By Ishaya Amaza
In September 2008, the government of Nigeria presented a bill that was aimed at reforming its entire petroleum sector- the Petroleum Industry Bill (PIB) and making the national oil company more efficient.[1] The bill which is yet to be passed into law provides for the restructuring of the NNPC in the following ways;
a. The Nigerian National Petroleum Corporation would be dissolved and in its place a new national company would be incorporated to be known as the Nigerian National Oil Company Limited.[2] The new company would be wholly owned by the government but would make provisions for divestiture of any amount of shares in the company to the public after two years of existence. The new company shall also take over all the assets, liabilities, obligations, bonds and interests of the NNPC
b. The subsidiary companies that were established to carry out the separate tasks of refining, policy regulation and asset management would be re-constituted as independent companies. The role of the NNPC limited would be strictly commercial
c. The Nigerian National Petroleum Company limited would be set up as an independent company to be governed by a board whose appointment would be transparent and according to that state guidelines in the articles of association of the company. It shall no longer be subject to the budgetary allocation from the government and will be free to raise money for itself from the capital market and its operational cashflow.
Potential Economic Benefits of Restructuring National Oil Companies
Over the years, a number of countries have established national oil companies to meet their various national policies, but mostly to ensure that they derive the maximum economic benefit from their vast hydrocarbon resources. To meet these objectives, some of these countries have re-structured their national oil companies from plain government-owned entities into viable commercial entities, which now compete with the major oil companies on the global scene. An analytical examination shall be made in this chapter of a few national oil companies that were restructured and the extent of the economic benefits of such re-structuring.Overview of Some National Oil Companies
Statoil - The Norwegian National Oil Company: Statoil was established in 1972 by legislative fiat of the Norwegian Parliament and its initial purpose was to effectively harness the country’s petroleum interests which at that time was the hydrocarbon resources in the North Sea (Middelthon, 1981). It was originally set up as a vertically integrated government company that was supervised by the minister for petroleum and despite its commercial structure, its activities and operations were determined by the national goal and were completely controlled by the government. It was mandated to submit its operational plans to the Norwegian parliament and in that capacity also functioned as a regulatory tool for the government (Middelthon).
Statoil’s operations were conducted through the use of its subsidiaries, which were limited partnership companies it had formed with other oil companies to exploit the oil resources in Norway’s continental shelf and it revenues accrued either as carried interest or net profit payments from the various oil fields in which its subsidiaries operated (Middelthon).
In less than ten years of existence, Statoil had grown from an NOC with just two employees to a burgeoning oil company with over a thousand employees and owned the largest share of Norway’s petroleum resources with an annual investment of 2.5 billion Norwegian kroner (NOK) (Claes, 2003). However, the government soon saw the need to reduce the need for Statoil’s dominance and growing influence and allow other oil companies to participate on an equal footing. In 1984, some of the undeveloped oil fields were withdrawn from Statoil and directly controlled by the government thereby giving more leverage to the ministry for oil and energy (Claes).
In 1985, the price of crude oil collapsed and the revenue generated by Norway from the oil sector reduced by up 77% within two years. At the same time, the international petroleum industry became more competitive with new field opening up and the Norwegian government saw the need to expand its activities beyond its continental shelf and be a part of the wider global oil industry. To achieve this required more capital investments than Statoil could provide and because of complete government ownership of the company, it was not possible to raise funds through the sale of shares. In 2001, the Norwegian government got parliamentary approval to part-privatise Statoil and also some of its shares were sold on the stock exchange while a new state-owned oil company, Petoro was created to manage the remaining oil fields that had not been allocated.
The restructuring of Statoil has been of immense economic benefits to the Norwegian government because it has enabled it to invest in oil production activities in a number of countries while at the same time being the biggest operator in the Norwegian continental shelf. Statoil has been listed in the 2011 as the 60th largest company in the world with a market value of $83.8 billion, assets worth $110.3 billion, sales of $90 billion and profits amounting to $6.5 billion.[3] It has also made it possible for it to diversify its portfolio into the hydro-energy sector through a merger with a private energy company, Norsk Hydro ASA in 2007.[4] Lastly, the Norwegian government has become less dependable on Statoil despite having the controlling share and has been to diversify its sources of income by directly exploiting its remaining petroleum reserves through Petoro.Petrobras- The Brazilian National Oil Corporation
The Petróleos Brasileiro S.A. (Petrobras) was incorporated in 1953 by the Brazilian government as a fully-owned government monopoly and its primary role was to secure the energy supply in Brazil in the wake of its heavy industrialisation and oil consumption.[5] To achieve this purpose, the government granted it full financial and administrative autonomy to operate as a commercial company.
