how is nigeria seeking to improve the management of nnpc?

8/8/2019 HOW IS NIGERIA SEEKING TO IMPROVE THE MANAGEMENT OF NNPC?

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CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY

DECLARATION OF ORIGINALITY

STUDENT I.D.: 090018338

STUDENT NAME: AHMED ADAMU.

PROGRAMME: Msc Energy studies with specialization in Oil and GasEconomics.

MODULE CODE: CP51026 (Public Policy for sustainable Development in

Natural Resource-Rich Countries).

TITLE OF THE

RESEARCH PAPER: HOW IS NIGERIA SEEKING TO IMPROVE THE MANAGEMENT

OF NNPC?

ABSTRACT: since when oil was discovered in Nigeria in 1908 and subsequent

establishment of National Oil Company in 1971, Nigerian NationalOil Company had undergone only two major restructuring and had

not experienced any broad lawful review to reflect the evolvingcomplexity and dynamism of the oil sector. Nigerian National

Petroleum Corporation (NNPC) replaced the Nigerian National Oil

Company in 1977, six years after the latters formation due to

operational failures. Since 1980s during the military regimes NNPChas been facing challenges of corruption, inefficiencies and

mismanagement, subsequently, the resurgence of Democracy in thecountry in 1999 saw different efforts by different administrations toholistically restructure the NNPC and the Sector at large for a

modern and liberalized oil sector in the country, recently Petroleum

Industry Bill (PIB) was set up to consolidate all the legal and

regulatory structures necessary for the reform which is now at stageof legislative approval. Therefore, this paper analysed empiricallythe restructuring proposal of NNPC to evaluate how the reform is

capable of improving its management. Subsequently, the paperobserved some salient aspect of the proposal and came up with

some recommendations for better improvement of the National Oil

company management and the sector after the reform.

WORD COUNT: 4,300

PRESENTED TO: EVELYN DIETSCHE.

CONTRACT CONCERNING PLAGIARISM

I, the undersigned, have read the Code of Practice regarding plagiarism containedin the Students' Introductory Handbook. I realise that this Code governs the wayin which the Centre for Energy, Petroleum and Mineral Law and Policy regardsand treats the issue of plagiarism. I have understood the Code and in particular Iam aware of the consequences, which may follow if I breach that code. I alsoauthorise the centre to scan the e-copy of my research paper through thePlagiarism Detection Software to detect plagiarism

SIGNED: ____________________________

Date: 11-05-2010.


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TABLE OF CONTENT: PAGE NO.

LIST OF ABBREVIATION................................................................................................... 3

CHAPTER 1: INTRODUCTION ........................................................................................... 4

CHAPTER 2:

2.1. NATIONAL OIL COMPANY MANAGEMENTISSUES:............................... ......... 6

2.1.1 GOVERNMENT AND NOCs:............................................................................. ....... 6

2.1.2 NOCs AND IVESTMENT/CONTROL:............................................................. ........ 7

CHAPTER 3:

3.1. PROPOSAL ON REFORMING NNPC:.............................................................. ........ 9

3.1.1 NNPC NOW:........................................................................................................ ....... 9

3.1.2. PROPOSALS AND RATIONALE FOR NNPC AND PETROLEUM SECTOR

REFORM:.................................................................................................................... ....... 10

3.1.2.1 Transparency and tackling of corruption:..................................................... ........... 11

3.1.2.2 Administrative fairness:.................................................................................. ......... 11

3.1.2.3 Government revenue:...................................................................................... ......... 11

3.1.2.4 Employment Opportunities:........................................................................... .......... 12

3.1.2.5. NNPC IMPROVEMENT: .............................................................................. ....... 12

3.1.2.6. Nigerian Content:........................................................................................... ......... 13

3.1.2.7. Environmental protection:............................................................................. .......... 14

3.1.2.8. Natural Gas:................................................................................................. ............ 14

3.1.2.9. Downstream sector:..................................................................................... ............ 14

