‘Optimism surrounding NNPC’s transition must be balanced with key questions’
Prof. Damilola Sunday Olawuyi is a Senior Advocate of Nigeria and an international jurist with expertise in petroleum, mining, energy and environmental law. He discusses with KINGSLEY JEREMIAH, the many implications of the transition of Nigerian National Petroleum Company Limited.
The new NNPC is not subject to Public Procurement Act, or Fiscal Responsibility Act and does not answer to NASS. What are the implications of these for accountability and transparency?
Transparency and accountability in the petroleum and mining sectors are under the oversight of the Nigeria Extractive Industries Transparency Initiative (NEITI), which is established by the NEITI Act.
As a member of the governing board of NEITI, I can tell you that all public and private companies in the extractive sector are subject to the transparency requirements of NEITI, and this includes the new NNPCL.
NEITI continues to play its very significant watchdog role in ensuring accountability in the reporting and disclosure by all extractive industry companies of revenues due to or paid to the Government of Nigeria.
NEITI is also tasked with eliminating all forms of corrupt practices in the determination, payments, receipts and posting of such revenue accruing to the Federation.
NEITI has gained the respect and recognition of Nigerians and the international community since its establishment due to its independent and innovative approach to ensuring transparency by all operators in the extractive industry. NNPCL as an extractive industry company will continue to benefit from the guidance and oversight of NEITI.
Over the last few years, NNPC has already made commendable progress in terms of ensuring proactive and transparent financial disclosures in a timely and comprehensive manner, as well as open governance. It is our expectation and hopes that the transition to NNPC Limited would only advance and sustain these measures.
In addition to financial reporting, there is a need to prioritize non-financial reporting as well. For example, efforts are taken to enhance transparency in procurement processes, efforts to address environment, human rights and sustainability risks across the procurement and operational value chain, as well as to ensure wider stakeholder engagement in the design, approval and implementation of projects. These non-financial aspects of transparent disclosure are the gold standard in international law today which the NNPCL Board will need to prioritize.
Advancing both financial and financial aspects of transparency and accountability will require structural process changes that prioritize internal capacity development and training for the entire workforce of NNPCL to prepare them to imbibe and implement these important transparency and accountability standards in practice.
The transition of NNPC is bringing up some other issues in the PIA. For instance, under S.53(3) of the PIA, ownership of NNPC LTD is vested in the “Government” which is defined under S.318 as the “Federal Government of Nigeria.” Furthermore, chapter four which deals with the Fiscal framework provides that a core objective of the Act is “to establish a framework that expands the revenue base of the Federal Government. Are you worried about these issues?
By virtue of the 1999 Constitution, ownership of all natural resources is vested in the Federal Government. This explains why the allocation of shares of NNPCL is to the Federal Government of Nigeria, for and on behalf of the people of Nigeria, which is the constitutionally correct thing to do.
The PIA provides a robust framework that if well implemented, could address several of the perennially contentious issues on resource allocation and ownership, as well as how to ensure that social and economic benefits reach the local communities where the resources come from.
The transition of NNPCL is to ensure that the new entity is able to benefit from the entrepreneurial drive and innovation of a private sector-led business to expand the revenue base of the Federation through investments, partnerships and structural efficiency that maximize returns on investment.
For example, the company could diversify its investment interest and portfolio into other areas such as renewable energy, solid mineral assets, and extractive infrastructure, all of which would increase its revenue generation, while promoting energy transition, energy security and economic diversification in Nigeria. This is the kind of business and commercial mindset that could significantly invigorate NNPCL’s overall contribution to Nigeria’s path to sustainable development.
What will be your take on the transitioning of the NNPC? What are the gains and losses? Who are the gainers and losers?
The transitioning of NNPC to a private company is timely and in line with global market realities. Several national oil companies across the world have realised that the government, with its many responsibilities in other sectors of the economy, cannot finance and oversee the oil sector alone. Opening up the NNPC for private sector participation can unlock its competitiveness and effectiveness.
In addition to the additional financing and expertise that investors will bring to NNPC Limited, the company could benefit significantly from the organised effectiveness, innovation and entrepreneurial vision of a commercially oriented and profit-driven enterprise which will enhance its overall value and service delivery, while also boosting international investor confidence.
On the other hand, many commercially oriented ventures make decisions based on profitability, which could in the long run expose the local communities to elevated environmental, social and governance (ESG) risks if not effectively managed. Therefore, the optimism surrounding NNPC’s transition must be balanced with key questions on how to put in place the needed corporate risk management structures to address ESG and human rights risks of commercial enterprises.
The United Nations Guiding Principles on Business and Human Rights highlights the need for business enterprises to anticipate and address ESG risks. It is, therefore, important for NNPC Limited to take urgent steps to integrate the UNGP into its entire value chain to effectively anticipate and manage ESG risks while integrating sustainability into all aspects of decision making.
What needs to change for the new NNPC to compete with the likes of Saudi Aramco and how long do you expect this?
The change of name must be matched with a change of ideology, philosophy and values if the NNPC Limited is to compete favorably with the likes of Saudi Aramco and Brazil’s Petrobras. Private sector enterprises are known for being technologically driven, innovative, timely and effective in dealing with investors, partners and stakeholders. I, therefore, expect to see a more accessible and innovative NNPC Limited. This will require reducing bureaucracies and having a talented and vibrant workforce, equipped with the required technological know-how and dynamic innovation to respond to market realities, including competitive disinformation, in a timely manner.
Do you think the current structure of NNPC and political dynamics in Nigeria can birth the NNPC of our dreams?
The current leadership of the NNPC is already taking promising and commendable steps, especially by increasing its transparency by publishing its audited financial statements. The NNPC published its first audited accounts in 43 years in 2020 which is indeed remarkable. It is important for such steps to be increased and sustained in order to bring NNPC Limited closer and more accessible to private sector investors.
Without FAAC contribution from NNPC, what challenge and agitation do you expect from the 36 states?
There will surely be transition concerns and challenges associated with how states will access contributions from the new NNPC. However, these are not insurmountable problems. A lot will depend on how fast the Ministry of Finance is able to adjust its accounting schedules and payment systems to accommodate the changes in the NNPC and ensure that states are not left stranded during the transition phase.
What is your opinion on subsidy, liabilities, frontier exploration, theft and vandalism, redundant staff and obsolete refineries on the possible profitability of NNPC?
The rebranding of NNPC is the right step in the right direction in terms of boosting innovation, and effectiveness, as well as attracting private sector financing and expertise.
However, without addressing old developmental challenges relating to insecurity, crude oil theft, sabotage, obsolete refineries and collapse in host community relationships occasioned by many years of weak implementation of environmental protection laws, the rebranding exercise may not deliver anything new. The perennially challenging investment environment in the oil and gas sector exacerbates the legal risks and expenses associated with private sector participation.
For example, according to some estimates, while on average it costs roughly $8 to produce a barrel of crude oil in Saudi Arabia and about $9 in Iran and Iraq, the price soars to $17 in Nigeria. These perennial challenges weaken investor confidence and have resulted in increased asset divestments over the last years.
The Petroleum Industry Act provides a promising legal framework for addressing several of these challenges if effectively implemented. It is therefore important to fast-track its implementation so as to further boost the attractiveness of the Nigerian petroleum industry to foreign and local sector participants, as well as host communities. Stable, secure and transparent petroleum industry is vital to the overall profitability and effectiveness of NNPC Limited.