Looking beyond NNPC’s reforms and the Petroleum Industry BillDolapo OniHead, Energy ResearchEcobank

o Overview of Nigeria’s oil industryo Recalibrating the Nigeria‐Oil dynamicso NNPC is keyo Reforming the way NNPC makes moneyo Overview of NNPC reforms – planned, ongoing and proposed reformso What about the PIB?o Reforms in the Global Oil Industryo Attracting investment with reforms

Table of Content

What is the biggest factor restricting investment in Nigeria’s oil sector?⃝ Insecurity in the Niger Delta⃝Fiscal terms for deepwater/PIB⃝Negative outlook for oil prices⃝Corruption & transparency issues⃝Other reasons

Vote on         Twitter on our handle @ecobankresearch 

Quick opinion poll…

Nigeria’s Oil Industry in a mix

Upstream Midstream Downstream

NNPC reforms/IPO Oil Lifting reforms Cancellation of oil swaps Low production cost Rise of Indigenous producers

Production troubles Low oil prices Inconsistency in supply Losing to strong competition in oil 

market – Iran etc NNPC legacy issues

Investment in Refineries  Investment in gas pipelines Reduction of storage charge in 

gasoline prices

Low capacity utilization of refineries Insecurity of pipelines  Concentration of depots in Lagos Non‐usage of  hinterland depots  Not enough offloading points for 

fuel laden vessels

Frequent periods of fuel scarcity high dependence on imports Delay in payment of subsidies Low enforcement of pump prices Low profitability of marketers FX challenges

Expansion of retail outletsAcquisition by international firmsRemoval of subsidiesLow oil prices

Recalibrating the Nigerian Oil IndustryComparison of Nigeria with other oil economies

NIGERIA NORWAY ANGOLA* SAUDI ARABIA

Share of Government Revenue 67% 30% 73% 80%

Share of Export Revenue 95% 45% 95% 90%

Contribution to GDP 14% 23% 39% 45%

Oil & Gas share of Stock Market Capitalization 2% 43% ‐ 1%

Oil & Gas share of Banking Sector Loanbook 24% 10% 2.57% c. 1.5%

Reserve Life (Reserve to Production ratio) 49 9 20 75**

Refinery output to oil Consumption 17% 144% 38% 89%***

*Angola does not have a stock exchange yet – one is planned for 2017**Some reserves lie in the neutral zone between KSA and Kuwait, not factored into this calculation (2.5billon barrels)***Saudi Aramco holds stakes in another 2.4mbd refining capacity outside KSA, not factored into this calculation

• The Nigerian National Petroleum Corporation(“NNPC”) was established on April 1, 1977 by amerger of Nigerian National Oil Corporation andthe Federal Ministry of Mines & Power.

• NNPC is the largest business entity and investorin Nigeria, and is among the foremost national oilcompanies in the world. It is a wholly-ownedstatutory corporation of the Federal Governmentof Nigeria.

• NNPC manages on behalf of the Government, allgovernment interests in the Nigerian Oil & GasIndustry.

• NNPC typically holds approximately 60% in itsupstream joint ventures, with the exception of theShell operated joint venture and the NGLprojects with Mobil Producing Nigeria Unlimitedin which it holds 55% and 49% respectively.

• NNPC conducts business through itssubsidiaries and several associated companies,in both the upstream and downstream sectors “The gross annual revenue of the NNPC

Group in 2015 is estimated at circa

USD 10.5 Billion6”

Estimated Market Size of the NNPC Group of Business

NNPC

NPDC

NAPIMS

Integrated Data Services Ltd

Pipelines and Products Marketing Company

NNPC Retail

Nigerian Gas Company

Kaduna Refinery and Petrochemical Company

Warri Refinery & Petrochemical Company

Port Harcourt Refinery Company

Upstream DownstreamMidstream

-

Duke Oil

Hyson OilNational Engineering

and Technical Company

6Excluding NNPC crude liftings from Joint Venture operations

NNPC is where to start

Upstream18%

Midstream35%

Downstream46%

Others1%

Reforming the way NNPC makes moneyLifters

IOC 3rd Party Financing

NNPC

Nigeria oil output (2.1mbd)

IOCs

Independent Producers

Entitlements Revenue Account Final Destination

Royalty/Cost/Tax & Profit Oil

Royalty/Cost/Tax & Profit Oil

Royalty/Cost/Tax & Profit Oil

Tax oil from PSC/MCA

3rd Party Financing

Royalty from PSC/MCA

Royalty from PSC/MCA

JV Equity/PSC Profit Oil

PSC Trail Marketing

Company Account

Company Account

Project Proceed Account

FIRS Account

Project Proceed Account

DPR Account

Company Account

Federation Account

Escrow

Company Account (Cost/Profit Oil)

Company Account (Cost/Profit Oil)