CHAPTER 4:

4.1. NNPC RESTRUCTURING:............................................................................ ............ 15

4.1.1. Name:............................................................................................................... .......... 15

4.1.2. Ownership:...................................................................................................... ........... 15

4.1.3 Assests and Liabilities:...................................................................................... .......... 15

4.1.4. Board of management:.................................................................................... ........... 16

4.1.5. Shareholders:.................................................................................................... .......... 16

4.1.6. Un-bundlement:............................................................................................... ........... 17

CHAPTER5: OBSERVATION AND RECOMMENDATIONS:..................................... 18

CONCLUSION: ......................................... ............................................................... .......... 20

BIBLIOGRAPHY ...................................................................................................... ........ 21


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LIST OF ABBREVIATIONS:

Nigerian National Petroleum Corporation (NNPC)

Organization of Petroleum Exporting Countries (OPEC)

Nigerian National Oil Company (NNOC)

National Oil Company (NOC)

National Oil Companies (NOCs)

Organization for Economic Co-operation and Development (OECD)

International Energy Agency (IEA)

National Petroleum Investment Management Services (NAPIMS)

Nigerian Petroleum Development Company (NPDC)

The Nigerian Gas Company (NGC)

The Product and Pipelines Marketing Company (PPMC)

Integrated Data Services Limited (IDSL)

Nigerian LNG Limited (NLNG)

National Engineering and Technical Company Limited (NETCO)

Hydro Carbon Services Nigeria Limited (HYSON)

Warri Refinery and Petrochemical Co. Limited (WRPC)

Kaduna Refinery and Petrochemical Co. Limited (KRPC)

Portharcourt Refinery Co. Limited (PHRC)

Eleme Petrochemicals Co. Limited (EPEL)


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CHAPTER 1:

INTRODUCTION:

The Nigerian National Petroleum Corporation (NNPC) is the company that defend the

interest of the government in the oil industry of the country to help provide an adequate

exploitation of the oil resource toward developing human capital and social infrastructures in

the country. The company faced two major transformations all in 1970s. in 1908 when oil

was found in the country, it has not been produced or extracted for business purposes till in

1950 when foreign oil companies were responsible for the production, but under an

agreement of 50-50 sharing of returns with the Nigerian Government.1

In early 1970s, Nigerian government decided to join the Organization of Petroleum Exporting

Countries (OPEC) which made the country as a member to mandatory have a major share in

companies functioning in its land. Similarly, some of the oil companies felt short of fulfilling

its expectations of developing social infrastructures and involving indigenous people in its

operation. Subsequently, Nigerian government opted to form its domestic oil company

known as Nigerian National Oil Company (NNOC), NNOC started to acquire substantial

shares of oil companies to give its self mandate to participate in all affairs of oil production in

the country, among its responsibilities included the exploitation, production, refining,

marketing, transportation and distribution as well as developing human capital. IDCH

(2005).2

The NNOC faced different challenges due to its inability to make optimal decision

independently without government interference, also due to its inadequate practical and

monetary resources to administer the highly complex oil industry led to the formation of

NNPC in 1977 which replaced and inherited all the property and responsibility of the NNOC

added with more responsibilities and sovereignty with responsibilities under twelve

1LPG World (2005), Nigerias oil and gas sector faces overhaul , Longman.

2International Directory of company Histories, (2005), Vol. 72, st. James press


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supplementary companies to ensure good organization and development of the industry.

Similarly, like the NNOC, NNPC faced a number of challenges from wastefulness,

dishonesty to lack of good governance which prompted sequence of incomplete reforms in

the corporation throughout 1980s and 1990s. 3

Recently, the Nigerian government is committed to a holistic reform toward improving the

management of NNPC and the oil and gas sector at large. This was made evidently known by

coming up with a new National oil and gas policy which proposes a complete management

reshufflement, opening of the sector for private investment and un-bundlement of the NNPC

to provide a solution to the problems of the industry and address the issue of subsidy and

create opportunities for private participation in the upstream and downstream sector for better

management and adequacy.

