INITIAL COMMENTS ON NNPCL’S 2022 AUDITED ACCOUNTS
underperformance in grim perspective is how our national oil company is not optimising its reserves. According to Wood Makenzie, NNPCL’s proven reserves in oil equivalent is 24.78 billion barrels. But its total production entitlement is below one million barrels per day, with crude oil accounting for just about 500,000 barrels per day. By comparison, PEMEX (the Mexican national oil company) derives production entitlement of 2.45 million barrels of crude oil per day from proven reserves of 7.4 billion barrels and Petrobras generates production entitlement of 2.68mbpd from proven reserves of 10.47 billion barrels.
NNPCL has reserves twice or thrice that some of its comparators but is deriving entitlements less than a quarter of theirs. NNPCL is not maximising its reserves, which negatively impacts its revenue and assets. A key reason why NNPCL generates low revenue from its assets is because 51% of its revenue in 2022 came from sale of petroleum products, which is a low-margin business. The company looks more like a downstream company than a national oil company.
NNPCL trumpets that it made a record profit of N2.52 trillion in 2022. This has made the headlines. But the decomposition of the profit and some other segments of the report paint a less flattering picture. It should be noted that N1.172 trillion (or 46%) of the profit came from other incomes, including a N501.35 billion from gain in variation in prices of crude stock. But more interestingly, NNPCL had a liability of N2.15 trillion in 2022: N926.8 billion in unpaid royalty and N1.22 trillion in unpaid taxes. There is no note on why those liabilities were not paid or netted off the record profit.
The second issue arising from the 2022 financial statement is the extent to which NNPCL is leveraged and how this will negatively impact foreign exchange inflows into the country and oil revenue to the Federation. NNPCL entered into different financing arrangements that left it with a liability of N2.25 trillion that will be settled with future oil production. The report also revealed that NNPCL bought 20% stake in Dangote Petroleum Refineries and Petrochemicals Free Zone Enterprise (DPRP, FZE). The 20% stake was valued at $2.76 billion.
NNPCL secured a loan of $1.036 billion from Lekki Refinery Funding Limited, out of which it gave $1 billion to DPRP, FZE and incurred $36 million as transaction cost. The loan and the cost will be repaid to the lender in crude oil of 35, 000 barrels per day. The outstanding $1.76 billion of the 20% stake in DPRP, FZE will be paid to the refinery through crude oil of 300, 000 barrels per day (calculated at a discount of $2.5 per barrel of crude) and 100% of the dividend from its stake in the refinery.
There are many sub-issues here, including the level of due diligence involved in the valuation of the company. Who decided that this is a good investment by, or a good deal for, the country? How was that decision arrived at? What guardrails were put in place? What level of disclosure was made to and the authorisation given by those who are custodians of the public asset?
In this deal alone, NNPCL pledged 335, 000 barrels of crude oil per day. NNPCL recently pledged another 90,000 barrels per day for the controversial $3.3 billion facility from Afrexim bank reportedly obtained to provide relief for the Naira. This brings the crude oil pledged by NNPCL for these two transactions to 425,000 barrels per day. The current data of Federation’s share of oil is not in the public domain (because those who should be disclosing them are not).
But my optimistic guess is that the current Federation share of oil will be between 500kbpd and 600kbpd. So, the crude oil already pledged by NNPCL for these two transactions alone will be between 70-85% of Federation’s share of oil. Bear in mind that NNPCL has other pledges and forward sale obligations. Apart from the issue around the opaque nature of commodity-backed loans, NNPCL has made commitments that will deny our external reserves of forex flows and the Federation Account of future revenue.
The third point that I want to highlight from the financial statement is the issue of accountability. NNPCL makes some investment decisions and charges some tidy sums as general administrative costs. Who exercises oversight on these investments and expenses? For example, NEPL (the upstream subsidiary of NNPCL) took a stake in a disputed JV asset and had to fork out $300 million in settlement to River State Government. Relatedly, NNPCL pledged 8000 barrels of crude oil per day to secure a $300 million deal to buy a gas asset from Chevron. The pretext was the need to increase assets even when most of NNPCL’s assets are underutilised. Who did the due diligence and who sanctioned the investments?
Also, NNPCL spent N114.28 billion (264.54 million) on repairs and maintenance, N193.41 billion ($448 million) on transport and travelling, N267.93 billion ($620 million) on security services and N496.36 billion ($1.14 billion) on other expenses (without a note to show breakdown). While the N266 billion ($615.74 million) as employees’ benefit expenses can be overlooked because of the need to attract and retain the best to our national oil company, it is important ask if the company is being competently run and if the country is deriving value from such investment.
One thing that might have escaped many Nigerians is that post-PIA, NNPCL receives 30% of PSC profit oil and gas as management fee. And that is not all. As can be gleaned from the 2024 to 2026 MTEF, the national oil company is also scheduled to receive 20% of NLNG dividend and 35% s of JV profit oil for NNPCL’s reinvestments (which is different from the 30% of PSC profit oil for the Frontier Exploration Fund, FEF).
According to NNPCL’s reports to FAAC, the company retained N421.6 billion for management fee and FEF between August 2021 and October 2023. And in 2024, as contained in the MTEF, NNPCL is scheduled to receive N1.16 trillion for FEF, and as its management fee, its share of NLNG dividend and the earmark for reinvestment. Beyond the quantum of money going to the company and the fact that this is money not available to the Federation, questions should be asked about whether the country is receiving commensurate value from the company. To whom much is given, much is desired.
In its 2022 financial statement, Petronas showed how it was maximising public value for Malaysia. It achieved 26 Final Investment Decisions (FIDs), signed six Production Sharing Contracts (PSCs), and made nine exploration discoveries, among others. When was the last time NNPCL closed an FID or signed a new PSC? What are NNPCL’s comparable achievements within the same period? Does NNPCL have annual and measurable targets? Are the targets aligned with its core mandate? Who approves and tracks the targets? Who holds the behemoth to account?
For Nigeria to get the national oil company that it deserves, these and more are questions that should constantly be asked. And the interrogation should be done not only by political authorisers but also by citizens and civic groups. The company and the resources in its custody belong to all Nigerians.