Fixing NNPC: Dangote Business Plan on Steroids

The debate over what to do with the four refineries currently under the control of the federal government is hardly just an economic question: hence, in the examination of the various options available to it (our dubious government) going forward, socio-political implications of all options on the table must be weighed. I shall try to present workable solutions as succinctly and chronological as I can. Anyone familiar with the process of writing project plans and implementing them will tell you it is a very painstaking and difficult process- its probability of success depending more on the personnel charged with delivering the goods than the planner. Hence, it is perfectly possible to have a great plan and still fail.

But half of the problem has been whacked when you acknowledge there is a problem to tackle and begin brainstorming on possible solutions. While this article could be termed pedestrian by professional standards, it should be helpful in drawing the boundaries of the subsets of possible solutions to a perennial national problem. Of any global universe of solution available, the one I will highly recommend is copying the strategy of the competitor. Putting it in few words: since Blue Star must have submitted a business plan before they “won” the refinery bid, is it not high time NNPC start learning by copy cat? May be, I am giving the managers of NNPC too much credit.

It must be noted that when Alhaji Dangote makes entry into a market be it Indomie, Sugar, Cement or even Rice, he shakes it and takes it by storm. Hence, if the government is interested in reforming the petroleum industry in Nigeria it must be shaken to its foundation. The first action will be to investigate and dismantle NNPC as we currently know it. Let this not be one of those shenanigan investigations, which are often groping in the dark; predetermined to fool the unaware public. To avoid an unnecessary wild goose chase, only contracts and deals made after 1990 should be opened up to forensic investigation. This will ease the burden on the investigators and allow for in-depth recovery operation.

The good thing is that there is hardly anyone that partook in the pre-1990 looting that is still not doing so today: same personalities such as Lukman, Kupolokun, Obaseki and Daukoru still dominate the NNPC. The fingers of IBB-OBJ-Abacha and their heirs apparent will definitely be caught in the cookie jar while it will be a delight to watch Offor, Etete, and Danjuma squirming as their nefarious oil deals are opened up for the world to see. Until the saboteurs of Nigeria’s oil industry and their friends are prosecuted, I believe firmly that any reform will be naught. Is it not high time NNPC accounts got audited? Public and private enterprises do so as a matter of routine check on corruption, yet no audit of the NNPC has been done in decades! I am very sure that the bribes for which Halliburton and Wilbros are indicted in the US by the Justice Department was given to someone. The collector is somehow still below Ribadu’s radar!

Immediately the investigation is concluded and Ribadu gets to do real police work instead of vain PR and grandstanding, the NNPC as a mater of necessity must be broken up into three integrated petroleum giants with differing strengths but shared capabilities in refining, petrochemicals and oil prospecting. This transitional strategic move does away with the monopoly called NNPC by encouraging government enterprises to compete against one another with dire consequences for the laggards and their management board: Chinese treatment is a perfect strategy in the national emergency we find ourselves. Breaking up the NNPC must be accompanied by an immediate divestiture of NNPC joint venture interests in the upstream sector from NNPC to a new Trust manned with professionals charged to ensure the JV partners live up to their contracts as at when required and negotiate new ones (an alternative is to carve out NAPIMS for this purpose from the current NNPC group structure).

The new integrated national oil companies shall be subsidized at the back end. Meaning crude oil (FG share of JV interests currently allocated to NNPC) should be provided at discounted rates for refining and eventual local sale, allowing refineries to recoup cost of operation and profit by giving them assured market access. This eliminates the corruption of front end subsidies that have encouraged fuel importation. The back end subsidy will be in form of selling crude oil at below international prices, within a budgeted price band, via an auction system that matches local demand to local producers who in turn sell at fix profit margin to the public. This trend will continue to favor local refining and increased economic activity which in turn will fuel a petrochemical revolution that add impetus to the much needed industrial growth that the country need. Ultimately, it will reverse the trend of crude export and refined fuel import in favor of valued added export and efficient use of our natural resources. Instead of using our surplus (a symptom of underdevelopment) to fuel other folk’s economic growth we would instead use our crude and export the bye products. While in the near term we will sacrifice cheap foreign exchange for low energy costs locally, it will be more than made up for with export of petrochemical resins and manufactured products.