Subsequently, cynicism and fear engulfed the minds of Nigerians on the rationale and

outcome of reforming the NNPC and the sector at large, as a result, this paper studied the

proposal of the reform with a view to provide wider familiarization of the reform and come

up with some observations and recommendations for better improvement and proper

implementations of the reform. Empirical and theoretical issues were considered for the

qualitative analysis. The paper is divided into five chapters, chapter two studied some

theoretical issue surrounding National Oil Company (NOC) management, chapter three

elaborated on the proposal of the NNPC reform, chapter four analysed the proposal and

offered some recommendations and chapter five is the conclusion followed by Bibliography.

3Pearson, S. R. (1970), Petroleum and the Nigerian Economy, Stanford, Carlifornia, Stanford University Press.


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CHAPTER 2:

2.1. NATIONAL OIL COMPANY MANAGEMENTISSUES:

2.1.1 GOVERNMENTAND NOCs:

Obviously government faces pressures on the polity and economy but tend to have kin

concern on its political interest, which motivate it to intervene in the National oil Companies

to ensure adequate flow of money in the state despite the fact that interference of the

government in the business and administrative decision of NOCs adversely affect its

productivity. Moreover, some governments continue to rely solemnly on the oil sector to

raise revenues to the state which is detrimental to the economy at large due to

unsustainability of revenues from the oil sector. Velerie Marcel (2006) stated that even with

a careful management of revenues, NOC Managers recognised clearly that the oil rent would

not be able to sustain the economy in the future. Though some of the countries have realized

the challenge and are trying in different ways to diversify the economy to avoid the

occurrence of resource curse or Dutch disease.

Due to increase in the expectations and pressure on the government, National Oil Companies

(NOCs) tend to be affected by unnecessary interference and high demand for more returns to

meet those expectations. Similarly, governments tend to force the NOCs to recruit or employ

citizen even if the company do not require that, governments do that to keep faith with their

voters for their own political ambitions. A Saudi Aramco Manager when interviewed by

Velerie said we cant solve the problem of employment, we wont have enough jobs,

therefore, we should focus on growing income for the government not on finding jobs and

make contribution to diversify the government income.4

However, the coming out of privatization globally during 20th

century, most of the NOCs

were privatized as a way forward toward addressing those challenges, this had given the

4Velerie Marcel (2006), Oil Titans, chatham House, London, Bookings Institution Press, Washington, D.C.


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market with other private companies, NOCs may improve its efficiencies and invest in new

technology thereby reducing the vulnerability of Energy predicament in the future.6

6Martha, B. O., (2007), The changing role of National Oil companies in International Markets , Carnegie

Endowment, Washington, D.C.


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Petroleum Resources (DPR) which ensures adherence to the regulation of the industry,

process applications for licences leases and permits, design and enforce environmental

regulations. The NNPC is further divided into six Directorates under its management

namely.7

y Engineering and Technology Directoratey Corporate Servicesy Exploration and Productiony Refineries and Petrochemicalsy Commercial and Investmenty Finance and Accounts.

Source: NNPC official website

3.1.2. PROPOSALS AND RATIONALE FOR NNPC AND PETROLEUM SECTOR

REFORM:

The complexity and lack of autonomy imposed by consolidation of so many responsibilities

in one place and interference by government has negatively affect the industry and NNPC in

particular leading to inefficiencies, bribery and negligence. Similarly, since the oil was found

in the country and production commenced in 1958, the laws regulating the industry has not

been reconsidered carefully. Considering the complexity and dynamism of the oil and gas

sector make it essential to update the Laws and organization of the institutions in the industry

to reflect the evolving nature of the industry globally.

Subsequently, the Nigerian government decided to embark on restructuring of the industry by

coming on with a legislative bill that proposes new lawful and administrative setup,

institutions and regulatory authorities, it specify new orders for the upstream and downstream

sector. The consolidation of these legal proposals is known as the Petroleum Industry Bill

7NNPC website (2010),http://www.nnpcgroup.com/home#, NNPC groups and Directorates.


