When it first emerged the only surprise was that the Nigerian National Petroleum Corporation (NNPC) had for the first time in its history published audited accounts. The fact that this is an historic event says it all. The financial statements provide in part a snapshot of a poorly run organisation with many of its subsidiaries insolvent which was entirely predictable and no one was astonished.So much so that despite the initial euphoria which must accompany any apparent act of transparency in Nigeria, one must question the motive behind such an abrupt willingness to lay bare its hitherto most coveted secrets. Though all considered, their publication does provide the basis for some scrutiny and accountability.
Notably if we are to take the audited accounts at face value, they underscore the financial burden operating the local refineries seemingly place on NNPC and by extension the governments balance sheet. They also highlight the amounts lost to 'Under Recovery', the controversial subsidy replacement policy implemented by NNPC at its own behest.
According to NNPC'spublished financial statements for 2018, operating the refineries resulted in a combined loss of ₦154 billion (US$503.3 million) with the Kaduna refinery recording no revenue at all despite having ₦64 billion ($210 million) spent on it. Such figures make a very powerful case for the government to divest the refineries as they attempted in 2007, only to be thwarted by huge public outcry. But they tell only a part of the story. The refineries are insolvent not because the refining industry has been subject to years of negative yields, but because they have been operated abysmally. The argument must therefore be, under what regime and by whom can the refineries be successfully operated.
The Group Managing Director of the NNPC, Mele Kyari at an interactive session organised by aJoint Senate Committee on Petroleum Resources on "Exiting Petroleum Subsidy: Ensuring Self-Sufficiency in Domestic Refining of Petroleum Products"stated that NNPC deliberately shut down the three refineries because they were producing at a loss. Kyari went further "There is such a condition that we can only extract 70 to 80 percent of the value of a crude. It is needless to operate it when you know you will lose 20% of the value. "Second is that we cannot even guarantee crude oil supply to these lines".
NNPC's refineries have been operating with negative crack-spreads for decades. On the few occasions the FCCU works it is sporadic at best then is down for months at a time. In layman terms creating losses through operating inefficient refinery processes has been NNPC's de rigeur . Despite expending huge amounts of money on Turn Around Maintenance (TAM) the GMD would now have everyone believe and I quote him " "We have not done proper maintenance in the last 30 years, and the cumulative effect is that even when you start it today, it cannot be run optimally". In fact the blithe narrative the GMD recited to the Joint Senate Committee is an indictment on NNPC and a stark admission of managerial failure which has characterised the company down the years.
If Kyarior anyone at NNPC were commercially minded or perhaps demonstrated some sort of cognitive loss aversion bias, then surely their first act would be to preserve the asset value of the refineries by mothballing them rather than creating an annual $500 million liability. A truly staggering act of profligacy that appears to have drawn no criticism from any stakeholders, not least the Government itself. Now that the financial statements have placed this loss front and centre, perhaps it will make it easier for the government to implement the solution the GMD hinted at.In his words, with the exception ofPort Harcourt refinery, which will be partly funded by government money because there is provision for it in the 2020 budget, the two others will be fixed completely by third party financing.
Setting aside for a moment that NNPC seem to have lost a Refinery, Mallam Kyari's comments came after a statement attempting to explain away the reason for NNPC's inadequacy. Once more I quote,
"Why can't we fix our refineries? We started this very many years ago. However, all attempts to fix our refineries failed for very simple reasons and that was a strategy problem".
It is as if the GMD is indulging in some sort of dialectic with himself, an exercise in insincerity. In October last year he blamed the problem on negligence and bad maintenance culture, effectively indicting the NNPC, so what has changed?. The strategy problem he now alludes to is the silly notion of inviting the OEMs to rehabilitate the refinery, followed by seeking to induce international crude oil trading companies to fix the problem. One has to wonder as to the provenance of NNPC's policy decision making.
In 2014 we put a proposal to NNPC which was essentially plain vanilla project finance. A proposal which allowed NNPC to continue to own the refinery but for us to control the processing units with a guaranteed off-take agreement at market rates for the refined products. I suspect any deal done with a third party investor will be similar. You need look no further than Eleme Petrochemical to see its transformation from a debt ridden poorly run company under NNPC management to within 2 years a highly profitableglobal leader in class under Indorama.
NNPC's intransigence has perpetuated the farcical and financially damaging situation that a country with a template refining capacity of 445,000 bpd is unable to refine a single drop of its 38 billion barrel proven reserve profitably. It has consistently and without oversight put the nations financial welfare at risk by embarking on a policy of under recovery, openly admitting that a substantial amount of the petrol attracting subsidy is smuggled out of Nigeria. All done under the nose of a sleeping National Assembly. Furthermore the GMD after presiding over subsidy losses (which soared to over 210% within a two month period from a daily cost of N774millionto N2.4 billion,now glibly asserts that deregulation is the only solution.On that basis he informs us that NNPChave decided to establisha 200,000 bpd condensate refinery. Not satisfied in running the existing refineries down to scrap value, the Corporation somehow believes their dismal performance in refining warrants the nation trusting them with additional billions to repeat the same trick all over again.
Pardon me for not applauding along with the Executive Secretary, Nigeria Extractive Industries Transparency Initiative (NEITI), Mr Waziri Adio at the publication of these financial statements. Maybe the time for high fives will come when the statements confirm NNPC as a well run and profitable entity. NNPC's shareholders are the Nigerian people, NNPC management of Nigeria's resource endowment is shameful. It is difficult to see how if NNPC set out with the sole intention of making the worstpossible mess of Nigerian refining they could not have done better.