Oil production in Nigeria began in the late 1950s. Its exploration was made available to foreign corporations in the following decade, and the industry grew steadily to become a global behemoth. In 1977, the Nigerian National Petroleum Company (NNPC) was established by the government to regulate the country's oil industry. Before the coronavirus (COVID-19) epidemic, Nigeria's oil sector accounted for around 9 per cent of the country's Gross Domestic Product (GDP). However, between October and December 2020, the industry dropped to 5.9 per cent of the total GDP from the previous quarter. In the second quarter of 2023, the oil sector contributed 5.34 per cent of the country's GDP. The impact of the COVID-19 pandemic and other variables, such as low production caused by oil theft and subsidies, have contributed to decreased earnings in the sector.
Specific measures have been introduced to increase profitability and improve the sector's contribution to GDP. In July 2022, the Nigerian government transformed the former Nigerian National Petroleum Corporation (NNPC) into NNPC Limited, a commercially viable National Oil Company (NOC) comparable to Saudi Arabian Oil Group (ARAMCO) (formerly Arabian-American Oil Company) and Petróleo Brasileiro (PETROBRAS). This transition meant that NNPC would become a private venture with limited shares. Although state-owned, NNPCL is intended to operate as a fully commercial enterprise without government backing or control and will be governed by the Companies and Allied Matters Act of 2020. The NNPCL was expected to distribute dividends to shareholders while holding on to 20% of earnings for future business expansion. It is anticipated that the public will buy shares to acquire equity capital for the company's operations, mainly since it can no longer access state funding to achieve its goal of commercialising the corporation.
The primary objective of this transition is for the NNPCL to be run to maximise profit, just like any other private organisation. Notably, some events suggest the institution's profitability. For example, a 2024 report held that the NNPCL made N2.548tn in 2022 from N674.1bn in 2021. Before this time, the company had posted losses of N807 billion in 2018 and N1.7 billion in 2019. Yet, the race to higher profitability relies on the continuous value that the organisation provides and its capacity to manage various challenges. As a result, this insight proposes efficient strategies for NNPCL's continuous profitability as a private corporation.
Impediments to Continuous Profitability
While initial results imply a profitability trend, Nigeria faces numerous barriers. For one, Nigeria's skyrocketing debt will diminish profitability. Nigeria’s debt profile is valued at N88 trillion as of the second quarter of 2024. Debt servicing is expected to eat a considerable portion of NNPCL's revenues. Furthermore, there should be greater transparency about dollar revenues and subsidy expenses, which makes calculating actual profitability difficult. Despite removing the official fuel subsidy, the reappearance of an "inescapable fuel subsidy" could keep the NNPCL's net oil revenues below expectations. Furthermore, operational issues such as oil theft reduced production from ageing facilities and the need to import refined petroleum products continue to erode NNPCL's profitability.
Lessons from ARAMCO
Saudi Aramco is the world's biggest oil producer. Officially known as Saudi Arabian Oil Corporation, the corporation is primarily state-owned and headquartered in Dhahran, Saudi Arabia. Aramco is the world's most lucrative firm, outperforming tech giants like Apple and Google. Before going public in 2019, Saudi Aramco drew increasing investor interest in 2016 when Saudi Crown Prince Mohammed bin Salman bin Abdulaziz Al-Saud revealed plans to list 5% of the company at a valuation of around $2 trillion in the most extensive initial public offering. In 2020, Aramco recorded a revenue of $229.97 billion, which climbed to $400.74 billion in 2021 and $495.34 billion by 2023.
Aramco’s corporate structure allows for sufficient fiscal predictability to finance investment with low government influence. The corporation has also prioritised accountability and reinvestment with relevant financial reporting and capacity building across value chains.
Aramco is also leading in sustainability efforts. In October 2023, it launched a $1.5 billion sustainability fund to invest in technology supporting a stable and inclusive energy transition. The fund aspires to invest in technologies to help the company achieve its announced net-zero 2050 targets for wholly-owned operating assets and developing new lower-carbon fuels.
The Path Forward for Nigeria
While the NNPCL may continue to maintain an affinity with the government, the government should be guided by corporate governance rules. Sections 58 and 59 of the Petroleum Industry Act require the NNPCL board to include six non-executive members with at least 15 years of industry experience, one for each geopolitical zone. Selections by geopolitical zone may favour the politicisation of appointments over merit. The prior practice of government officials sending notes for NNPC allocation or positions would be unsustainable under the new system. As a commercial institution, the NNPCL should be answerable to shareholders, and recruitment be based on competence and quality.
The NNPCL must commit to transparency and accountability consistent with global best practices. Investments should be made to improve staff and equipment/facility capacity. As a result, the government should accelerate ongoing initiatives to modernise refineries and outdated infrastructure. The NNPCL should leverage the experiences of NOCs like ARAMCO to propel exponential profitability.
To increase production and profit, the government must collaborate with stakeholders, particularly oil-producing communities, to preserve oil facilities and prevent oil theft. In turn, the government must demonstrate its commitment to the well-being of these communities by assuring access to quality healthcare, education, and job opportunities.
During the United Nations Climate Change Conference, also known as COP28, in 2023, an NNPCL representative mentioned the organisation's plan to partner. As such, NNPCL should begin to extend partnerships with global entities to reduce emissions in oil and gas operations.
The NNPCL's shift into a private company creates new potential for profitability and expansion. However, the corporation must deal with the challenges of Nigeria's debt profile, operational issues, and the need for increased transparency. By learning from the experiences of NOCs such as ARAMCO and committing to sustainability initiatives, the NNPCL can position itself for long-term success in Nigeria's oil sector.
References
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