Making elephant dance: How to drive economy by refocusing NNPC
If each resource nation was a living cell, the national oil company would be the nucleus. NOCs are that important. They are the economic engine rooms of resource dependent nations. Conversely, like fish rotting from the head, it’s easy to smell degraded national economies from their national oil companies. Just as surely, though, nations can be revived by fixing their NOCs.
When Malaysia decided to launch itself into global reckoning, free from dependency to resource rent, it created what is today Petronas, the launch engine for its emergence and transformation. When President Getulio Vargas decided to move Brazil into a new level of existence, he launched what became Petrobras, to great opposition climaxing in his death, but propelled Brazil into an energy future. The wisdom of that move is only fully unfolding now with world-class exploration successes of the past two years. Look around, driving the momentum for each successful resource nation is the horsepower of its national oil company, these days so successful that some are referred to as international NOCs, an index of the threat they have become to the once mighty IOCs.
Nigeria is embarking on whole-scale re-engineering of its energy industry. Rightly, the proponents have identified re-energizing the Nigeria NOC as a central piece of that work. We believe that refocusing NNPC has the potential to propel a new virile Nigerian economy, no less.
But how should it be prosecuted? There is a blueprint in the OGIC recommendations, mid-wifed by Dr Rilwanu Lukman. In order to succeed in galvanising the national economy by refocusing NNPC, these strategies need to tick a number of boxes. Let’s point out a few of them.
No whitewash
The changes proposed for NNPC need to be fundamental. Granted, the organisation’s institutional memory, collective knowledge of the Nigerian energy industry and primacy of place therein will need to be cherry picked and preserved. Yet, it won’t do to just change a few nodes in the organogram. The remake has to be about the grain of the organisation, a far-reaching redefinition of the reason for the existence of a national oil company in the first place, and a business model that delivers on that raison d’être. It cannot be an organisation for redistributing rent; that is not sustainable in today’s world, where the energy paradigm is increasingly shifting the burden of delivering hydrocarbons and sustaining whole economies on state entities. When the government of Malaysia decided on founding a national oil company, it was not to manage rent; it was to compete with the majors on all fronts including operations and credibility, and in time displace them. If it’s about an NOC delivering to the national economy what IOCs cannot, a success like Petronas is proof that initial purposes do matter.
Prepare to compete
Yet it’s not enough to hope to best the majors by some miracle. Those who will lead the new NNPC need to be prepared to compete in a very real sense, for everything from acreage to funds to markets and staff, the whole works. It helps to be a sovereign entity; but it doesn’t help much when you know how to do nothing else, like finding oil and convincing creditors. The new NNPC has to be able to earn its place in the world. No assumptions, no comfort zones.
Separate regulation from resource management
One of the most redeeming elements of the OGIC propositions is the one about separating regulation from operation. This irony of two incompatible roles has distorted NNPC as a national oil company from moment one, when it emerged from a merger of the National Oil Corporation and Ministry of Mines and Power, in 1977. You can’t be a referee and a player in the same game and succeed in both. None of the successful NOCs does that, in fact the ones that have emerged profitable did so when they shed their quasi regulator pretentions and concentrated on operating a commercial model. Again to use Petronas, it once distracted itself by trying to do everything the state fancied, including national banking, and paid dearly for it. Success in energy doesn’t mix with much else; even for an NOC, it takes full focus, especially when the global economy is experiencing giddy commodity prices and dodgy finances.
Communicate right
Of all the symptoms plaguing the Nigerian NOC, the image problem is one of the most significant. One of the most critical pieces of work needing to be done therefore will be communicating the rebirth of a credible Nigerian national oil company. It will take a lot of convincing to win back the trust of Nigerians in the whole NNPC concept, just like it will take loads of creative international positioning. The new leadership will have to be presented and made believable. Lots of internal reaffirmation will be needed, given the massive reorganisation involved. Nigerian oil industry will need to see evidence that something has changed. The financiers will need some credible indicators. So will NOC peers and their governments.
The global energy community will be looking for transparent, meaningful and specific commitments. And they would like to see those elements couched in the indicators and language they are used to, not in ours. Even to attract new talent and skilled professionals will require evidence that it’s not business as usual. We’re not talking about road shows, glossy brochures and afterthought press releases alone. There will have to be real insight into the extent of erosion of trust, to begin with, and then believable programs will have to be articulated and communicated, seasoned with proof points all the way. It will be almost like engineering a whole new perception from the ground up. Petrobras did it when it needed to justify its very existence to cynical political elite, and when it nearly went belly up in 1973 in the “first oil crises” before repositioning itself once more. So it could be done; it has to.