Unlike most NOCs, Petrobras operated in Brazil solely as a monopoly without the involvement of other oil companies and it took the exploration and production risks involved (Barboza, 2010).Before the formation of Petrobras, the oil industry in Brazil was virtually non-existent and there was no private or international company in existence from which the technological know-how could be obtained. Consequently, the NOC had to develop in its own technology, especially in petroleum exploration.
Due to the fact that domestic oil exploration costs were high, Petrobras decided to employ its technology abroad and in 1972, it formed its international subsidiary- BrasPetro- which it used to undertake oil exploration and production activities abroad. This was at a critical period when Brazil was highly dependent on hydrocarbons import and was developing the use of ethanol as an energy source.[6] As its international operations became successful, the company began to focus once again on improving domestic productions and it was soon providing for half of the country’s oil consumption from its local operations by end of the 1990s.
Despite the progress of Petrobras, the country was yet to achieve energy independence and it became imperative to liberalise the petroleum sector. In 1997, Petrobras and BrasPetro were merged into one company and some of its shares were offered for sale with the government still retaining a controlling share. The monopoly system was established with other oil companies allowed to compete on equal terms with Petrobras for the petroleum reserves in Brazil and the company was free to enter into joint venture with other oil companies.
This made Petrobras very competitive, both domestically and internationally. It has emerged as a leader in deep-sea oil exploration due to its investment in technology and currently has operations in 27 countries (Barboza). In addition to securing energy supply for Brazil, this has also made it to develop a very strong local content and skilled work force. Petrobras is currently ranked as the 8th largest company in the world with a market value $238.8 billion, assets worth $313.2 billion, sales of $121.3 billion and a current annual profit of $21.2 billion.[7] This has made it to be the biggest company in the Latin America region and one of the biggest oil companies in the world.Ecopetrol - the Colombian National Oil Company
Colombia has an oil industry that has been active since the 1920s with concessions granted to private oil companies.[8] To administer and regulate the operations of the oil companies, the government created Empresa Colombiana de Petróleos S.A (now Ecopetrol) in 1948. In 1951, the Colombian government regained control of the ‘Mares Concession and began limited operations in 1955.[9] It also assumed control of more reverted oil fields and acquired two refineries but it was not until 1970 that it was ratified as government-owned commercial company under the supervision of the energy ministry.[10]
In 1974, the government made it compulsory for all oil companies operating in Colombia to partner with Empresa Colombiana de Petróleos in their operations and also gave the national oil company a right to have up to a 50% stake in future commercial discoveries (Coral, 2001, page 50). Notwithstanding the huge reserves Empresa Colombiana de Petróleos controlled, it only participated in the production stage while leaving its joint venture partners to take the exploration risks. The total number of agreements Empresa Colombiana de Petróleos had with other oil companies operating in Colombia as of 2003 was 76.[11]
In that same year, the oil reserves in Colombia started to decline which led to the reduction in oil production and consequently, loss of revenue that would have accrued from further investment in the oil industry. Colombia was in danger of not only losing revenues accruing from oil exportation but also faced the problem of security of supply and energy sufficiency. It therefore became necessary to for it to participate in the international oil industry to counter these problems which made it imperative for the national oil company to be restructured to allow for private investments.
In 2003, the government passed a law which relieved Empresa Colombiana de Petróleos of its regulatory functions which were transferred to a newly created independent body, the National Hydrocarbons Agency and changed the name of the national oil company to Ecopetrol SA, which was organised as publicly listed company with the government having 100% stock ownership with the intent to make it fully commercial and more competitive.[12] In 2006, the Colombian government decided to allow Ecopetrol to become a joint-stock and investors were able to purchase shares in the company, though with certain restrictions while the government still maintained control of the company. The money realised from the sale of shares increased the capital base of the company and it was able to invest in oil operations in other countries with its capital expenditures increasing from $617 million to about $3 billion from 2004 to 2008.[13]
The resultant effect of Ecopetrol’s restructuring has been an increase in foreign direct investment in the petroleum sector from $278 million in 2003 to $3.4 billion in 2008,[14] largely as a result of the full commercialisation and partial privatisation of Ecopetrol which resulted in the abolishment of its mandatory participatory right in future commercial reserves. The conversion of Ecopetrol from a stock-holding company to a joint stock company has also made it possible for it to make investment decisions to diversify its portfolio to other countries without being subjected to the control of the Colombian government. The Forbes Global 2000 ranks Ecopetrol as the 178th biggest company in the world in 2011 with a market value of $84 billion, assets worth $35.8 billion, $21.9 billion in sales and a current annual profit of $4.2 billion.[15]
Prospective Benefits for Restructuring the NNPC
Public/Private Shareholding
The NNPC should be restructured as publicly-traded stock company with the opportunity for private investors to purchase some of the shares. This would infuse the company with more capital for meeting its joint venture obligations that’s has slowed down the rate of its growth in the oil sector. Its status as a stock company would transform the management from mere government employees to directors who would be accountable to the shareholders and would be able to make sound investment decisions. Government could still retain control of the company by capping the total percentage of shares any entity or corporation would have in the company like Ecopetrol or limiting the role of foreign investors, as in the case of Gazprom.[16] It would also ensure financial accountability and efficiency in the management of the company, especially where the board members appointed through the shareholders meeting, and not by the government’s fiat.Internationalization
The NNPC has participated in the oil industry in Nigeria since the 1970s but mostly through joint ventures with multi-nationals and private oil companies and revenue it generates from crude exports accounts for more than 90% of the Nigerian government’s revenue. Restructuring it as a fully commercial company will make it possible to utilize its long working relationships with these oil companies to enter into partnerships and invest in oil exploration activities abroad, especially in the new commercial oil discoveries being made in Ghana,[17] Sierra Leone,[18] Sao Tome & Principe and other African countries in which Nigeria has had considerable influence in the past. This will add to the value chain by increasing the revenue of the government, creating more jobs and diversifying its portfolio.
