July 11, 2016 - 7:31 AM EDT
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Hard Nuts Baru Must Crack At NNPC

Dr. Maikanti Kachalla Baru assumes office as the Nigerian National Petroleum Corporation's (NNPC) helmsman at a time the country struggles with low oil prices, delayed projects, declining oil investments and a devastating militant insurgency. Sourcing funds to meet the corporation's needs and lower its future liabilities, as well as fixing its costliest problems, are tough hurdles before Dr. Baru.

President Muhammadu Buhari recently appointed Dr. Maikanti K. Baru as the Group Managing Detector (GMD) of the NNPC. He is the seventh GMD in the last six years, replacing Dr. Ibe Kachikwu who held the position for 11 months.

The appointment calmed worries and confusion in the industry over the double roles Kachikwu held as head of the country's national oil company and minister of state.

The latest overhaul means that Kachikwu would no longer have influence over the day-to-day operations of the NNPC, but he still retains strategic input in the corporation as the minister of state for petroleum resources and chairman of its newly constituted board.

The new GMD returns to the NNPC after a brief stint in the petroleum ministry as upstream adviser to the minister of state following the March 2016 restructuring.

Dr. Baru was the group executive director for exploration and production and group general manager at various upstream arms of the corporation after being a director at Carlson Bermuda Ltd, an NNPC and Vitol venture that markets Nigerian crude.

He takes charge of the corporation on the back of the achievements of his immediate predecessor. Under Kachikwu, the leadership of the NNPC diligently started addressing its key business and operational challenges.

No doubt, Kachikwu made positive changes in how the NNPC sells the nation's oil, by cutting the number of passive, well connected middlemen that pocket Nigeria's money. He canceled costly, unbalanced swap contracts and sought more efficient replacements.

Under Kachikwu, the NNPC began publishing monthly financial reports, held weekly podcast, regular town hall meetings and focused on briefs, through which he maintained effective communication with stakeholders.

Under Kachikwu's leadership, the NNPC started a 20-fixes concept for some of its costliest problems, including a widely publicised restructuring that aimed at efficiency, profitability and value creation.

Despite these achievements, many challenges still lie in wait. Baru comes in at a time Nigeria is struggling with crude prices that are still low to balance the 2016 budget and a militant insurgency that is affecting oil production and export. Recent upsurge in vandalism has negatively impacted on Nigeria's crude oil production, losing its African top crude oil producer position to Angola.

Operational challenges have continued to cost the corporation huge resources. The NNPC recorded 1,166 pipeline breaks in the last four months, with repairs of the breached pipelines denying the Nigerian coffers about N34billion revenue.

Apart from the broader challenges listed above, many operational and structural grey areas still remain in the NNPC, which the new helmsman is expected to contend with. Some NNPC problem areas that need reforms have been well documented.

Discretionary spending, revenue retention

Dr. Baru has an arduous task to sanitise the people on how the NNPC spends revenues from oil, and how it retains funds meant for government coffers and public good.

Under him, the NNPC will be required to adopt new financial controls and transparency measures for its subsidiaries, especially around the several billion dollars retained each year from the operations of its upstream arm, the NPDC, its crude oil trading subsidiaries, and its downstream arm, the PPMC.

In the last three years, Nigerians have been inundated with scathing reports by government and independent audits about how the NNPC devastatingly retains and spends oil revenues that are supposed to go to government treasury for public use.

Indeed, this problem of retaining major share of oil sale earnings and spending them at will have continued even under President Buhari's administration.

The Revenue Mobilisation Allocation and Fiscal Commission (RMAFC) recently reported that the NNPC withheld N4.9 trillion ($25 billion) in revenues between 2011 and 2015. The RMAFC report was preceded by an NRGI report, which claimed that the corporation continued to withhold billions of dollars ($N4.2bn in six months of 2015) in oil sale revenues from the treasury, even under the Buhari administration.

