NIGERIA'S BIG OIL

As petroleum minister during the 1970s oil boom, Muhammadu Buhari set up the Nigerian National Petroleum Corporation. It is an accident of history that the same man, elected president in March, could now be compelled to dismantle the state oil company he helped create.

The first opposition leader in Nigeria to unseat an incumbent president at the polls, the ascetic, 72-year-old former military ruler will be sworn in on Friday against a backdrop of crippling fuel shortages and falling revenues. His success or otherwise in fixing the company that manages the lifeblood of the economy — oil — could make or break his presidency and determine whether or not Nigeria lives up to its potential.

Enmeshed in a web of patronage and allegations of criminality, the NNPC is, according to a vociferous group of technocrats, oil officials and politicians, leading Africa's top oil producer on a path of self-inflicted decline.

"When you look at the way the NNPC does business it is a horribly destructive thing," says Aaron Sayne, an American lawyer who has studied the company. "The way it has structured some deals will make it really hard for anyone who comes after it to unravel."

Mr Buhari has pledged to stamp out corruption, invest in infrastructure and spread wealth more evenly across the country's 170m population. On all counts, his approach to the NNPC will be central.

"The man who created the NNPC could take it apart for the betterment of Nigeria," says Kola Karim, chief executive of Shoreline Energy, one of a number of indigenous oil producers.

Hobbled by its inability to raise financing commercially, each year the NNPC amasses billions of dollars in debt to its joint venture partners such as Shell and ExxonMobil. Each year, allegedly through fraud in the allocation of fuel subsidies, and contracts for lifting crude, it swallows a growing proportion of national revenues from sales.

Although Nigeria's contractual arrangements for selling crude and buying refined fuels are opaque and complex, there is a growing body of research showing that the way it does business allows for the questionable diversion of vast amounts of money.

The former central bank governor, Lamido Sanusi, put the figure at more than $1bn a month. Nuhu Ribadu, a former anti-corruption chief, found that NNPC funds were leaking at a cost of billions of dollars a year to the state. PwC called for the company to be urgently "restructured" after a forensic audit of billions of dollars unaccounted for in its 2012 and 2013 accounts.

Critical state

The mismanagement of the state oil company has stymied investment in new reserves and emaciated the spending power of the state. The outgoing president Goodluck Jonathan's stewardship of the oil sector contributed to his demise. When oil was above $100 a barrel, as it was for much of his six years in office, the government failed to save against an eventual fall in prices.

With prices now hovering between $50 and $65 a barrel, his successor has no time to waste. In a speech delivered at a meeting of Mr Buhari's All Progressives Congress last week, Tony Blair, the former British prime minister, advised the government to "crack the NNPC nut" within 100 days of taking office.

The depressed price of oil is concentrating minds. For all the expansion in services, consumer industries and agriculture over the past 15 years, Africa's largest economy still depends on its oil resources for more than two-thirds of state revenues and nearly all of its export earnings.

Both have halved since the oil price began sliding last June. As a result , the treasury is depleted, many of the country's 36 states are struggling to pay salaries and foreign reserves have dipped below $30bn — less than five months import cover.

For the past six years, legislation to commercialise the NNPC and raise more income for the state via higher royalties and taxes on the oil majors' offshore production sharing contracts has been delayed in the national assembly. As much as $100bn of fresh investment from the likes of Royal Dutch Shell, ExxonMobil and Total has sat at Nigeria's door, according to oil company officials and western diplomats.

Business people see an associated failure to harness Nigeria's vast gas reserves as equally frustrating.

"Nigeria could be growing at 12 per cent a year for a decade if it had a power industry with the gas feedstock to supply it. And they are talking about a few percentage points on royalties. The danger now is that $100bn will be going somewhere else," says a western official.

The NNPC both regulates and participates in the oil industry via its joint ventures with the oil majors. It also manages the ailing refineries and the marketing of fuel. Just over half of Nigeria's production of roughly 2m barrels a day is pumped by the joint ventures with Shell, Total, Eni and Chevron, down by 53 per cent over the past decade.

As a mark of how much more effective the oil majors have been when liberated from their state partner, offshore production — managed under different contractual arrangements — has risen by 1,287 per cent in the same period.

The most radical proposal is to sell-off the NNPC and remove the state from direct involvement in the oil business. But a less drastic version, to reduce its 55 per cent equity stake in joint ventures, is gaining traction.

Those advocating this include Godwin Emefiele, the central bank governor, as well as influential politicians within Mr Buhari's own circle.

They believe a sell-off could address several problems at once and provide a war chest for the government to spend on development, infrastructure and shoring up the fiscal buffers.