Project Financing Account

Federation Account

Debt Account

Company Account

Reforming the way NNPC makes money

What are the key issues to be fixed about how the NNPC makes money?1. Domestic Crude Allocation for the refineries (445,000bpd) was not working ‐ The refineries 

have functioned at less than 25% for about 5 years and Nigeria only consumes about 300,000 bpd of petroleum products, the balance of the DCAs are typically lost in a maze of unrecorded sales, swaps and corrupt practices1. Part of the Domestic crude allocation was used for the Offshore Processing Agreements, 

which were not being properly tracked and resulted in losses for the government2. Part of it was also used for the crude swap deals, in which the government also made 

losses. 2. NNPC was discretionarily retaining too much money for itself and most of that is not properly 

documented3. NNPC lacks trading ability and retains the services of too many middlemen, creating difficulty in 

the marketing of its crude4. NNPC financial reporting was poor and not public. Lack of transparency and accountability 

ensured that lots of unrecorded transactions occur and end up outside the government’s pockets. 

Overview of NNPC reforms – PlannedOBJECTIVES INITIATIVE

Category 1 Stop the Bleeding Reduce waste and stop leakages

1. Reduce and audit costs2. Restructure corporate centre and staffing3. Renegotiate existing contracts, including PSCs4. Streamline subsidy management5. Boost pipeline security

Category 2 Shine the light Ensure end‐to‐end transparency

6. Enhance transparency and accountability7. Achieve zero tolerance for corruption8. Rebrand NNPC’s image

Category 3 Increase Efficiency  Push for best practice efficiency in operations

9. Unbundle PPMC10. Unbundle NGC11. Reduce contracting cycle12. Restructure refineries13. Improve information technology to drive business

Category 4 Manage Performance  Drive delivery and execution

14. Embed staff and business performance management

Category 5 Push Profitability Maximize Profitability 

15. Restructure JV funding and reduce cash call16. Improve retail profitability17. Deploy and attract focused investments18. Re‐kit NPDC19. Expand crude marketing20. Generate Power profitably 

Overview of NNPC reforms – Ongoing & Proposed

Some of the changes so far:• Changes in top brass of oil industry (Category 1)• Personnel changes at the NNPC and its subsidiaries (Category 1)• Adoption of open accounts system, publishing of NNPC accounts monthly (Category 2)• Cancellation of former crude oil swaps and offshore processing agreements (Category 2)• Reduction of crude oil lifting contracts from 43 companies to 21 (Category 1)• Increased funding for JV ventures (Category 5)• Move towards Incorporated JV for some oil blocks (Category 5)• Unbundling of the PIB, presentation of first draft – Governance segment*• Revamping of gasoline pricing template and reduction of subsidy (Category 1)

Proposed reforms:‐ Sell equity in Refineries (Category 3) Refineries to source crude oil themselves; no more DCA‐ Privatize pipelines to raise cash for JV cash calls (Category 5)‐ Refineries to engage in direct crude sale and direct purchase of petroleum products (Category 3)‐ Take the NNPC public via IPO (Category 1 ‐ 5)

What about the PIB?• Nigeria’s Petroleum Industry Bill is set to be split 

into smaller bills to enable quick passage into law

• The first draft sent to the senate is “The Petroleum Industry Governance and Institutional Framework Bill 2015”

• Splits NNPC into two – new NOC and a management company NPAMC

• Repeals NNPC act and creates new regulator

• Cuts powers of ministers and president

• Increases role of national assembly in critical petroleum sector decisions

• Presidential order in December split NNPC into four and not two

• Other segments to be released in bits

• Fiscals may be reduced to commercial agreements but best withdrawn from PIB

Reforms in other marketsNationa

l Oil Co

mpa

nies   

Top Performers:Petronas, Statoil, Saudi Aramco

Middle Performers:KazMunaiGas, GNPC, Sonangol

Low Performers:NIOC, NNPC, SNH, Pemex

5 key types of reforms seen around the world:a. Achieving right form of commercialization for the 

NOC ‐ Ethiopiab. Developing sustainable financing for operations 

(Saudi Aramco, NNPC)c. Reducing political interference in NOC operations d. Improving transparency and accountabilitye. Opening up the sector for foreign participation to 

attract investments (Mexico, Algeria & Brazil)

Apart from reforms we’ve also seen NOCs involved in‐ Strategic re‐acquisition of assets ‐ Sonangol‐ Expand into other world regions – ENOC‐ Borrowing at the low rates to expand investment in 

other areas of oil and gas – Saudi Aramco, Kufpec‐ Licensing rounds

Attracting investments with reforms• Reform of fiscal terms are key to attracting investments in the oil and gas space

• Reforms must target increasing flexibility and providing certainty• Protection of critical infrastructure is key for Nigeria• Bureaucracy  and ‘operational structures’ are also a challenge• Whatever reforms are planned in Nigeria must fit into a 2‐3 year window• A case study of reforms attracting investments – Colombia vs. Mexico

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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

Colombia Mexico Nigeria

Colombia, Mexico and Nigeria crude oil production 1980 to 2014, 000 bpd

Thank you