Commodity auctioning within a subsidized price band will result in pseudo deregulation of the retail oil/gas operations (since producers that pay more within the price band will likely have higher prices for refined products and vice versa), while insulating the domestic markets from price shocks of terrorism and international politics that is currently bleeding our economy. It is true that price differential between Nigeria and her less endowed neighbors can encourage smuggling, but this can be curtailed by the use of simple GPS technology combined with inventory management systems by refiners who in turn should be tightly regulated by DPR (who for one should take their regulation mandate serious) to ensure petroleum products destined for local markets do not find their way on to the international market. Dire consequences are prescribed for saboteurs of controlled deregulation and managed privatization. The crime of economic sabotage could be made an equivalent of coup plotting and terrorism!

As I earlier suggested it will suffice to mention that the FG should copy from the Blue Star Consortium model, by bringing in proven world class organizations to straighten out operations of the new companies (which include the refineries) in the interim. This period of transition (five years) should enable the three entities emerge as public traded companies under management in return for about 5% ownership if certain operational benchmarks are met. This proposal should be all or nothing, making the payments to the management organization contingent on consistent execution in those five years. If properly negotiated, this could be a good deal for everyone- including the Chinese!

In view of the fact that even a 100% production rate at current refineries is unlikely to meet future demand; imports within the five years transition should continue to enjoy current subsides pending accelerated construction and start-up of additional capacities of new refineries. JV styled partnership based upon the successful upstream model currently in place with the majors should be pursued to rapidly increase refining capacity with private sector backed partnerships. To this effect, the current administration should start good faith negotiations with Blue Star to build refineries with the cash refunded from the rescinded deal. With additional equity of 750 million dollars from the FG, that is a good chunk of money to put two mega-refineries up and running in three years in a classic joint venture deal that should be a win-win for all; shared risk and capital appreciation.

In every business plan, there must be an exit strategy that allows the owner or financier to cash out. In this case, the FG should sell a fifth (20%) shares of each of the firms in an IPO allowing market forces and the Nigerian people price such shares at premium (hopefully after turn-around) at the end of the five year turn around period. Monies invested by the managing company for the government will be recouped by this method, while the balance is paid into the treasury. It is not unrealistic to expect each of the integrated companies being worth $2b-$5b on the bourse if properly managed.

This should be followed up by an invitation to core investors (doubling as new operators) to pick up 26% equity with the proceeds going into the treasury financing infrastructural development that is badly needed. I look forward to Blue Star or the firms managing the firms in the interim (with guaranteed 5% interest stake) participating at this point, paying fair market value as determined by the stock exchange for these shares (of not just refineries but integrated business). The 49% balance of equity in the oil concerns are to be held in trust by independent JV management entity (currently NAPIMS) representing the people’s continued vested interest in the oil industry alongside the JV partnership with majors in the upstream and downstream sector, replicating the success story in the upstream and LNG sector. This passive ownership approach effectively provides the best middle ground between active government involvement and laissez faire.

There are enormous benefits to Nigeria refining her crude oil. Not only will the multiplier effect of adding value to such product be enormous, but the foreign exchange and employment provided by these activities cannot be discounted. Local refiners and petrochemical companies will also benefit from lower cost of transporting crude (their feed stock) and consequentially higher profit margins when their products get to the international market. This should lead to the steady growth of the downstream sector and increased investment in the upstream sector as well as foreign expansion especially in Africa (Angola, Sao Tome, Congo, Sudan, Equatorial Guinea) led by the new publicly traded oil companies with the benefit of local expertise and international exposure. It is my hope that Dangote and Otedola participate in this process in a fair manner.

In conclusion, it is very important to dispel the myths making the rounds on the status of Nigeria’s refinery. This week, the GMD of NNPC confirmed our worst fears, by stating the obvious that in fact the refineries were somewhat functional and that “only a breached major crude pipeline bringing the feedstock crude oil into then was preventing operations”. A refinery operating at 75% capacity is definitely not “scrap” and describing it as such is being economical with the truth. There are capable Nigerian engineers at home and abroad that can turn around the fate of these organizations. Fire sale at the behest of the government is not an option. Are you even aware that your country exported $1.2 billion worth of refined petroleum to the US in 2005? Is this not a country yet to meet local demand and importing feverishly? Such is the paradox of our great country! No problem is too big to solve by 140 million brains thinking.