Olusola Dahunsi, PhD, Lecturer, KolaDaisi University
Subjects of Interest
- Development Finance
- Fiscal Policy
- Public Sector Reform
How NNPC limited can become profitable 16 Mar 2023
The Nigerian National Petroleum Corporation (NNPC) Act, 1977 empowered the NNPC to participate in all commercial activities and enforce regulations relating to the petroleum industry. However, as an operator and regulator of the industry, the operations of the corporation were characterised by a conflict of interest between profitability and standard regulation, leading to its poor performance over the years and subsequently its transition to NNPC Limited.
Under the new Petroleum Industry Act (PIA) 2021, NNPC Limited is an independent commercial entity operating in the petroleum industry for profit. Also, the PIA created two principal regulatory bodies – the Nigerian Upstream Petroleum Regulatory Commission (the Commission) and the Midstream and Downstream Petroleum Regulatory Authority (the Authority) responsible for regulating petroleum industry operations independently from the management of the NNPC Limited.
Just like every private company, NNPC Limited is expected to make a profit as the PIA has mandated that where it has a participating interest or 100 per cent interest in a lease or license, the company shall pay its share of all fees, rents, royalties, taxes and profits. Besides, the company manages the joint venture partnership arrangements with other operators in the upstream petroleum operations. As a concessionaire of all production-sharing contracts, NNPC Limited transfers the agreed crude oil to the Commission and royalties to the Federation account. Moreover, the company solely lifts all crude oil and has remained the only importer of petroleum products for the nation.
In addition to its existing retail outlets, NNPC Limited recently acquired OVH Energy Marketing Limited, which is a major downstream petroleum operator. This deal will bring over 380 additional filling stations under NNPC Limited retail brand to attain over 1,500 filling stations, making it the largest petroleum product retail network in Africa.
However, NNPC Limited, as a commercial entity established to make a profit and generate revenue for the coffers of the Federal Government and pay taxes into the Federation Account, can no longer afford to sell petroleum products below the prevailing market price. But its level of participation in the upstream, midstream, and downstream sectors has accorded it an undue advantage in the industry thereby creating the emergence of a “monopolist.” The negative impact of this is evidenced by the scarcity and arbitrary price increases of petroleum products in recent months.
Just as Nigerian Telecommunications Limited (NITEL) was commercialised towards profit-making in 1992 and dominated the telecommunication sector with epileptic services and bad management until the year 2001, the operations of NNPC Limited have been characterised by inefficiency and loss of consumer surplus. However, the commercialisation of any government establishment should not be an end in itself but a means to greater efficiency.
Generally, private firms tend to be efficient, which leads to their high profitability. As such, any government intervention beyond the establishment and regulation of standards will be excessive and counter-productive, particularly to the petroleum industry's performance. Thus, to ensure the profitability and efficiency of NNPC Limited, the government must provide a level-playing ground for all operators in the industry.
This can be achieved through the liberalisation process, a system that allows many competitive firms to participate freely in the industry without giving any player an undue advantage. Just as the performance of NITEL was unacceptable after its commercialisation and the government took a giant stride by adopting a National Telecommunication policy in 2000 that gave rise to the licensing of three GSM operators a year later, the same approach is required to maximise the social welfare in the petroleum industry.
The liberalisation process will foster adequate supply of petroleum products and a drastic reduction of petroleum product prices – over the longer-term – since every firm will monitor its performance by the market price of its competitive counterparts, unlike a typical monopoly/dominant firm that does not have to learn from anyone and yet profitably remain in business operating sub-optimally.
Furthermore, to guarantee the profitability of NNPC Limited, the practices of transparency, accountability, and disclosure of relevant financial and non-financial information as required from every private company must be upheld by the company. According to the Organisation of Economic Co-operation and Development (OECD), transparency and disclosure of information are key drivers for maintaining a level-playing ground for all market players. The operations of the defunct NNPC were characterised by a lot of disguised and undisclosed transactions and where information is made available they are usually laid with inaccuracies, making it difficult for well-meaning Nigerians to monitor the performance of the state-owned enterprise. Under the PIA, information on the annual budgets and accounts of the Commission and the Authority is required to be published on their websites to encourage transparency and accountability. But since the transition, the financial and operation reports of the NNPC Limited and the regulatory bodies have not been publicly available.
The PIA provides that the Minister of Petroleum (MoP) will perform oversight functions on the operations of the petroleum industry, which suggest that the administration of the industry is under the control of the MoP. On the other hand, the appointment of the board of directors of the two principal regulatory bodies, as provided by the PIA, is done by the President, subject to the confirmation of the National Assembly to ensure independence, thereby improving corporate governance practices in the industry.
However, since the enactment of the Act, the President and the MoP have continued to be the same person, invalidating the independence benefits to be enjoyed by the Commission and the Authority. This is contrary to the guidelines of good corporate governance in ensuring that the administration of NNPC Limited is transparent and the company is run independently and on an equal basis with other private companies.
Succinctly, the new PIA seeks to move the petroleum industry from a muddy state to a clear and transparent one in terms of its operations, regulations, disclosure of information, governance, award of contracts and licenses, among other objectives. However, the industry must be fully opened up to encourage further investments from local and foreign investors, including in petroleum products importation and distribution with the long-term objective of attracting investments in the building of local refineries. This will reduce over-dependence on fuel importation and the operational burden on NNPC Limited.
In addition, the free-market mechanism that emphasised the interplay of demand and supply and market allocation of resources should be adopted. This will bring about competitive pricing, thereby leading to the maximisation of social welfare in the petroleum industry. Beyond profitability, resource use and operational efficiency must be employed as a measure of performance in evaluating the scorecard of NNPC Limited.
An efficient NNPC Limited will make a profitable company. Lastly, the government’s direct participation in the operations of state-owned enterprises has always resulted in a monopoly, which is an inefficient way to produce and distribute goods and services. Therefore, the government should limit its involvement to the establishment and regulation of standards to allow corporate governance in the industry.
Olusola Dahunsi, PhD, who is a chartered accountant, is a lecturer in the Economics Department at KolaDaisi University, Ibadan.
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