Kayode Oluwadare, CEO, Green Fort Ltd

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Lessons for NNPC from the Saudi Aramco reform 18 Feb 2020

An image of a programme for the launch of the IPO by Saudi Arabia’s Aramco

For many resource-rich countries, energy resources fuel their economic growth and prosperity. This is achieved both directly through revenues generated from their sale and indirectly through their catalytic effect on industrial development. A fossil fuel, crude oil also plays a key role in global geopolitics, with large oil-producing economies exercising the role of regional powers.  
The American oil giant, Standard Oil Company, dominated the world's oil and gas value chains until a 1911 Supreme Court ruling dissolved the company and split it into several companies. Its successor companies (which became part of the 'seven sisters,' also known as the world's seven oil and gas supermajors) controlled about 70 per cent of the world's oil production, refining and distribution before the Second World War began in 1939.

In 1933, one of the supermajors, Standard Oil of California (now Chevron), began prospecting for oil in the Arabian mainland and the Arabic-American Oil Company (Aramco) was formed in 1944. In the following decade, Aramco remained a fully-owned American oil major, with the host nation, Saudi Arabia, enjoying only minimal benefits of the oil produced. But in 1950, the then-King Abdulaziz threatened to nationalize all the kingdom's oil assets and infrastructures. This compelled the US oil company to cede 50 per cent of its profit to the Kingdom. However, Aramco continued to be largely owned and controlled by the Standard Oil successor company until the 1970s when Saudi Arabia finally made good its threat by wresting the full ownership and control of Aramco from the American company.

Since its nationalization, Aramco has grown to be the largest and most profitable company in the world, with multi-billion-dollar assets scattered across the gulf countries. Aramco is indeed the “Arabian Sun.” Saudi Arabia is endowed with the largest crude oil reserves in the world; on some occasions, the nation has reached daily oil production of over 11 million barrels, which is roughly 10 per cent of global oil production.

As part of its numerous oil assets, the Ghawar field in the kingdom's eastern province alone has a production capacity of 4 million barrels per day (mbpd), making it the largest conventional oil field in the world. It is fair to say that Saudi Arabia has created enormous wealth from its oil and gas resources in the course of the kingdom’s recent history. Founded in 1971, the Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund, had $320 billion in total assets under management by 2019.

Leveraging its position as one of the largest oil producers in the world and a key member of the oil cartel, Organization of the Petroleum Exporting Countries (OPEC), Saudi Arabia has played the price-output game to great effect, often tinkering with the cartel’s production levels to keep oil prices at a level generally deemed favourable by the members. But as a matter of fact, Saudi Arabia has often been the greatest beneficiary of such price-fixing strategies as it has the least operating cost per barrel of oil produced, which is sometimes as low as $8 per barrel in some of its onshore fields.

The same can't be said of other high-cost frontier producers like Nigeria, whose operating cost per barrel in most of its fields is about $40. Since it made its first crude oil discovery in Oloibiri in 1956, the largest black nation in the world has been unable to translate its abundant oil resources into formidable socio-economic prosperity for its citizens, unlike many of its counterparts in the Persian Gulf.

Historically, the Nigerian oil industry has been dogged by institutional opacity with issues ranging from bogus oil and gas production and export data to asymmetrical tax regime. The lack of transparency is responsible for the loss of public trust in the Nigerian National Petroleum Corporation (NNPC). The international oil companies (IOCs) operating in Nigeria have exploited the institutional weaknesses of NNPC to the detriment of the Nigerian people.

Since the first and second oil shock in the 1970s, many national oil companies – including Aramco, Petrobras of Brazil, Abu Dhabi National Oil Company (ADNOC) of the United Arab Emirates, Statoil of Norway, Gazprom of Russia – have been increasing their ownership of assets in the international energy space, accounting for 90 per cent of proven oil reserves, according to a 2010 World Bank report. However, the NNPC has consistently failed in its bid to increase the country's oil reserves. In 2018, the national oil company said it would increase Nigeria's crude oil reserves by one billion barrels yearly from 37 billion to reach 40 in 2020. But NNPC is not on track to meet this target.

