investors and stakeholders in the industry. The government should let us know what they intend to do about the bill and the process it will use to fast-track its passage into law,” Pengassan’s president Francis Johnson told local media.

Nigeria is already struggling with the low oil price and production has stagnated at about 2m b/d for several years. The currency has also suffered: the naira has lost a fifth of its value against the dollar over the past year.

Compounding the pain, production in the US has nearly doubled over the last five years, and Nigerian oil is now competing for Asian markets along with Saudi Arabian and Algeria oil producers.

Reducing losses in crude oil sales has even become more crucial with the slump in global oil prices that have battered Nigeria. Oil sales account for 70% of government revenues. Furthermore, analysts do not expect a near-term rebound to the $100/b prices that prevailed reliably from 2011 to mid-2014.

But some analysts said that the low price environment offers Nigeria a good time to carry out reforms within the industry. “Nigeria needs to take advantage of this current environment to resolve issues around restructuring the NNPC, block revenue leakages and loopholes in the fiscal and regulatory structure, remove fuel subsidies and deploy the funds to make the refineries generate more fuel,” said Oni.

Keep the subsidies coming

Buhari appears to be in no rush to end the costly fuel subsidies despite advice to the contrary. “I have received much literature on the need to remove subsidies, but much of it has no depth,” he told local media in July. Although the country pumps over 2m b/d, the nation is almost entirely reliant on imports for the 40m litres/day of gasoline it uses.

Analysts said Buhari is keen to avoid the kind of social unrest that followed Jonathan’s announcement of the removal of the fuel subsidy in 2012. Teneo’s Cheto estimates the $550m budgeted for fuel subsidies for the entire year was all gone by the end of June. “Buhari is trying to delay the possibility of social uproar but I think the biggest risk is this open-ended extension of the fuel subsidies which everyone agrees is financially unsustainable,” Cheto said.

Hansen said that Buhari was not fully convinced that ending the fuel subsidies was the right move in the short term. Politically, he said, it was very difficult. But Buhari is enjoying a “honeymoon” period so any opposition against his government would not be as “significant” as it was against Jonathan,” he said.

Delta challenges

During his election campaign, Buhari vowed to improve security and development in the oil-producing Niger Delta in the south. In July, he said this government would not scrap the amnesty program and he said he would focus on investment in projects and development programmes already in place.

Earlier in August he made available a $10m donor-driven grant for the immediate clean-up of the heavily-polluted Ogoniland in Rivers state, four years after a damning UN report advised the industry and government to act urgently to prevent spills. The grant was welcomed in the Niger Delta and viewed by many as one of Buhari’s most significant decisions since his 29 May inauguration.

The action also silenced critics, who implied that the president would marginalise the underdeveloped region where he picked up few votes. The fund will be overseen by representatives of the Ogoni people, the UN, companies in the Niger Delta and the government. His decision to clean up the Ogoniland puts paid to rumours that he is marginalising the region, said Cheto.

That, coupled with Buhari’s pledge to share $2.1bn with federal, state and local governments to offset a funding crisis, could go a long way to ending armed conflict and prevent a return to militancy in the Delta. Buhari cannot solve all the country’s woes overnight. “The problems are so overwhelming, there’s no quick fix,” said Roberts. But considering the importance of the oil industry, he has picked a good place to start.

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