In a period when oil producers are enjoying financial abundance, Nigerians are grappling with challenging economic conditions. This underscores the need for a comprehensive examination of its national oil company, which has failed to maximize the value of the country’s oil and gas resources for its citizens.
President Bola Tinubu, during his inauguration on May 29, emphasized the necessity for a thorough overhaul of monetary policy. However, when we compare the performance of other national oil companies with the Nigerian National Petroleum Company Limited (NNPCL), it becomes evident that this “overhaul” should extend beyond the Central Bank of Nigeria.
Last year, Saudi Aramco declared an unprecedented profit of $160 billion, setting a record for publicly traded firms, while the NNPCL struggled to remit sufficient proceeds from oil sales to support the government’s budget.
Nigeria, Africa’s largest oil producer with 37 billion barrels in reserves, only produced an average of 1.5 million barrels per day last year. In contrast, Saudi Arabia, with 258 billion barrels in reserves, averaged over 11.5 million barrels per day in 2022.
Nigeria’s African counterparts, Angola and Algeria, with reserves of 9 billion and 12 billion barrels respectively, lag behind with an average daily production of 1.1 million barrels. At Nigeria’s current production rate, its reserves could last for about 55 years, whereas Saudi Arabia has approximately 70 years of reserves at a rate five times that of Nigeria.
This underscores that Nigeria is not extracting sufficient value from its oil resources at a time when revenue is crucial to stabilize declining income and support a weakened currency. In the second quarter of this year, Saudi Aramco paid cash dividends totaling $29.38 billion, with a substantial portion going to the government. Meanwhile, NNPCL’s finances were weighed down by subsidies.
The state of the oil industry in Nigeria has been fraught with challenges, from the oil subsidy to non-functional refineries, oil theft, and other issues. The sector has fallen short of its potential, as noted by Adewale-Smart Oyerinde, director-general of the Nigeria Employers’ Consultative Association.
NNPCL, as the country’s oil firm, is at the heart of this turmoil. Entrusted with 445,000 barrels of the nation’s oil output from various contracts with local and international partners, the company resorted to swapping crude for refined products due to its inability to maintain its refineries.
When NNPCL initiated these opaque oil swaps in 2010, its refineries were operating at a mere 20 percent capacity. This led to the government granting waivers to marketers to cover deficits exceeding $3 billion, marking the era of fraudulent petrol subsidies.
In the eight years of President Muhammadu Buhari’s tenure, Nigeria spent over N11 trillion on subsidies, enough to build and equip another refinery. Despite claiming to have invested billions of naira in refurbishing its dilapidated refineries, they remain non-operational and incur substantial personnel expenses.
The government has announced plans for the Port Harcourt refineries to start production in December. However, inadequate crude output remains a concern. NNPCL has already committed 67 percent of its oil production share to the Dangote Refinery, which could pose a challenge to other local refineries. Unless production reaches 2 million barrels per day, Nigeria will continue to face difficulties.
NNPCL’s operating models also require a thorough overhaul. It relies on Joint Venture Agreements with local and international oil companies for onshore and shallow water oil wells. While it owns 60 percent of the benefits in these agreements, it often fails to contribute its share of costs, resulting in cash call arrears in the industry.
Many of these fields face sabotage and local community issues, causing multinational partners to withdraw. Under Nigerian law, they are obligated to decommission these fields, which incurs substantial costs. They have found a solution by selling their stake to local oil companies, a move opposed by NNPCL.
Despite insisting on the right of first refusal in divestment deals, NNPCL, in comparison to local producers like Aradel and Seplat, struggles to extract sufficient value from the fields it manages alone. Its subsidiary, the Nigeria Petroleum Development Company, possesses numerous oil and gas blocks, yet 70 percent of its fields lie dormant. Those in production often involve expensive financing and technical contracts with third parties.
Nigeria’s vast natural gas resources have also underperformed, particularly when compared to countries like Russia with significant gas reserves. Despite having a third of the continent’s gas reserves, Nigeria faces challenges in earning substantial revenue from its resources.
The Nigeria LNG Limited (NLNG), which represents the country’s best chance to exploit its gas resources, has encountered difficulties, including pipeline vandalism that hampers production and revenue loss.
Additionally, multiple taxation from various government agencies and frequent amendments to the Finance Act disrupt corporate planning, dampen investor confidence, and limit investment opportunities in the sector.
NNPCL, as a government entity, has operated based on government directives, which often diverge from market realities. While this approach has been relied upon, given the country’s dire fiscal situation, it may no longer suffice.
Mele Kyari, group CEO of NNPCL, has emphasized the company’s role as a state agent facilitating Production Sharing Agreements (PSA) to ensure value delivery. However, relying heavily on PSAs, in which the country didn’t invest equity, carries significant risks and makes Nigeria vulnerable to international oil companies.
Under Kyari’s leadership, NNPCL has worked to address issues related to the fiscal environment, capacity, and regulatory aspects based on the provisions of the Petroleum Industry Act. Nevertheless, attracting new investments remains a challenge.