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Cleaning the Augean Stable

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The special task-force on corporate governance and control outlines measures needed to fight corruption and ensure transparency in the oil industry. But has President Goodluck Jonathan the guts to implement them?

|  By Maureen Chigbo   |  Dec. 2, 2012 @ 12:11 GMT

ONE of the popular demands during the fuel subsidy removal protest in January was that the federal government should take measures to strengthen corporate governance in Nigerian National Petroleum Corporation, NNPC, as well as in the oil and gas sector as a whole. This is because of the belief that weak structures made it possible for the endemic corruption in the management of both the downstream and upstream sectors of the oil and gas industry.

The most telling evidence of corruption in the sector is the pervasive management of the fuel subsidy and government’s inability to prosecute those involved in the grand scam which cost the country a whopping N1.76 trillion as subsidy in 2011, according to Central Bank of Nigeria report. The opaque management of the fuel subsidy regime among other things led to public protest when the government removed fuel subsidy.

As part of the effort to douse public anger, the federal government set up a special task-force on corporate governance and control in the NNPC and other parastatals. The parastatals were the Department of Petroleum Resources, Petroleum Products Pricing and Regulatory Agency, PPPRA, Petroleum Equalisation Fund, PEF, Petroleum Trust Development Fund, PTDF, Nigerian Content Development and Management Board, NCDMB and the Petroleum Training Institute, PTI.

The primary mandate of the task-force was to review corporate governance and controls in the Nigerian National Petroleum Corporation, NNPC, and other parastatals and make recommendations on appropriate systems to promote transparency and good governance. In order to achieve its mandate, the special task-force conducted assessment of industry’s governance framework and bench-marked it with peer countries. The task-force reviewed all management controls within the NNPC and other parastatals, designed a new corporate governance code for ensuring full transparency, good governance and global best practices among others in NNPC. It also designed a blueprint for separating policy from operators in the NNPC and other parastatals, set key performance indices for the NNPC and other parastatals, designed a blueprint for eliminating all rent seeking opportunities and arbitrage in the NNPC system. Besides,  it designed a blueprint for professionalism of management and personnel in the NNPC and other parastatals as well as designed a roadmap for transition from the current industry structure to the time when the Petroleum Industry Bill would  be implemented.

The 12-member task-force chaired by Adedotun Sulaiman, described as the one of the most influential management consultants in the country, submitted its recommendation to President Goodluck Jonathan November 2, with many thought provoking recommendations for reforming the NNPC. The task-force which was inaugurated on January 21, by Diezani Alison-Madueke, minister of petroleum resources, took six months to complete its work. In its report, the task-force defined a new industry structure and developed an implementation plan to reform the sector.

The task-force held a series of stakeholders’ engagement sessions. The industry operators  involved in the meetings were  Andrew Fawthrop, managing director, Chevron Nigeria, Mark Ward, managing director, ExxonMobil Nigeria, Bernard Vos, VP Finance, Africa, who represented Shell Petroleum Development Company, Austin Avuru, managing director, Seplat Petroleum Development Company, Saidu Mohmmed, managing director, Nigerian Gas Company, Anthony Ogbuigwe, managing director, Port Harcourt Refinery, Abiye Membere, then managing director, Nigerian Petroleum Development Company, NPDC, Haruna Momoh, managing director, Petroleum Products and Marketing Company, PPMC, Isa Inuwa, group general manager Audit, NNPC, Christopher Osarumnwese, group general manager, human resources, NNPC and Timothy Okon, coordinator, CP&S, NNPC.

[caption id="attachment_1050" align="alignright" width="256"]Jonathan Jonathan[/caption]

Other industry regulator, the committee met are Ernest Nwapa, executive secretary, NCDMB, Osten Olorunsola, director, DPR and chairman of the PIB Technical Committee and Reginald Stanley, executive secretary, PPPRA. The PIB consultants which the committee met were Funsho Kupolokun, former group managing director of the NNPC, Senator Udo Udoma, chairman, PIB legislative committee, Taiwo Ogunleye and Francis Adigwe, both PIB committee members.

Seyi Bickersteth, National Senior Partner, KPMG professional Services, Demeji Salaudeen, KPMG Executive, and Soji Awogbade, partner, Aelex, a private legal practitioner and Dick Kramer among others also had sessions with the task-force.

