By Nwogwugwu Ijeoma 07.26.2010
The Nigerian National Petroleum Corporation is suffering from selective amnesia. In every twist and turn, it contradicts itself forgetting earlier statements that portray the corporation’s inability to be consistent. This was evident penultimate week when the Federal Executive Council and the NNPC scrambled to reverse a statement attributed to the Minister of State of Finance Remi Babalola.
Babalola, during his monthly Federation Account Allocation Committee meeting held two Tuesday’s ago with his colleagues and their representatives from the 36 states and the Federal Capital Territory, was at pains to explain why there are shortfalls and (sometimes) overpayments from the monthly allocations due to the federal government, states and the local government areas that constitute the federation.
The NNPC, a major contributor to the federation account, he explained, has been unable to make remittances to the tune of N450 billion to the said account, except it is reimbursed N1.156 trillion owed the corporation in outstanding subsidy claims by the Finance Ministry. He buttressed his claims with a letter written by NNPC’s group managing director Austin Oniwon, in which the latter acknowledged that the state-run oil company was insolvent due to financial difficulties as a result of the disequilibrium between costs and cash inflow streams. On that basis, Babalola declared the corporation insolvent.
Before we proceed, let us be clear about one thing: Insolvency by its strictest definition means the inability to pay one’s debts when they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts because it has a negative cash flow. Whereas if a company has negative assets on its balance sheet, it means its liabilities exceed its assets and is deemed to be balance sheet insolvent.
Should we accept the above definition, Babalola and Oniwon were right in his assessment of NNPC’s financial status. Yet on the face of it, if a company owes the federation account N450 billion and the same account owes the company N1.156 trillion, technically that company cannot be deemed insolvent. Even an elementary school pupil should be able to net off the N450 billion from the N1.156 trillion to arrive at a surplus for NNPC; that is, in so far as proper reconciliation has been carried out to ascertain the true indebtedness of both parties to each other.
It was for this reason that the Ministers of Finance and Information and Communication, Olusegun Aganga and Dora Akunyili, were assigned by FEC the next day the unpleasant task of reversing Babalola’s statement. The thinking by the FEC, and most likely the Petroleum Resources Minister Diezani Allison-Madueke, was that Babalola by his damning verdict on NNPC had implied that the Federal Government of Nigeria was insolvent, a statement that was repeated by NNPC’s spokesman Levi Ajuonuma to a foreign news agency. If that was the conclusion reached by the FEC and NNPC, they were both wrong.
In attempting to reverse Babalola’s revelation, Aganga and Akunyili did a crude job of the task they had been given. Rather than provide incontrovertible clarification on its finances, they exposed NNPC’s flanks and brought to the fore the urgent need for the speedy enactment of the Petroleum Industry Bill, of which nothing has been heard for several months. Aganga, in particular, made reference to the numerous transactions and outstanding balance between the government and NNPC, which if reconciled and netted off would show that NNPC was not insolvent and is a “great going concern” (whatever that means). Yet, he failed to enumerate what these transactions and balances are.
As if the oversight by the finance minister was not bad enough, he made the bigger mistake of bringing into the picture the joint venture assets operated by the international oil companies on behalf of the federation, implying that the joint venture projects belong to the NNPC. That was a fallacy that only people without a keen understanding of oil industry operations would swallow hook, line and sinker.
But then again, Aganga could only have tried to pull the wool over our eyes because Babalola failed to provide more information last Tuesday at the FAAC meeting. He was silent on if the N450 billion debt incurred by NNPC arose from the sale of crude oil to the corporation for its refineries, or from the sale of crude oil belonging to the federation. Given that N450 billion translates to roughly $3 billion and this is being linked to outstanding subsidy claims of N1.156 trillion, it will be easy to conclude that the debt arose from the sale of crude oil to NNPC for refining purposes.
