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African Energy Outlook

A News Feature

A fresh start for Nigeria's oil industry?

September 4, 2015 -- By Neil Ford

When Muhammadu Buhari took power May 29, following his election in March, it marked the first ever handover of national power from one political party to another in Nigerian history and also the first defeat of an incumbent president.

Buhari promised to investigate the disappearance of billions of dollars in oil and LNG income, fuel scams, irregularities surrounding crude oil swaps and the inability of the state oil company, the Nigerian National Petroleum Corporation, to bring its four oil refineries fully on-stream.

Oil price versus Federation Account oil sale receipts

During his previous brief period in power, as a military dictator in 1984-85, the new president gained a reputation as a disciplinarian and took a hard line on corruption, but there are questions regarding his ability to delegate.

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These have been highlighted by the delay in announcing his cabinet. It is now due to be unveiled in September and there has been some speculation that he will appoint himself oil minister.

He has been nicknamed 'Baba Go Slow' by sections of the Nigerian media, but his official spokesperson, Femi Adesina, said: "Those who are getting impatient after six to eight weeks should realize that they gave him a mandate for 48 months and he's going to deliver."

NNPC reform

Buhari had been fairly non-committal when it came to his timetable for reforming the NNPC, but here at least he has acted quickly.

His first move was the selection of a new group managing director for the parastatal. He sacked Joseph Dawha and replaced him with Emmanuel Kachikwu, who was previously executive vice-chairman and general counsel at ExxonMobil.

JV cash calls, budgeted versus paid ($ billion)

For his part, Kachikwu sacked the heads of all eight NNPC directorates, while dozens of other managers were removed from their positions. He has pledged to ensure that the government receives all of the money due to it from the NNPC.

Many of the new managers come from International Oil Companies operating in Nigeria, although there were still a number of internal appointments.

Kachikwu said: "Over the next five to six months, you will begin to see emerging a new NNPC ... Having said that things have been done wrongly, things need to be done rightly. We are doing a lot of work of repositioning, re-strategizing, getting the right personnel in the key places and setting a culture for accountability and service delivery."

He added that the company would "look at all the existing contracts; are they good? Are they ok? Do they need to be redone? What do we do to energize recovery and income growth so that the government will have money to work with?"

The new managing director said in mid-August that all production sharing and joint venture agreements would be reviewed to "reflect current day realities in the global oil and gas industry".

The JVs between the NNPC and Shell, Chevron, ExxonMobil, Eni and Total have formed the bedrock of the Nigerian oil industry for many years, but the foreign firms' enthusiasm for them has declined.

All partners share costs and revenues, and IOCs are then required to pay taxes and royalties to the state.

Endemic corruption

The NNPC has often been unable to produce its share of JV investment, while corruption in the company, oil theft and other crimes have badly hit profits.

Austin Avuru, the chief executive of independent oil firm Seplat, says that the NNPC's failure to pay its partners comes a close second to the falling oil price in terms of operational problems.

He estimates that the company owes about $7 billion to the oil companies.

There is little doubt that this is the result of corruption. The figures are shocking even to seasoned Nigeria-watchers.

Under the previous government, oil revenues fell while the oil price rose and Buhari estimates the losses to the public pursue from corruption over the past decade at $150 billion.

The National Economic Council calculates that the NNPC earned N8.1 trillion ($41 billion) between January 2012 and end-May 2015, but paid just N4.3 trillion ($21.6 billion) to the federal government in Abuja.

The NNPC does not publish an annual report, but an audit by PricewaterhouseCoopers found that it owed the federal government up to $4.3 billion for the 19 months following January 2012.

PwC could only work with the figures it was given and even then complained about a lack of cooperation, so that it eventually completed the audit with extensive caveats.

Nevertheless, it concluded that the company had "a blank check to spend money without limit or control".

Buhari has sanctioned a request from some state governors for an investigation by a four person panel into oil sales and the management of the Excess Crude Account.

The latter is designed to balance state spending over years with high and low oil prices. The account held $2 billion following the election, down from $4.1 billion last November.

The governor of southern Edo state, Adams Oshiomhole, said: "The NNPC claimed to have earned N8.1 trillion [$40 billion], what NNPC paid into the Federation Account... was N4.3 trillion. What it means is that NNPC withheld and spent N3.8 trillion. That tells you how much is missing, what is mismanaged, what is stolen. These are huge figures."

In August, he appointed the seven member Presidential Advisory Committee on Anti-Corruption, mostly comprising Nigerian academics, to advise him on legal reform as well as tackling corruption.

The Independent Petroleum Marketers Association of Nigeria calculates that the oil and gas industry accounts for about 80% of all corruption in the country by value.

IPMAN president Chinedu Okoronkwo said: "I say this because all the corruption that we are talking about wouldn't have been a big issue without the NNPC. We cannot shy away from it."

Under previous governments, senior officials who spoke out about financial irregularities were quickly replaced.

After Lamido Sanusi last year claimed that $20 billion in oil revenue had disappeared between 2012 and 2014, he was sacked from his post as governor of the Central Bank of Nigeria. The same happened to the heads of the Economic and Financial Crimes Commission, which now hopes to play a bigger role in investigations.

It is possible that the NNPC will be broken up, with its regulatory role given to a new state-owned body and the core company turned into a state business that is expected to operate on a commercial basis, but the ruling All Progressives Congress appears divided over the matter.

The president has said that he is still considering his options, but spokesperson Adesina said in late July: "Mr President will soon split the NNPC into two entities. One will be an independent regulator and the other one an investor vehicle."

The NNPC's 24,000 workforce could be reduced, as Kachikwu has warned that no employee's position is safe. He said: "If you have not done well enough and we can retrain you, we will. But if you have not done well enough and there is no possibility of retraining you, we will let you go. At the end of the day, NNPC isn't a public service, it is a corporation and it is going to be run like a company, generating money and profit for Nigerians..."

Dolapo Oni, an energy analyst at Ecobank, commented: "It might be difficult to trim the NNPC, especially if they will now handle all [fuel] imports, but these moves will go a long way to assure investors that we are trying to address the issues."

Article continues: Buhari cracks down on Oil theft

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