In order to fulfill its mandate, the task-force did a benchmark analysis consisting in-depth research on the oil and gas industry in select countries in order to study the approach or systems adopted by the countries in developing a viable industry. It selected Argentina, Brazil, Norwayand Malaysia based on various factors ranging from economic similarities with Nigeria to clear success story in the development of a vibrant oil and gas sector in those countries.

A key observation of the task-force from the benchmark study was the existence of strong and commercially focussed national oil companies, NOCs, in select countries. “Over the years, due to NOC inefficiencies and market reforms, there has been a greater drive towards commercialisation and minimal government interference in the operations of the NOCs. As such, these NOCs have been strengthened and have continued to play a significant role in the development and growth of their respective industries,” the task-force said. The key feature of these NOCs is that they are active operators and investors in the energy assets they own across the value chain.

According to the study, “The growth of these NOCs has largely been organic and they have progressively expanded their operations and investments across various geographies. They have built significant technical capabilities in specific areas of their operations.”

From their findings, it was obvious that the NNPC was lagging behind in all the eight comparative indices. For instance, the NPDC, the exploratory arm of NNPC, has non operated interest in nine deep-water acreages. OML 119 is NPDC’s (only asset concession) on continental shelf while Statoil of Norway has 84 exploration and production ventures in 42 countries. It operates in 45 ventures and is an active partner in 39 ventures. Even Petronas of Malaysia has 75 exploration and production ventures in 23 countries and operate in 27 ventures, 14 joint operation and active partner in 34 ventures. Whereas the NNPC has 1.8 billion barrels reserve (NPDC reserve only), Statoil, Petrobras and Petronas have 5.3 billion barrels, 16 billion barrels, and 8.6 billion barrels, respectively.

The NPDC produces 150,000 barrels per day, BPD, compared to 1.7 million bpd, 2.8 million bpd and 1.44 million bpd produced by Statoil, Petrobras and Petronas, respectively. The NNPC has four refineries with refining capacity of 445000 bpd and 37 retail stations whereas Statoil has two refineries refining 311,000bpd and 2,283 retail stations; Petrobras has 16 refineries refining 2 million bpd of derivatives and owns 8, 477 retail stations. Petronas owns four refineries refining 500,000 bpd with 2,700 retail stations. The NNPC is also lagging behind in terms of pipeline network. The corporation has 5,000 km (crude and petroleum product) and 254 km gas pipeline compared to 7,800 km gas pipeline for Statoil, Petrobras 29,398 km and 2,505 km gas pipeline for Petronas.

[caption id="attachment_1049" align="alignright" width="204"]Alison-Madueke Alison-Madueke[/caption]

On revenue and net income, the report did not provide any figure for the NNPC but Statoil’s net operating income is $35.3 billion while its revenue is $105.b billion. Petrobas’s net income is $16.3 billion while net revenue is $119.6billion. The revenue for Petronas is $77.8 billion. The report does not show that the NNPC has any presence at the global level but Statoil operates in 40 countries, Petrobras in 30 countries while Petronas operates in more than 20 countries.

The report said that even though the respective governments continue to play a major role in terms of NOC ownership as evidenced by its exercise of voting rights and board representation, there has been minimal government interference in the operations of the benchmarked NOCs.

Based on its observations and findings from its study the committee recommended five new industry institutions that will define the new industry landscape after the PIB has been passed. They are the National Petroleum Directorate, NPD, to act as the secretariat of the minister, Nigerian Petroleum Inspectorate, NPI, to serve as industry regulator, National Oil Company, NOC, to serve as an integrated and commercially focused national oil company, Petroleum Asset Management Company, PAMCO, to serve as an investment management company to manage the nation’s hydrocarbon resources through viable investments in upstream oil and gas ventures and Nigeria Content and Capacity Development Agency, NCCDA, to promote local content and capacity development across the industry.

The NPD will take over the role currently performed by the ministry of petroleum resources and, among other things, will ensure that the development of energy policies is integrated and coordinated centrally.  The task-force has recommended a non-civil service pay structure that would enable the NPD to attract and retain the right calibre of technical and industry experts. This will enable it build internal capability (eliminate dependence on NOC to bridge capability gaps), have a differentiated career path and pay structure from the civil service structure.