In failing to make the distinction between crude oil sold to NNPC by the federation for refining (not by the federal government, because the revenue that accrues thereof belongs to the three tiers of the government), and the crude oil sold by NNPC on behalf of the federation, Babalola allowed his colleagues in the FEC to capatalise on the loopholes in his statement. But both are distinct as night and day.Crude oil, translating to the equivalent of NNPC’s refining capacity of 445,000 barrels per day, is sold to the corporation by the federation at prevailing international market prices. Had its refineries been working, NNPC is meant to refine the crude it buys, and distribute and market petroleum products in the domestic market, while excess capacity is supposed to be exported.
However, most of the unrefined crude is exported in exchange for refined petroleum products, which is imported and sold in the domestic market at government regulated price. This means that there is always a shortfall between the price at which NNPC buys its crude from the federation and the price at which it imports and sells products in the domestic market. That funding gap is plugged if and when the Ministry of Finance reimburses subsidy claims due to NNPC.
The 445,000 barrels of crude oil sold to NNPC, however, is distinct from the nation’s share of crude oil extracted by oil companies and sold by NNPC on behalf of the federation. Crude oil sold on behalf of the federation is obtained from its share of the joint venture operations. This combined with the 445,000 b/d taken by NNPC, account for 90 percent of foreign exchange earnings and 85 percent of total revenues accruing to the federation.
The share of the federation’s stake (approximately 57 percent) in the joint venture assets does not belong to NNPC. As such, there is absolutely no ambiguity as to which entity owns what. Under the joint venture arrangement, the NNPC and oil firms merely act as agents of the federation. The Nigerian Constitution is also very clear on which entity owns all minerals, gas and oil extracted within the country’s territory.
That is why Nigeria’s investment in the joint venture programme, which is funded by the federation (not by NNPC), is managed by a department - the National Petroleum Investment Management Services – and not by a subsidiary partly or wholly owned by NNPC. It is also for this reason that the law establishing NNPC gives a permanent seat on its board to a representative from the Federal Ministry of Finance (usually the permanent secretary).
It is important to make this distinction between the federation and NNPC’s assets for a number of reasons, the first being that when NNPC buys crude oil from the federation for its refineries, it does so as a commercial entity distinct from the federation. Its refineries, though not functioning at nameplate capacity, are wholly owned by the corporation. Accordingly, when it falls back on payments for its 445,000 b/d it is deemed to owe the federation. Conversely, when the federation fails to reimburse NNPC for products, imported or refined locally, but sold at subsidized prices, it owes the corporation.
Second, in addition to the refineries, NNPC owns other subsidiaries, chief of which include the Products and Pipeline Marketing Company (PPMC), Nigerian Petroleum Development Company (NPDC), Nigerian Gas Company (NGC), National Engineering and Technical Company (NETCO) and Integrated Data Services Limited (IDSL). It is these subsidiaries that comprise the assets of NNPC and not the federation. Sadly, its upstream exploration and production assets – NPDC, NGC and IDSL - like all its other subsidiaries are either mired in debt, underperforming, or unprofitable. And where the subsidiaries own gas and product pipeline infrastructure, depots, plants and other installations, they are either obsolete or in dire need of upgrades.
Third, NPDC, the exploration and production arm of NNPC should ordinarily have been its flagship company and most profitable subsidiary. NPDC has nine oil concessions and working interest in another nine non-operated blocks distinct from the joint venture assets. This does not include some marginal fields acquired from the NNPC/Shell/Elf/Agip and NNPC/Chevron joint ventures, and Block EG14 in Equatorial Guinea.
Yet, NNPC on its own website admits that NPDC’s production output of 70,000 b/d and reserves of 356 million barrels are modest in comparison to the IOCs. Also, NPDC’s negative earnings before interest, tax, depreciation and amortisation (EBITDA) of an estimated N10 billion in 2009 show that NPDC/NNPC relative to other national oil companies like Saudi Aramco, Petrobras, Petronas and Statoil is not only an underachiever, it is equally unprofitable.
Last but not the least, the biggest give away of NNPC’s viability as a going concern can be found in a revealing document that the corporation presented last March at a town hall meeting on its transformation process. Next week, the contrast in FEC, NNPC and more recently, the Senate’s defence of the corporation’s financial viability and its presentation from four months ago, shall be scrutinized alongside related industry issues.
email: ijeomanwogwugwu@thisdayonline.com
