What to Watch for at NNPC

Nigeria's President Muhammadu Buhari recently announced that former ExxonMobil executive Emmanuel Ibe Kachikwu will head the national oil company, the Nigerian National Petroleum Corporation (NNPC). Eight top NNPC officials were sacked, and the head of crude oil marketing was “reassigned.” A list of fresh appointments soon followed.

Despite the personnel changes, analysts and the media are still left speculating about the Nigerian oil sector's direction of travel. The only sure priority of the new administration, according to many accounts, is the recovery of stolen assets – an effort that would undoubtedly feature investigations into oil sector affairs.

But what about the actual business of running the sector? What can we expect in the coming months?

On August 4th, we released a major new research report, Inside NNPC Oil Sales: A Case for Reform in Nigeria. It catalogues a range of problems with NNPC's management of its affairs, and explains how these practices deprive the nation's treasury of billions of dollars each year.

Drawing on our report's findings, a few near-term decisions (below labeled “indicator of reform”) will help indicate whether Buhari and Kachikwu will stick with the status quo or usher in a new way of doing business.

1. Restructuring NNPC's oil-for-fuel swap agreements. Because of the state refineries' performance failures and heavy debts to fuel importers, Nigeria will be stuck running oil-for-refined-product swap agreements for several more years. However, the deals' structures could be improved. The latest scrutiny of the swaps (and explanations from the companies involved) appears to focus on whether the traders with contracts supplied enough fuel, rather than the suitability of the contracts themselves.

Status quo
NNPC allocates around 10 percent of the country's entire production to unbalanced and convoluted swap agreements with two companies. The contracts were not awarded competitively, and the parties conduct their own oversight. The current offshore processing agreements (OPAs) are inappropriate for Nigeria's needs – we found that just three provisions of a recent OPA could have cost Nigeria $16 per barrel.

Indicator of reform
The government could choose to wind down the current deals and not sign more OPAs. Following a competitive tender, NNPC could sign straightforward value-for-value deals that deliver only gasoline and kerosene. Through such deals, traders would receive crude of a certain value, and import fuel of the same value, minus certain fees that should be carefully negotiated in the contract. (For full analysis of the swaps, see annex B of the Inside NNPC Oil Sales report.)

2. Allocating export term contracts. We expect that NNPC will soon issue a new round of one-year crude oil lifting contracts, i.e. the list of companies that can buy oil from NNPC.

Status quo
Rather than sign new deals this year, the corporation has rolled over the 2014 list. Nearly all companies on that list are intermediaries; many lack the operational and financial capacity to sell in the global market themselves. Influenced by patronage agendas, NNPC's process for selecting buyers has been opaque, discretionary and prone to abuse.

Indicator of reform
NNPC's Crude Oil Marketing Division could select the next group of term contract recipients through a transparent process, including the publication of data that shows the recipients met robust pre-qualification standards. The new list would not contain any companies, whether Nigerian or foreign, that don't sell their allocations to refiners; that routinely sell to big trading companies that are already NNPC term customers; or that have ties to politically exposed persons. (See pages 46-59 of the main report for a full discussion on the glut of middlemen present in Nigeria's oil trading operations.)

3. Reducing NNPC withholdings from the treasury. Following up on former central bank governor Lamido Sanusi's allegations that $20 billion in oil sales earnings were “missing,” our report uncovered how NNPC retains massive revenues due to the treasury.

Status quo
The Federation Account (Nigeria's treasury account) receives less than two-thirds of the value of the oil sold to NNPC as part of the “domestic crude allocation,” a deficit that has recently topped $6 billion per year. The Federation Account also receives no revenues from oil produced from fields controlled by NPDC, an NNPC subsidiary, including around 30,000 barrels per day in Okono-grade crude—output worth $12 billion over the past decade.

Possible path toward reform
NNPC's unilateral withholdings could decrease, with Federation Account receipts more fully reflecting the value of the oil sold by NNPC. Press accounts suggest the corporation may already be altering its practices in this regard. NNPC's new leadership could respond to Buhari's call for agencies to keep treasury revenues in single accounts by ordering a review and consolidation of all of NNPC's accounts and financial flows. NNPC and the finance ministry could start publishing more detailed reports on the transfers, including from monthly revenue allocation meetings.

Comprehensive NNPC reform that will benefit all Nigerians will require much more than these quick fixes. However, targeted and urgent action can stop a number of the largest leakages, and signal an end to business as usual. Politically powerful vested interests make this a heavy lift, but watching these three areas will provide early signs of how much the new leadership is willing to take on.

Alexandra Gillies is NRGI's director of governance programs.