It recommended the creation of a lean workforce comprising technical experts to ensure NPD focus on its core mandate of policy formulation and industry development. It recommended that a director-general, instead of a permanent secretary, should be in charge of its administration.

The NPI, which replaces the DPR and the PPPRA will serve as a single point of contact for stakeholders in the industry with regards to regulatory matters (licenses and permits etc.) According to the report, the creation of a single regulator for the upstream, mid-stream and downstream sector will eliminate overlapping responsibilities/ accountabilities during enforcement of industry regulations and a reduction in political interference in the governance of the regulator. It will also eliminate regulatory ineffectiveness due to dependence on appropriations-based financing. The NPI will be an independent entity with financial autonomy and a clear industry focus.

The task-force said there is the need for a world class NOC capable of effectively competing with other IOCs/NOCs within and beyond the shores of Nigeria. The loss of control over existing government JV assets will compel the NOC to focus on its core business and build requisite technical and commercial competencies. It said that a partial privatisation and eventual public listing of the NOC will instill and entrench world class corporate governance principles in its business operations. “Adequate upfront capitalisation will ensure non-recourse to continuing government funding – the entity will be commercially-driven, ensuring optimal return on invested capital for its shareholders.

[caption id="attachment_1048" align="alignright" width="382"]Oil rig Oil rig[/caption]

The task-force also recommended that the Petroleum Asset Management Company, which will take over the role of NAPIMS, should have a workforce of seasoned oil and gas professionals with technical portfolio management expertise to ensure optimisation of returns on government investments. It should have a lean and specialised organisation that enables it to have a strong focus on the core business of managing and driving maximum value from national assets and as well as that eliminate distractions associated with involvement in JV operations and contracting.

“The creation of PAMCO allows the NOC to focus on its core commercial business and hone its own hydrocarbon asset management capability. The NOC will no longer manage JV assets on behalf of the federation. Core capabilities currently residing in NAPIMS, will need to be moved to PAMCO”, the task-force said.

The Nigerian Content and Capacity Development Agency whose role is currently performed by the NCDMB, PTDF and PTI will serve as an integrated vehicle for oil and gas industry development and also align capacity development in the industry. “The amalgamation of oil capacity development bodies will eliminate overlap of responsibilities and accountabilities”, the task-force said.

In an effort to ensure the success of the implementation of the recommendations made for the industry, the special taskforce proposes the establishment of a dedicated time-based transformation management organisation, TMO, to coordinate implementation of the industry-wide transformation roadmap, manage the overall transition to deliver the new industry structure it has recommended. Ideally, the taskforce said that the TMO should be inaugurated and activities kick-started immediately the draft PIB and other committee reports are presented to the president.

The terms of reference of the TMO will be to coordinate overall industry, change management activities, oversee initial setting up of the new post-PIB institutions, continuously monitor/track implementation status, scope, risks and issues and constantly engage key stakeholders, for example, the National Assembly, the general public etc. before and after the PIB has been passed. Moreover, it recommended that the president should appoint a TMO leader with proven competence in leading a large scale industry/organisational strategic initiatives.

The TMO’s leadership will be on a full-time basis and empowered to hire all resources required (financial, technical etc) to deliver on its mandate. Other key attributes of the TMO which include representation from the special taskforce on corporate governance & controls and PIB committees in TMO to ensure continuity, dedicated staff from existing institutions on a full-time basis for a minimum of two years, availability of part-time members from other institutions on a need basis and existence of a budget for the TMO and procurements, will not be subjected to the Public Bureau Procurement Act in order to ensure tight deadlines for the industry transformation to be realised.

According to the task-force  the overall success in implementing the recommendations depends on the readiness of the government to promote and sustain key reform initiatives across the sector. The government must have the political will to implement and sustain recommended initiatives, establish a dedicated TMO to drive the entire transformation effort. There is also the need for the passage of the PIB without fundamental modifications by the National Assembly. Finally, it said that Stakeholders buy-in for the programme at industry and institution level should be achieved through regular interactions that would ensure extensive awareness and consultation as well as availability of adequate funding for the programme as and when required.

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