Postscript by Waziri Adio
NNPC Limited grabbed the headlines from Wednesday after announcing its $3 billion loan from AFREXIM Bank. According to NNPCL, the loan will assist the Federal Government “in its ongoing fiscal and monetary policy reforms aimed at stabilising the exchange rate market.” To ensure that no one missed the import of its messianic intervention, the national oil company framed its terse statement with this screaming kicker: Relief for the Naira! The media, both traditional and social, lapped up the nifty frame.
Without a doubt, the Naira deserves some relief, Nigeria needs massive dollar inflows to address the supply constraints in its foreign exchange market, and NNPCL merits some commendation for standing in the gap for the country while foreign investors and development partners are still hesitant. However, there should be concerns about NNPCL becoming a company for everything. And the worry is not only about how NNPCL will be distracted from its core functions but also about potential abuses.
Many may have missed it but NNPCL was somehow involved in the recent visit by Nigerian Islamic leaders and clerics to Niger Republic. The peace mission clearly yielded some fruits, as the head of the junta met with the religious leaders and expressed readiness to dialogue with ECOWAS. This, too, is laudable. Blessed are the peacemakers! But we don’t need NNPCL, now a limited liability company, to be an all-purpose company that can dabble into diplomacy and religious affairs today, external reserve management tomorrow, and whatever else catches its fancy or that it is pressed to do the day after, or at any other time. It is a slippery slope.
Let’s look at a few issues and claims around this loan before we move on to the central issue. What NNPCL has done is similar to a farmer taking a loan against his future farm produce to pay rent of many years in advance to his landlady who has an emergency. In its case, NNPCL has taken a loan from AFREXIM Bank and made it available to the country as payment for future taxes and royalties. This has the potential to do two things simultaneously: one, it will boost dollar supply in the country and swell its forex reserves; and two, it will translate to predictable cash for all tiers of government when drawn and converted to Naira.
NNPCL has the latitude to do this based on its assets. As mentioned earlier, it is also a good thing to do, as it provides the country some necessary, even if only temporary, breather. Contrary to claims by some, this is not part of our public debt and thus parliamentary approval is not needed. It is a loan taken by a limited liability company. However, the fact that this is technically not a public debt does not exclude it from public scrutiny. This is not a purely private transaction. The loan has implication for current and future revenues to the government. Besides, NNPCL is owned by all Nigerians, with ministries of finance and petroleum holding the shares on behalf of all of us.
The company will repay the loan with future earnings on its crude oil. So, it is a resource-backed loan, which in most cases are expensive, non-competitive and opaque. In all its spin offensive, NNPCL has not provided any information on the tenor and the terms of this loan. All that the company boss has said is that the loan will be repaid with “a fraction of proceeds from future crude oil production.” What this fraction amounts to is left to the imagination. This raises serious questions around transparency and accountability. Nigeria will definitely need massive forex injection, preferably in form of concessionary, long-tenor loans, to address its dollar supply shortfall. Without disclosure about interest rate and the duration of the NNPCL loan from AFREXIM bank, it is difficult to assess whether this is a good deal or not.
There will definitely be a cost to the loan, and the cost will not just be to the company but also to the federation. The interest will contribute to the company’s costs, which in turn will affect its profitability and the dividends due to its shareholders. Also, the cost will be higher when oil prices tank: the lower the price of oil, the more barrels of oil that will be needed to pay the principal and interests of the loan. Yes, there will always be trade-offs, and in this case between having some urgent cash up-front and reduced income in the future. In a way, it is a trade-off between today and tomorrow. It is always good to put all the cards on the table and not misrepresent things.
On the issue of misrepresentation, NNPCL made two extravagant claims in what it projected as facts about the loan—’facts’ which were excitedly amplified by social media handles of the Presidency. NNPCL categorically stated that the loan will not affect petrol prices and that because of the loan, petrol subsidy will not return. These optimistic claims want us to assume that the only factor that determines the price of petrol and the existence of subsidy on petrol is the exchange rate. It is such a wild assumption to make, and NNPCL should know and do better, except the purpose is political propaganda.
While substantial, and assuming it is immediately available for disbursement as claimed, the $3 billion loan is not enough to fully address the supply gap in the forex market. At best, it is a temporary relief. Nigeria still needs to find more dollars to bridge the supply gap and to ensure a stable and fair value for the Naira. Even then a stable and fair exchange rate will not keep the price of petrol the same if the price of crude oil continues to rise. Also, the twin desire of NNPCL not to increase the price of petrol and not to incur subsidy can only hold till it exhausts its current stock and if the price of crude oil stops rising or falls. Crude oil at $100 and above makes nonsense of NNPCL’s exuberant claim. Maybe the company has devised a way of controlling the international price of crude oil.
