Nigeria launches restructuring of oil sector

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Far-reaching and long-awaited plans aimed at reforming Nigeria’s oil industry are gathering pace, though they have met with resistance from some stakeholders.

Nigeria’s flagship hydrocarbons industry – which produces an average of 1.95m barrels per day as of January, accounting for two-thirds of government revenue and 90% of export earnings – has been targeted for reform for several years, with draft legislation in the works since 2007.

However, the drop in global energy prices has accelerated the pace of reforms earmarked for the Nigerian National Petroleum Corporation (NNPC).

Performance targets

Under the restructuring plan, the NNPC will be split into seven independent operational units: upstream, downstream, gas and power, refineries, ventures, corporate services, and finance and accounts. Each division will be run by a CEO, who will be held accountable for the individual unit’s performance.

Alongside restructuring plans, Emmanuel Ibe Kachikwu, minister of state for petroleum and group managing director of the NNPC, has also set an ambitious target of ending the practice of importing refined petroleum products within 12-18 months.

Nigeria imports almost all of its refined petroleum products, despite holding Africa’s largest oil reserves, largely due to ongoing problems at its refineries. Three of the country’s four facilities were closed for more than six months last year due to vandalism and maintenance work.

According to the NNPC, domestic output meets only 9% of daily consumption of petrol, 24% of dual-purpose kerosene and 28% of automotive gas oil, with the rest imported from abroad, particularly from the Netherlands. These imports are secured through both swap agreements and normal imports.

The federal government spent a combined N1.87trn ($9.4bn) on imported petroleum products in the first nine months of 2015, according to data from the National Bureau of Statistics, down 25% year-on-year.

The focus on belt tightening at the NNPC already appears to be yielding results. Earlier this year the agency reported a substantial decrease in its monthly operating deficit, from N30bn ($150.7m) in August 2015 to N3bn ($15m) by January.

Perhaps more significantly, the report marked the first time in a decade that the company released its financial results.

Resistance ahead

However, the proposed changes – which include dividing the NNPC into separate, autonomously run units – are likely to face further resistance.

A strike by NNPC workers in mid-March, carried out in protest of the restructuring plans, worsened lengthy queues at the petrol pumps in major cities and highlighted the challenges that the government faces in its bid to reform the industry.

While the strike was halted one day later, after the unions representing the workers sat down with the NNPC’s management, several of the issues related to the strategic direction of Nigeria’s hydrocarbons industry remain unresolved.

Broader goals

While the contentious reform of the NNPC reflects the myriad challenges Nigeria’s leadership faces in the broader oil industry overhaul, it could also remove one of the key obstacles to the successful passage of the long-awaited Petroleum Industries Bill (PIB).

First drafted in 2007, the PIB seeks to bring the country’s 16 petroleum laws under a single umbrella and strengthen transparency at the NNPC. However, increased oversight of the organisation has been a stumbling block to progress in the past.

Speaking in early March, Yakubu Dogara, speaker of the House of Representatives, said the National Assembly was in the final stages of passing the legislation and aimed to expedite its approval.

The passage of the legislation will depend in part on the reaction from the private sector to planned royalty rate hikes, as well as the government’s ability to reach agreement on proposed revenue-sharing arrangements between the federal oil account and Nigeria’s 36 states.

However, the benefits to improving the sector’s governing code would be significant. Strengthening the legal framework for Nigeria’s oil industry could be instrumental in boosting investor sentiment at a time when global uncertainty has taken a toll on capital inflows. Kachikwu estimates the country is missing out on roughly $15bn worth of investment per year while awaiting the PIB.

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