Cheta Nwanze, Lead Partner, SBM Intelligence

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Subjects of Interest

  • Fiscal Policy
  • Geopolitical Analysis
  • Governance
  • Politics

How NNPC became profitable by losing money 14 Oct 2021

One of the most popular tricks beginners in magic or illusionism learn is how to make a coin to disappear and appear. But quite unartistic, in February 2018, Philomena Chieshe, an accounts clerk with the Joint Admissions and Matriculation Board (JAMB), a Nigerian state-run tertiary entrance examination body, testified that a snake had “spiritually” made away with N36 million cash that was supposed to be in the office safe. In claiming her innocence of the theft, she said what actually transpired was that another JAMB worker had connived with her housemaid to use spiritual snakes to steal the money.

JAMB didn’t buy it, any more than Nigerians were incredulous about her story, and Chieshe was arrested and charged to court. The pantomime of money disappearing from JAMB has since given way for money appearing in the national oil company (NOC): Nigerian National Petroleum Corporation (NNPC).

For almost half a century, NNPC hardly made a profit. This period includes the spells of time when crude oil traded above $100 per barrel in the international market. But alas, in the year of the Covid-19 pandemic, when collapse in global demand depressed oil prices, NNPC pulled off an unexpectedly stupendous profit. It posted an after-tax profit of N287 billion ($698 million) in 2020.

This feat, desirable as it is at a time of heightened fiscal deficit, appears improbable to have actually happened. NNPC made losses of N803 billion ($1.95 billion) in 2018 and N1.7 billion in 2019. In 2020, NNPC’s four refineries generated zero revenue as they didn’t process a barrel of crude oil. Yet, they incurred a total salary of N69 billion in the financial year, which underlined management imprudence.

The corporation’s refineries in Warri, Port Harcourt, and Kaduna (located there for political rather than economic reason) suffered a combined loss of N108.29 billion in 2020, and a loss of N162.22 billion in the previous year, according to data obtained from audited financial statements made available by NNPC. Despite the record-low oil prices during the year, production cutback in line with the OPEC+ pact, crippling Covid-19 lockdown measures and substantial losses by its refining subsidiaries, NNPC nevertheless reported $698 million profit.

If the profit is illusionist, the messaging could have been purposeful, that the Nigerian NOC has transformed from loss-making to profit-making. To what end?

NNPC is in a search of a legacy even as it is in a desperate situation. The Petroleum Industry Act (2021), which seeks to overhaul the Nigerian petroleum industry to reposition it before the obituary of the global oil economy is finally written, was enacted in August. However, the PIA provides for the liquidation of NNPC. In its place would be NNPC Limited, which is to be incorporated within six months of the new legislative enactment. The 2020 financial year, in effect, closed the curtain on NNPC, which had been a national symbol for a tragic loss of opportunity and financial impropriety. In which case, the profit of 2020 passes off as a memorial of a sort, written by the ruling class for an institution that served it and not the people – or even the economy.

Although NNPC Limited, by the new statute establishing it, would be incorporated as a private sector company, it would be wholly state-owned – at least initially. Preparing it for success is a legitimate intention. One of the major issues that NNPC Ltd. would be immediately faced with is its valuation, given that a possible initial public offering (IPO) has been mooted for the corporation in no distant future. But the valuation would be informed by broader market issues, including the global oil market outlook.

The decline of oil is now fait accompli. The Middle East is responsible for 27 per cent of the world’s oil supply and has 48 per cent of known oil reserves. Oil has been the lifeblood of our modern civilisation and the Arab economies with a majority of the world’s supply used it as a platform to build infrastructures, gain international economic clout, and wield geopolitical relevance. But recently, the region has been determined to diversify its oil economy. The sustainability of hydrocarbon usage, in the face of our warming planet, is unassured. Renewable energy and electric vehicles are gaining increasing prominence as the future of energy and mobility.

In early 2020, an IMF report prepared by a team of Middle East and Central Asia specialists at the institution projected that if significant fiscal and economic reforms were not undertaken, the region could see $2 trillion of its financial wealth and non-oil wealth depleted by 2044. Countries like Qatar, Oman, Saudi Arabia, the United Arab Emirates, and Kuwait already have plans to sell off energy assets or issue bonds tied to them to generate funds for economic diversification to reduce their economic reliance on oil and gas revenues. Saudi Arabia has raised roughly $30 billion from the sale of a two per cent stake in its NOC: Aramco.

There is a trend among oil-producing countries that Nigeria is belatedly trying to emulate, but with NNPC having accumulated substantial liabilities over the years. Against its streak of loses and the 2020 profit, a flash in the pan, NNPC is different from Aramco: the latter has consistently made profits – $111 billion in 2018, $88.2 billion in 2019, and understandably steep decline in profit to $49 billion in 2020. NNPC used ‘impairment reversal’ to enhance its figures, a strategy that would unlikely impress investors. Reversal of impairment is when a company declares an asset valuable after it had previously declared it a liability. NNPC declared a net impairment reversal of N718.4 billion in December 2020. The previous year’s net impairment figure was N273 billion.

“The impairment reversals during the year relate mainly to the recovery of strategic alliance receivable amounts from the federation and reversal of full impairment on receivables which are no longer doubtful,” NNPC said, but unsuccessfully erasing public doubts. Assets were revalued and cash infusions were received. But there were no business fundamentals that improved. The profits are only there on paper.

Nigeria’s Petroleum Industry Act creates a Frontier Fund for oil exploration at a time Saudi Arabia has adopted a Vision 2030 program aimed at economic and social reform to reduce dependence on oil, achieve economic diversification, and “develop public service sectors such as health, education, infrastructure, recreation, and tourism.” The Saudi vision aims to reinforce economic and investment activities, increase non-oil international trade, and promote a more secular image. In contradistinction, Nigeria is transmuting to a sectarian state and looks set under PIA to continue to play politics with its oil revenue.

Economic diversification requires financial investment but the political and cultural will to embrace diversification is arguably even more important. The Nigerian government needs to focus on liberalising the economy while improving its capacity for sensible economic and market governance.

Cheta Nwanze is Lead Partner at SBM Intelligence.