Increase in Foreign Direct Investment
Restructuring the NNPC into a purely commercial oil company and removing its quasi-regulatory duties would increase the growth of foreign investments in the petroleum sector in Nigeria which had been earlier constrained by the inability of NNPC to fund its share of joint venture agreements. It would also create a level playing ground that would ensure that the revenues from the economic rent of oil will be paid directly to the government accounts as in the case of Ecopetrol.
Financial and Administrative Autonomy
Commercialisation and part-privatisation of the NNPC with limited government control will give some level of financial and administrative independence. As in the case of Statoil and Petrobras, the NNPC could be restructured so that it only pays taxes, royalties and dividends from the crude oil revenue but will be free to make independent re-investments decisions. It would also free it from the clutches of government bureaucracy and parliamentary budget approval that had always slowed its business. It would also have to freedom to hire qualified staff in the company and reposition it as a major player in the oil and gas industry.
Conclusion
National Oil Companies have become a prominent feature of the petroleum industry as they are reported to control over 90% of the world’s oil reserves. Their emergence was a result of the need to ensure security of supplies after the Second World War but their dominance was due to OPEC’s mandate of ensuring that its members have maximum control over their own resources which could only be achieved through the existence of NOCs.
Nigeria, like most petroleum exporting countries, established the NNPC to participate in the petroleum sector on behalf of the government of Nigeria which had absolute ownership of the hydrocarbon resources in the country. The NNPC had always been content to allow other oil companies to explore for oil in Nigeria with a right to participation in the event of a commercial discovery. However, other countries with similar national oil companies have been able to corporatize and restructure their companies to meet up with the transformation of the energy sector. This has made it possible for them to go multinational and investments in oil production overseas which has been of immense benefits to their shareholders and ultimately, their home state governments while at the same time retaining their status as the dominant oil company in their respective countries.
The adapting of the measures taken by these governments, NNPC can be restructured to focus more on commercial objectives while leaving the sector- regulation and making of policies making to other government bodies. Rather than depending on the expertise of major oil companies, an alliance with them could build the company into a regional oil company while at the same generating huge revenues for the state and the country at large.
NUTSHELL:
Sequel to the article examining the economic benefits of restructuring the NNPC where the historical evolution and the structural organisation of the NNPC was examined, Ishaya has, through an analytic examination of various restructured national oil companies and the detecting of the benefits of such restructuring, identified the potential benefits of the restructuring of the NNPC. What is your take on this? Read, Learn, Share and Discuss!!!