Official figures shows that daily oil production averaged 1.86 mbpd as at June 2019, as against the estimated 2.3 mbpd. OPEC's monthly oil market report, released last month, shows that the country's oil production fell from 1.66 mbpd in November 2019 to 1.57 mbpd in December. While the decline in oil output will impact budget implementation, the country will not attract investment in a lot of new capital projects unless the NNPC is restructured to carry out its operations with minimal bureaucratic processes. A significant part of the restructuring process will require NNPC to go public and attract domestic and foreign investments needed to rejig the underperforming national asset, just as Aramco recently did in its December 2019 Initial Public Offering (IPO).

Considered the world's largest IPO, Saudi Aramco initially sold 1.5 per cent of its shares to the public from which it raised $25.6 billion, valuing the company at $1.7 trillion in December. Last month, the company reported that it sold additional 450 million shares, increasing the company’s public stake to 1.725 per cent and raising its IPO earnings to $29.4 billion. Despite this sum slightly falling short of the Crown Prince Mohammed bin Salman’s valuation of the company, the company has been able to retain its status as the largest and most profitable company in the world.

The crown prince’s aim of taking the company public was to enable the country raise funds to drive its Vision 2030 economic reform plan, which was introduced in 2016. Under the plan, the kingdom aims to reduce its dependence on oil, diversify its economy, attract foreign investment and invest in various sectors such as health, education, infrastructure, recreation and tourism.

While Saudi Arabia has made its national oil company the fulcrum of its development, the Nigerian government, over the years, has often considered the NNPC to be nothing more than the goose that lays the golden eggs. Yet there has been little or no attempt to care for the 'goose' as long as it keeps laying the 'golden eggs'.

By making economic diversification a key objective of the Aramco IPO, Saudi Arabia is positioning itself to mitigate future oil-price shocks and the consequences of the emerging energy transition. As efforts to tackle the climate crisis caused by global warming intensify, a major shift is underway in the oil industry. For instance, the European Investment Bank (EIB) has announced that it will stop funding fossil fuel projects at the end of 2021, pledging to significantly support investments in renewable energy projects in the coming years.

In recent years, renewable energy technologies are becoming less expensive as cost of energy storage has dropped by over 50 per cent. The transportation sector, which is perhaps the largest consumer of crude oil products, is currently experiencing the electric revolution as major automobile companies across the world are joining the electric vehicles bandwagon.

While Tesla and Volvo are leading the revolution, other mainstream automobile outfits like BMW and FIAT are gradually shifting attention from the production of combustion engines to cheaper and leaner electric engines. As renewable energy technologies continue to thrive on environmental sustainability and cost efficiency, demand for fossil fuels would be impacted eventually. In 2019, International Energy Agency (IEA) reported that global oil demand will plateau (or peak) in the 2030s.

Apart from the challenges of climate change, the rising demand for energy efficiency and falling demand growth for crude oil in a slowing world economy, national oil companies are also faced with national security challenges. Oil and gas installations have often been the target of terrorism and foreign aggression. The September 2019 aerial attacks on Aramco’s oil and gas facilities led to a temporary shutdown of half of the Kingdom's production. Nigerian oil and gas installations have not been spared from crushing and costly attacks by militants in the Niger Delta region and illegal oil bunkering. According to Nigeria Extractive Industries Transparency Initiative (NEITI), Nigeria lost about $42 billion to crude oil and refined petroleum products theft between 2009 and 2018.

Considering the scale of the issues being faced by the global oil industry, it becomes more imperative for a high-cost frontier producer like Nigeria to embrace strategies and reforms to ensure its national oil company improves its management and operations, and achieves global best practice.

To achieve long-term profitability and contribute more to the sustainable development of Nigeria, NNPC needs to be reformed. This will entail diversifying its operations, limiting the political interference in the institution, and giving it the mandate to be the bedrock of national development. It is important to note that such reform can only be successfully executed through a partial privatisation, which has been mooted several times by the current administration of President Muhammadu Buhari.

Following its IPO in December, Aramco has released its production and profit report for the first time in its illustrious history. This move will inevitably endear Aramco assets to investors and enable the country deliver the promised social and economic reforms.