NNPC: several positives amid the uncertainty

The old-style Nigerian National Petroleum Corporation (NNPC) viewed financial and operational data as its private property, and not to be shared at any cost. The new-look corporation in place since mid-2015, in contrast, looks to share data and engage with some of its stakeholders. One result of this stance has been the introduction of a monthly Financial and Operations Report.

Rather than regret the weaknesses in the reports such as the fact the monthly financials end with the results at the operational level (and so without below-the-line adjustments), we scrutunize them for what they do reveal. The financial performance has improved, ie losses have been contained. So the operational loss has been reduced from N267bn in 2015 to N197bn in 2016 and N46bn in H1 2017.

In the current environment this is about as good as it gets: by this we mean the security issues in the Niger Delta, the absence of a new legal framework for the industry for many years, the soft price of crude and the sorry condition of the corporation’s refining arm. All becomes clear when we look at the performance of the three main activities (production, refining and retail/marketing) through the results of this June and those of June 2016.

Revenue from production amounted to N75bn in June (or N9bn net after costs), compared with N19bn (or N2bn) one year earlier. The increase is due to more settled conditions in the delta. Officials have indicated that sabotage (production losses/leakages) peaked in mid-2016 at up to 700,000 b/d. The problem has receded rather than gone away. The corporation’s COO said last week that the Trans Niger Pipeline has been breached 27 times year-to-date, compared with 39 times in 2016.

The Nigerian Petroleum Development Corporation is one of the principal losers from leakages. It managed production of 50,000 b/d in June and hopes to push up output to 250,000 b/d on the completion of its “re-kitting project” and repairs to other vandalized oil infrastructure.

Revenue from refining totaled N37bn in June 2017 (N3bn after costs) and was negligible the previous year (N7bn loss). Accounting changes explain the variance in this case. Since January 2017 the results reflect the refineries business model whereas last year the data excluded petroleum product sales and crude processing costs. The results for this June also reflect the temporary closure of two of the three refining companies.

Looking ahead, the corporation also announced last week that the refineries would shortly be closed for rehabilitation and would be reopened producing at their full capacity by 2019. This deadline coincides with the target to end imports of premium motor spirit (PMS or petrol/gasoline). We have to be wary of the target and also of the rehab since this is far from the first over three decades.

The future of the refineries has become subsumed within national identity politics so we do not see any mileage for our favoured policy (of allowing them to wither away). The minister of state for petroleum resources, Emmanuel Kachikwu, has said that in their current condition (without the costly rehab) they could contribute no more than six million litres per day to domestic consumption of about 35 million litres. Happily, Nigeria is moving towards self-sufficiency in petroleum products thanks to the private sector. At least some of the projected 650,000 b/d capacity of the Dangoterefinery project in Lagos State will be available within the target date. Other projects are on the drawing board such as a 150,000 b/d scheme for which Agip Nigeria has signed a MoU with the FGN. Industry sources suggest that small-scale modular refineries could produce an additional 100,000 b/d by 2019.

The corporation’s retail and marketing activities made an operational loss (after related costs) of N3bn in June, compared with N11bn one year earlier. Revenue was similar in the two months at about N180bn but the corporation managed to trim its costs. Availability of products for retail across the country has improved in recent months, and the corporation has steadily raised its share of product imports at the expense of the said marketers.

As it is unclear how self-sufficiency will affect the economics of this business so we have little idea what form the industry bill will take. It would be wrong to assume that the House of Representatives will support a version close to the petroleum industry governance bill passed by the Senate in June. A further complication is that the ministry has released a draft fiscal policy which analysts in the industry see as having similar tax proposals to the last version of the old petroleum industry bill.

It is therefore premature to paint a rosy picture for the industry in the years ahead, one in which there will be additions to the five large deep offshore producing fields (Bonga, Erha, Agbami, Akpo and Usan) beyond Total’s Egina due to start producing next year. While we play this endless waiting game, we can say that the corporation has upped its performance under Kachikwu’s influence and gone almost as far as it can in this uncertainty.

Gregory Kronsten

Head, Macroeconomic & Fixed Income Research

FBNQuest