Instead of making fantastic claims or adorning Spiderman’s garb, NNPCL will serve the country better by concentrating on the thing under its control: focusing on its core job and doing it well. A timely editorial in the Africa Oil and Gas Report puts this succinctly: “NNPC should focus on the technical job, not playing games with financial engineering.” The points are so well made and I do not intend to repeat them. Here is the link: http://bitly.ws/SvtI .
We don’t ned an NNPCL that has a Messiah Complex. NNPCL can contribute more to the federation in various ways. One, it should improve Nigeria’s oil production, especially by boosting output from the prolific assets owned 100% by its upstream arm, NNPC Exploration and Production Limited (NEPL, former NPDC). Two, NNPCL should step up collaboration with others to improve Nigeria’s oil production and reduce oil theft. We are still struggling to meet our OPEC quota, which is much below our traditional 2 million barrels per day. We have been hovering between 900,000 barrels and 1.4 million barrels per day for some time now. More oil production should result in greater forex inflow.
Three, NNPCL should stop pledging crude oil in different forms of financing arrangements as these ultimately affect the revenue and the forex available to the country. As a side note: a significant portion of NNPCL/NEPL crude has been pledged under different financing arrangements such as pre-export financing, Eagle Exporting, NLNG third party financing, forward sale financing etc. A fraction here and there adds up, and the federation is poorer for it.
Four, NNPCL should discontinue its Direct Sale Direct Purchase (DSDP) arrangement because it robs the country of needed forex. The DSDP is basically a barter scheme through which NNPCL sells crude oil to commodity traders and asks the traders to supply petrol of equivalent sum. For context, the federation share of the oil produced in Nigeria is usually split into Federation Export and Domestic Cride Allocation (DCA). While the Federation Export earns foreign exchange, the DCA returns as Naira, since the petrol is sold in Naira. In recent years, and due to different reasons, there has been a precipitous decline in the federation share of oil to the extent that almost all our oil is allocated now to DCA, which is turned to petrol through DSDP. The sum of this is a massive decline in the dollars earned through crude oil sales.
As a result, oil inflows to the Nigeria’s external reserves shrank from $44.7 billion in 2008 to $7.2 billion in 2022, according to official figures. This is despite the fact that oil prices surged to historically high levels in 2022 due to the War in Ukraine and despite that oil still accounts for more than 80% of our exports. A major factor implicated in this head-scratcher is the crude oil for petrol swap which starved the Nigeria of forex inflows at a time other oil-producing countries are building up their reserves. In a post-subsidy era, NNPCL does not need to be the sole importer or provider of petrol. Therefore, it should re-allocate more of federation’s share of oil to Federation Export that will bring in dollars. Consistent flow of forex is actually more useful for our dollar supply, external reserves and FAAC disbursement than a one-off loan.
Five, NNPCL should resume making remittances to the Federation Account. Last month, the company paid N187 billion to FAAC as PSC profits and interim dividend payment. I understand the company is likely to make another payment this month. This should be sustained on a monthly basis. For about two years, NNPCL stopped making payments to FAAC, citing subsidy (or under-recovery), other deductions and other obligations shouldered on behalf of the federation as its reasons. With subsidy gone (hopefully), a major part of that alibi should be gone too.
And lastly, NNPCL will be more useful when it is efficiently, transparently and accountably run like its admirable peers in other oil jurisdictions. NNPCL transformed from a government corporation to a limited liability company in July 2022. It changed names and logos, and it did it with a song and a dance. It is still early days, but there is little to suggest that any fundamental shift has occurred in the culture or the DNA of the organisation.
An NNPCL that dabbles into everything will not be the new organisation envisaged under the Petroleum Industry Act (PIA). Before long, the company will relapse to its ungainly past of serving as a profound theatre of sleaze and opacity (by the way, the monthly financial and operational reports and even audited annual reports that NNPC commendably started have not been sustained by NNPCL). And in a short order, the organisation will revert to the slush fund/personal piggy bank for political authorisers. Of course, willing managers will also leverage this amorphousness for personal relevance and insurance. The $3 billion loan might have been motivated by good intentions, and it sure serves an immediate good. But as the saying goes: the road to hell is paved with good intentions. We need to be alive to the not-so-hidden dangers and erect sturdy guardrails.