The policy, advocacy, communications and campaigns manager of ActionAid Nigeria, Tunde Aremu, whose organisation has often beamed a searchlight on the operations of the NNPC, said the new helmsman must tackle issues raised by various audits, especially the Nigeria Extractive Industry Transparency Initiative (NEITI).

"There is the issue of underassessment and underpayment of royalties due to the country by the multinationals that are operating in Nigeria. The most surprising is the NNPC/Shell JV divestment, where there is an outstanding $1.7billion.

There is also the issue of remittance, which has been controversial, such as the unremitted revenue allegations raised by a former governor of the Central Bank, Sanusi Lamido Sanusi. How much has not been remitted? Nigerians need to know," Aremu said.

Piling cash call arrears

Another major task before the new man is how he would be able to galvanise resources to close NNPC's huge funding obligations to Joint Venture (JV) International Oil Companies (IOCs) in form of cash call payments.

Experts say a big category of the corporation's funding problems is its huge multi- billion JV cash call debt to its international oil partners. About $5/7bn is said to be owed IOCs as cash call arrears. Already, oil union workers in the sector have embarked on an indefinite strike to protest the piling debts because the backlog of debt has constrained IOCs to sack workers and delay key oil projects and investments.

Next to this challenge is how he is able to spearhead the process of raising funds to meet NNPC's need and lower future liabilities. Baru should build on the success of a first of its kind NNPC-China road show held in China, where a memorandum of understanding worth over $80bn, to be spent on investments in oil and gas infrastructure, pipelines and refineries was signed with Chinese companies.

Analysts say that perhaps the most appealing and practical step for him to raise capital for priority investments now is pushing for the listing of NNPC shares on a stock exchange, or converting the existing JVs to independent joint ventures (IJVs) so they can raise their own funds.


Nigerians expect to see a more independent government-owned oil company that would lead to market confidence that can support new investments.

Despite promises by the immediate past GMD, that the corporation would, for the first time in many years, become profitable, the NNPC and its subsidiaries are yet to operate like true profit centres.

After posting N255bn losses in 2015 from marketing crude and refined petroleum products, the trend of posting losses has continued, although there are signs of a turnaround in the nearest future.

The increasing operational deficit has compelled the NNPC to sometime engage in commercially unfavourable short term arrangements.

A US-based professor of Energy Law, Emeka Duruigbo, said the new GMD should endeavour to continue with ongoing efforts to run the NNPC as a real commercial enterprise that delivers true value to its stakeholders.

Duruigbo, who is the co-director, Institute for International and Immigration Law, Thurgood Marshall School of Law, USA, said by mail, "He should also concentrate on transforming the NNPC into a veritable exploration and production company that can add appreciable value to its partnerships with IOCs, or undertake meaningful projects on its own at home and abroad. In that sense, the NNPC can follow in the footsteps of Mexico's PEMEX or Malaysia's PETRONAS, among others.

"Finally, he should not yield to the temptation to seek renegotiation of existing contracts, including production sharing contracts, with E & P companies while oil prices are still low. Rather, his focus should be on getting the best terms in future contracts mindful, at the same time, of the current competitive environment with other potential investment destinations."

The president, Nigerian Association of Energy Economics (NAEE), Professor Wumi Iledare, said the major issue of concern was how independent the new GMD could be under the shadow of the immediate past GMD, whose adviser he was.

"Is it true that they had friction in the past? Is it going to be like the Diezani era?" Iledare asked.

Prof Iledare said that of interest to industry players was how the NNPC GMD would deal with funding and focus within the context of the restructuring Kachikcwu started. "For example, is he going to change the NAPIMS and COMD in the office of the GMD?" he asked.

The professor of Petroleum Economics said, "There is the need for capacity building and teamwork, devoid of parochialism. How does he intend to unify the team that Kachikwu put together? Are we to expect a new team? Remember, the board must ratify the structure."

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Source: Equities.com News (July 11, 2016 - 7:31 AM EDT)

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