Bibliography
Books
Agoro, S. K. O., Expanding the Nigerian Upstream Oil Industry through Restructuring/Privatisation, (unpublished dissertation), CEPMLP, University of Dundee, 2000
Ayoku, A. A., the Implication of Implementing Total Quality Management in NNPC: a Focus on the Refining and Petrochemical Industry (unpublished dissertation), CEPMLP, University of Dundee (2000)
Barboza, R. C., A Critical Analysis of Internationalization Strategy of Petrobras- how the Brazilian National Oil Company can become a major international player, (unpublished dissertation), CEPMLP, University of Dundee, 2010
Coral, R. D., Comparative Study on Corporate Strategy of State-Owned Oil Companies: New Directions and Options for Ecopetrol, (Dundee: CEPMLP Paper CP2/01, 2001)
Mohammed-Jalo, S., The Development of the Petroleum Industry and Petroleum Law in Nigeria (unpublished dissertation) CEPMLP, University of Dundee (1989)
Omoregbe, Y., Oil and Gas Law in Nigeria (simplified) (Lagos: Malthouse Press Ltd, 2001)
Turner, L., Oil Companies in the International System, Royal Institute of International Affairs (London: George Allen & Unwin Ltd, 1978)
Waya, I. I., Restructuring State Petroleum Corporation: The Nigerian Perspective, (unpublished dissertation) Centre for Petroleum and Mineral Law and Policy, University of Dundee, 1996
Seymour, I., OPEC: Instrument of Change (London and Basingstoke: Macmillan Press Ltd, 1980)
Stern, J., The Future of Russian Gas and Gazprom (Oxford: Oxford University Press, 2005)
Articles
Bond, F., Tullow strikes oil in Sierra Leone, 15th November, 2010 available on http://www.iii.co.uk/articles/13299/tullow-strikes-oil-sierra-leone
Bradboury, J., StatoilHydro signature unveiled, 10th May, 2007, Offshore247.com news, available on http://www.offshore247.com/news/art.aspx?Id=7695
Claes, D. H., Globalization and State Oil Companies: the case of Statoil, 1, Journal of Energy and Development, Volume XXIX (2003) page 43
Kokutse, F, Ghana leader: Oil reserves at 3 billion barrels, 22nd December, 2007 available on http://classic-web.archive.org/web/20071226200944/http://news.yahoo.com/s/ap/20071222/ap_on_re_af/ghana_oil_discovery_3
Middelthon, J. S., Statoil, the Norwegian National Oil Corporation- National Oil Company- Quo Vadis?, Topic 3, Paper 5, Volume 1, Energy Law (1981) 75
Olisa, M. M., The Nigerian National Petroleum Corporation- National Oil Companies – Quo Vadis?, Topic 3, Paper 6, Volume 1, Energy Law (1981) 87
Reports
Ecopetrol: Our History- available on the Ecopetrol website- http://www.ecopetrol.com.co/english/contenido.aspx?catID=169&conID=36899
Forbes Global 2000, available on http://www.forbes.com/global2000/
Nigeria Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal; United States Energy Information Administration, July 2010, available on http://www.eia.doe.gov/EMEU/cabs/Nigeria/pdf.pdf
Tordo, S. et al, National Oil Companies and Value Creation, Volume 1 (Study and Results), The World Bank, March 2011, available on http://siteresources.worldbank.org/INTOGMC/Resources/336099-1300396479288/noc_volume_1.pdf
Tordo, S. et al, National Oil Companies and Value Creation, Volume 2 (Case Studies), The World Bank, March 2011, available on http://siteresources.worldbank.org/INTOGMC/Resources/336099-1300396479288/noc_volume_2.pdf
[1] Public Affairs Section of the NNPC, available on http://www.nnpcgroup.com/PublicRelations/PetroleumIndustryBill.aspx (last visited 5th May, 2011)
[2] Chapter 6, Section 136 of the Petroleum Industry Bill
[3] Forbes Global 2000, available on http://www.forbes.com/global2000/ (last visited 7th May, 2011)
[4] Bradboury, J., StatoilHydro signature unveiled, 10th May, 2007, Offshore247.com news, available on http://www.offshore247.com/news/art.aspx?Id=7695 (last visited 7th May, 2011)
[5] Tordo, S. et al, National Oil Companies and Value Creation, Volume 2 (Case Studies), The World Bank, March 2011, available on http://siteresources.worldbank.org/INTOGMC/Resources/336099-1300396479288/noc_volume_2.pdf (last visited 7th May, 2011)
[6] Ibid
[7] Forbes Global 2000
[8] Tordo, S. et al, National Oil Companies and Value Creation, Volume 2 (Case Studies)
[9] Ibid
[10] Ecopetrol: Our History available on the Ecopetrol website- http://www.ecopetrol.com.co/english/contenido.aspx?catID=169&conID=36899 (last visited 8th May, 2011)
[11] Tordo, S. et al, National Oil Companies and Value Creation, Volume 2 (Case Studies)
[12] Ecopetrol: Our History available on the Ecopetrol website- http://www.ecopetrol.com.co/english/contenido.aspx?catID=169&conID=36899
[13] Tordo, S. et al, National Oil Companies and Value Creation, Volume 2 (Case Studies)
[14] Ibid
[15] on http://www.forbes.com/global2000/ (last visited 8th May, 2011)
[16] Stern, J., The Future of Russian Gas and Gazprom (Oxford: Oxford University Press, 2005)
[17] Kokutse, F, Ghana leader: Oil reserves at 3 billion barrels, 22nd December, 2007, Yahoo news available on http://classic-web.archive.org/web/20071226200944/http://news.yahoo.com/s/ap/20071222/ap_on_re_af/ghana_oil_discovery_3 (last visited 9th May, 2011)
[18] Bond, F., Tullow strikes oil in Sierra Leone, 15th November, 2010 available on http://www.iii.co.uk/articles/13299/tullow-strikes-oil-sierra-leone (last visited 9th May, 2011)
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