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(PIB). PIB came up as a proposal or recommendations of the oil and gas reform

implementation committee (OGIC) which was constituted by the Nigerian government in

2006 for the aim of undertaking a meticulous reform of the oil industry. Some of the drives

and benefits to be derived from the reform include the followings:

3.1.2.1 Transparency and tackling of corruption:

As corruption become pervasive in the industry, the new proposed law tries to tackle the

menace by removing much of the confidentiality and creating transparency by unbundling

the dominant firm (NNPC) into five (5) independent firms (to be discussed in the next

chapter). The law proposes removal of secrecy for all processes, agreements and payments.

Thereby giving all Nigerians the opportunity to know what is going on in the industry.

If

implemented, it will ensure absolute transparency in all procedures by making all data

accessible in a National Database.

3.1.2.2 Administrative fairness:

Due to the congestion of different institutions responsible for different responsibilities in one

entity, some of the institutions may not be given due attention and as such may be treated

unfairly, similarly, it brought about lack of concentration and unfair disbursement of

resources. In line with this, the bill tries to address the administrative challenges and help

ensure sound petroleum administration by creating some separate and clearly distinctive

institutions that will operate independently in terms of management and monetary affairs.

3.1.2.3 Government revenue:

due to some difficulties in collecting oil revenues from oil companies, the new bill proposes

to enforce all companies to set up an electronic information system thereby the allowed

government Auditors will have access to it. In line with this, The Minister of Petroleum

stated this the simplest government revenues to collect are royalties; everyone can calculate

and verify on the back of an envelope how much royalties should be collected from each oil


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and gas field each month. Therefore, the main emphasis of the new government petroleum

revenue system is on Royalties.8

The proposal on royalties determination and collection is set to be different from different

environmental areas and repeatedly change to the economic situations. Royalties will be

adjust every month and change according to the oil prices so that the country can garner an

instantaneous benefit in case of an abrupt high oil prices. However, an extra tax will be

introduced on emissions released by the oil companies which are known as Nigerian

Hydrocarbon Tax (NHT) to raise the government revenue. Similarly, the high revenue from

royalties was proposed due to the fact that Nigeria did not harvest better benefits when it

opted for production sharing contracts.

3.1.2.4 Employment Opportunities:

Due to the persistent increase in the number of unemployed qualified graduates and

subsequent high curiosity to work in the oil sector, the bill proposes to give opportunities for

Nigerians owned companies to become investors in the oil industry, by forming attractive

investment opportunities in small fields, low payments and taxes and allowing access to new

contract areas. Similarly, the government will ask the existing Companies to return unused oil

fields to be allocated to the new oil companies. Moreover, the operator of marginal fields will

be asked to own the fields they are operating thereby creating job opportunities and reducing

the total number of undeveloped fields.

3.1.2.5. NNPC IMPROVEMENT:

Despite the fact that NNPC is an oil company but it behaves like a government department,

its income go to the pose of the government, also it receives funding from the government,

which is not an adequate way of running an oil company. Subsequently, PIB offers NNPC the

opportunity to become self financing oil company. Though the bill proposes to maintain the

8Minister of Petroleum Resources Speech on PIB on the internet (2009).

http://www.nnpcgroup.com/media/petroleum-industry-bill-speeches.


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ownership to the government within few years before its shares would be opened for

subscription after it was changed to NOC, it will relate to the government in the same way as

with other oil companies by paying taxes and royalties. In terms of expansion and

development of new oil fields, the NOC with other oil companies operating in the country

will come together and contribute shares and form what is called an Incorporated Joint

Venture (IJV) which they will use their income and other means to discover and develop

other fields.9

3.1.2.6. Nigerian Content:

Due to the exclusion or little participation of Nigerian citizens and low contribution of the

petroleum industry to the societal and economic development in the country, the bill proposes

the following obligations on the operating oil companies as pointed out by the minister:

y The purchase of local goods and servicesy Procurement guidelines in order to assist local companiesy Employment to Nigerian Citizensy Training and Educationy Research and Developmenty Regular reporting and verification of the Nigerian content plan.