Engage the operators
Robust engagement is one of the key musts, with real potential for early wins. It’s wishful thinking to target someday to be reckoned with by the global majors while snubbing their subsidiaries who operate here. It’s easy to feel smug about owning the resource and all that. The game doesn’t end there, and the game has changed anyway. The new NNPC needs to get off the high horse early and discuss real business in business terms with the operators who are in-country. Everything from assets to credit to concession to technology options to swaps and training will have to be on the table. When in the sixties, Petronas was understudying the IOCs with a view to displacing them in much of its oil and gas, the government still listened to complaints about inconvenient policies and adjusted some to keep the majors in business. And its political stability also helped to counterbalance the rising net operating costs. Collaboration will do it, second-guessing won’t.
Lead right
One of the problems of the Nigerian energy industry is that it has lacked a leading voice for years; no one is really setting the agenda. If the new NNPC would genuinely engage, it won’t be long before it starts driving the agenda creditably, and eventually winning, both by its own technical and financial progress and by its own rights as a sovereign enterprise. In time, NNPC should be able to to fully drive real progress in Nigerian content development, reserves growth through exploration, safety an environment, basin diversification technology transfer and other national priorities if it succeeds in leading from the front. But it can only lead by succeeding, not by being an incompetent operator.
Don’t miss the mission
None of the stuff about building a commercial model and being profitable should detract from the fact that an NOC is a state enterprise. Despite what free market apologists might say, there is nothing illegitimate about that status, provided you’re running a sound business. A good NOC is a bit like a well-run family owned business: there is a sound business model, but beneath it an elemental philosophical core. The very history of Gazprom is inseparable from the prosecution of Russian energy policy. Petrobras was born as a state oil company, partly to disprove the cynicism of IOCs who had concluded they couldn’t find hydrocarbons in Brazil. Today, the cynics are returning for a stake in the massive finds. The best protection for national assets is to build a decent profitable business in developing them on your own terms; you just have to make profit to afford reinvesting to secure the future. Get the business right; the politics will take care of itself.
Find your own oil
Nothing brings an NOC as much respectability as taking a concession and getting down to looking for finding its own oil. Anyone can hand out acreage and collect rent. Only serious NOCs do the real business. Building on the modest activities of NPDC, its operating subsidiary, should be one of the proof points for the new NNPC about upstream commitment. Imagine if NNPC could actually take the trouble to explore one of the prospective blocks on its own account, land a good find and actually start a good sized development. Everything else its saying about being bankable, et cetera, will start to make sense. When Malaysia’s oil was depleting and IOCs were downsizing, it was Petronas that launched aggressive exploration that countered the trend, while simultaneously diversifying into energy heavy industries. Saudi Aramco didn’t become the world’s most profitable company by just sharing the booty; it actually operates stuff like the Ghawar Field, the world’s largest, and Safaniya Field, the world’s record for offshore fields.
There will be learnings of course, some of them bitter, like in 2001 when Petrobras lost P-36, the world’s largest exploration platform which it operated, and the huge setbacks in its operations in neighbouring Bolivia in 2006.Yet it is doing the business itself rather than by proxy that saw the same company give Brazil net self-sufficiency in vehicle fuels that same year. Doing the real thing is what will unlock the future for the new NNPC, like it did for its peers.
De-couple downstream
It’s out of synch, and trying to bring it on will sink the ship. This point is so evident it needn’t be over-flogged. The fact is that downstream sector in Nigeria is simply an anachronism, existing in a bygone era, way back from where the upstream is, and not just because of prices; it’s the whole mindset. There is no sense in diluting the prospects of a successful state upstream enterprise with the liabilities of the downstream. It may be wise therefore to think of engineering a separate set of solutions for the downstream.
It’s no rocket science
Finally, prototype it – the models are there, why reinvent the wheel? Petronas was deliberately modelled after Pertamina, the Indonesian NOC. After all, there is nothing original about the NOC business model anymore. All that those who will manage the new NNPC need do is look at Petrobras, Saudi Aramco, Petronas, and the rest, and simply replicate. It needn’t be rocket science. Really, if you take out the politics and the patronage, what it really comes down to is basic sound management.
DOZIE ARINZE
This piece, written by Dozie Arinze (doziearinze@yahoo.com) was first published in Nigeria Energy Intelligence in 2008, is hereby reproduced due to its relevance to the ongoing reforms at the NNPC.