As the petroleum Minister said any licensee and leasee shall provide for an extensive

economic spin-off program for host communities near petroleum activities some of the spin-

off obligations include construction of roads, hospitals and community centres and provision

of local job opportunities and training programs.10

9Supra Note 8, at 12.

10Supra Note 8, at 12.


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CHAPTER 4

4.1. NNPC RESTRUCTURING:

4.1.1. Name:

The NNPC under the reform is to be known as National Oil Company (NOC), it is stated

clearly in the PIB in Chapter 6, article 1 as follows:

The Nigerian National Petroleum Company Limited (the National Oil Company) shall be

a limited liability company and shall be the successor to the assets and liabilities of the

Nigerian National Petroleum Corporation (NNPC)

4.1.2. Ownership:

NNPC as a completely owned by government controlling the oil and gas sector, under the

reform will continue to be owned by the government, but as earlier mentioned, it will behave

in the same manner with other private oil companies, trying to raise profits and embark on its

own savings. This is clearly stated in Chapter 6 article 4 of the Petroleum Industry Bill

ownership of the National Oil Company shall be vested solely in the federal government of

Nigeria at the time ofIncorporation. But the bill proposes to give the government ability to

sell the shares of the company to Nigerians after two years from the transformation.11

4.1.3 Assests and Liabilities:

All the assets and liabilities of NNPC will be transferred to the National Oil Company.

Similarly, all the staff and employees of the NNPC will be the staff and employees of

National Oil Company, furthermore, the bill stated as follows in chapter 6, subsection 137,

article 5:

11Petroleum Industry Bill, Chapter 6, Nigerian National Petroleum Company Limited, draft law of the Federal

Republic of Nigeria,2009


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4.1.6. Un-bundlement:

The following table represent a brief about the un-bundlement proposal of the NNPC intofive (5) subsidiary companies.

s/n Former

organization

New organization reporting

1 Federal ministry of

petroleum resources

National Petroleum

Directorate (NPD)

Report to Minister of

state for Energy

(petroleum)

2 Nigerian National

Petroleum

Corporation (NNPC)

National Oil

Company (NOC)


state for Energy

(petroleum)

3 Department of

Petroleum Resources

(DPR)

Petroleum

Inspectorate

Commission (PIC)


state for Energy

(petroleum)

4 Pipeline and products

Marketing Company

(PPMC)

Petroleum Products

Distribution

Authority (PPDA)


state for Energy

(petroleum)

5 National PetroleumInvestmentManagement

Services

Company(NAPIMS)

National Oil and GasAssets HoldingCompany

(NOGAHC)

Report to Minister ofstate for Energy(petroleum)

SOURCE OF DATA:Petroleum Industry Bill.


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CHAPTER 5

OBSERVATION AND RECOMMENDATIONS:

The un-bundlement of the NNPC into different organizations will bring aboutcomplexity in terms of its organizational management of the sector at large which if

not adequately address may weaken the overall objective of the reform. Therefore, the

number of the subsidiary companies shall be reduced.

The active Nigerian Petroleum Development Company (NPDC) which undertakesactivities at both upstream and downstream sector which is owned by the NNPC

should have been given the power to become the National Oil Company instead of

NNPC its self.T

he NPDC therefore should be amalgamated to form the NOC.

In order to make the National Oil Company a full substantial National Oil firm, itsupposes to acquire other downstream belongings like oil refineries and pipelines.

Therefore, the four refineries should be part of the properties to be inherited by the

NOC. This will not distort the efforts of deregulating the downstream sector as the

NOC will be open for share subscription for all individual citizens.

Since the PPMC still control the pipelines system, as well as storage warehousesthroughout the country, it would have been allowed to continue as an essential part of

the NOC instead of creating an Agency responsible for products distribution as

proposed to be named Petroleum Products Distribution Authority (PPDA) which will

be an additional cost in terms of establishing the agency, building construction and

payment of its staff.

Due to essential need for the adequate utilization and supply of Natural Gas in Nigeriato tackle the bedevilling problem of power shortages. The NNPC subsidiaries

responsible for Natural Gas affairs i.e. NLNG and NGC should be merged together to

give a clear-cut and committed entity responsible for the development of the Natural

Gas Resource and for the facilitation of the implementation of the Natural Gas Policy.


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Finally, with regard to the formulation of the non-executive board members of theNOC, the non-executive board members who will be responsible for the nomination

and reporting of the board members might not discharge its duties fairly if its

memberships are to be appointed by the supervised board members. Subsequently, the

non-executive board members should be appointed in a joint meeting with the NOCs

management, shareholders, board members and government officials to reach a

consensus on the nominees to be the non-executive board members instead of the

board members singlehandedly.


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CONCLUSION:

Nigerian National Petroleum corporation (NNPC) has been facing challenges from

inefficiencies, operational failures to inadequate finances to develop the industry effectively

couple with the pervasive liberalization of the oil sector and NOCs globally prompted the

Nigerian Government since the resurgence of democracy in the country in late 1990s to

embark on restructuring and commercialization of the NNPC and the sector at large to

provide a new and improve legal and regulatory structures in order to reflect the dynamic oil

sector and also create opportunities for adequate and necessary investments needed in the

sector. The restructuring proposals are integrated in the Petroleum Industry Bill (PIB) which

is awaiting the final legislative approval.

Subsequently, this paper studied the NNPC restructuring proposal as contained in Chapter 6

of the PIB in order to discover how the new Bill is trying to improve the management and

efficiency of the NNPC. After analysing the proposals, it was discovered that the reform is

targeted toward improving the management of NNPC and the sector efficiency, some

observations and recommendations were proposed to help improve the reform. Particularly, it

was recommended that the Nigerian Petroleum Development Company (NPDC) as an NNPC

subsidiary Oil Company be empowered to be the new National Oil Company instead of the

NNPC its self. Similarly, the unbundlement of the NNPC is observed to be unnecessary wide,

therefore some of the proposed subsidiary companies should be merged together for

efficiency and better management. Details of the recommendations were contained in chapter

5. However, the academic word restrictions has restrain further analysis of the PIB and its

consequences on the economy at large.


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BIBLIOGRAPHY:

PRIMARY SOURCE:

Petroleum Industry Bill, Chapter 6: Nigerian National Petroleum Company Limited, draft law

of the Federal Republic of Nigeria, 2009

SECONDARY SOURCES:

BOOKS:

Pearson, S. R. (1970), Petroleum and the Nigerian Economy, Stanford, Carlifornia, StanfordUniversity Press.

Roberto, D. C., (2001), Comaparative study on corporate strategy of state owned oil

companies: New directions and options for ecopetrol, published by Centre for Petroleum,Mineral Law and Policy, University of Dundee, ISBN 1 900297337.

Velerie Marcel (2006), Oil Titans, chatham House, London, Bookings Institution Press,

Washington, D.C.

OTHERS:

Abubakar, A. N., (2007), The restructuring of the Nigerian National Petroleum Corporation(NNPC): some pertinent observations. Elendu Reports

LPG World (2005), Nigerias oil and gas sector faces overhaul, Longman.

International Directory of company Histories, (2005), Vol. 72, st. James press

Martha, B. O., (2007), The changing role of National Oil companies in International Markets,

Carnegie Endowment, Washington, D.C.

Minister of Petroleum Resources S peech on PIB on the internet (2009).

http://www.nnpcgroup.com/media/petroleum-industry-bill-speeches.

NNPC website (2010), http://www.nnpcgroup.com/home#, NNPC groups and Directorates.


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