Mr Emefiele says about $75bn would be a realistic target, leaving the NNPC with a 15 per cent stake in joint ventures for a sale he believes could attract private equity groups as well as indigenous producers and the oil majors.

"It is an option they need to consider as a way of raising further funding," he says, stressing that the alternative — raising debt — is a precarious strategy at a time of low oil prices.

A sell-off would also reduce the scope for corruption — the main plank of Mr Buhari's campaign — by removing politicians and civil servants from involvement in buying and selling oil.

It would also allow the oil companies to invest in boosting production free of the constraints of their difficult joint venture partner. Within its current structure the NNPC struggles to finance its share of investment in new exploration, or meet its maintenance costs because it competes for its slice of the budget with every other government department.

Industry experts believe the state would recoup initial losses by adjusting royalties and taxes, strengthening its regulatory role and reaping benefits from higher production.

"I am not producing more because the government is not funding its part so government is not getting the revenue either," argues Mr Karim.

Selling the NNPC, however, would almost certainly prompt resistance from those ideologically opposed to the shedding of state assets. If past reforms are anything to go by, p oliticians and allied companies dependent on privileged access to NNPC business for income will use the ideologues to mobilise popular opposition.

Ironically, the Nigerians most likely to participate in buying up NNPC assets are those who have benefited from the status quo and have available capital.

"You risk entrenching oligarchs and creating a Russian situation," says one multinational oil executive, "it needs to be done in a phased manner to avoid mobilising crowds."

Buhari's record

Mr Buhari's own instincts were honed when the Nigerian state was firmly in the economic driving seat. One adviser says the former general "is not exactly against capital accumulation but he is not gung-ho about it either".

Under his watch, first as petroleum minister in the late 1970s and later in the mid-1980s as military ruler, government financed the construction of oil refineries and thousands of kilometres of pipelines to distribute crude with revenues from expanding production.

"We didn't have to borrow a kobo," he told the Financial Times ahead of the elections, referring to the smallest unit of Nigerian currency and bristling at the idea of demolishing the institution he helped create.

"We cannot just wake up overnight and sell the NNPC. First we need to see how much damage has been done and how we can stabilise the situation," he said. "We have to look for those people who can deliver and get them to be in charge as soon as possible."

The challenge is daunting. The refineries are barely functioning, and Africa's leading oil producer has to import most of its fuel. Average crude oil production is declining — reserves are too — and the pipelines Mr Buhari speaks of proudly are punctured on a daily basis by oil thieves, who steal an estimated 232,000 barrels of crude every day at a cost of billions of dollars to the state each year.

Meanwhile revenues from oil sales are siphoned off at even greater cost to the state, a slew of independent, parliamentary and government sponsored investigations has found in recent years.

Mr Sanusi was suspended from his job when he revealed billions of dollars in dubious fuel subsidy payments and the transfer of revenues from state owned oil blocks to private companies with only marginal returns to the treasury.

"It is worse than most people see. At the moment the NNPC is just a slush fund. You need to let them run it as a commercial enterprise where they borrow money against reserves," says the former chief executive of a multinational, who declined to be named.

Properly managed, he adds, the NNPC would be bigger than ExxonMobil, the world's largest listed oil company, in terms of reserves and production.

NNPC officials vigorously batted off allegations of grand-scale corruption at senate hearings last year and the outgoing oil minister, Diezani Alison-Madueke, recently told the FT that there is "no amount that has disappeared" from the company.

For those advocating a wholesale change in structure, there are powerful precedents. For generations, corruption in Nigeria has fed on state monopolies that encouraged failure on a grand scale. Yet each time the government has broken up these power centres — in the banking and telecoms sectors for instance — the country's potential as a leading driver of continental growth has become evident.

But the gradual elimination of rent-seeking opportunities elsewhere has concentrated hands in the oil till.

"Revenue is being hijacked before it gets to government," says a top official in the ruling APC. "Our manifesto says we are going to break the NNPC up. But the ultimate answer may well be to divest the whole thing."

Oil company executives argue that Nigeria's production could be doubled to 4m b/d if the NNPC were freed from direct government control and allowed to run as a commercial enterprise, or sold allowing the oil majors to meet the full cost of investment. According to one senior executive, Nigeria needs to invest about $15bn to compensate for the natural decline in production of about 250,000 b/d each year, far more than has recently been invested.

"It is so frustrating that the huge potential the industry has is being wasted and completely run down. I am not expecting major changes but I am expecting sanity," he adds, of the incoming administration. "They will begin to fix what is broken."

Bunkering: Extent of trade in stolen oil revealed in report

There are no consistent estimates for how much oil Nigeria loses to "bunkering" — a term used elsewhere to refer to the supply of fuel to ships but which has been corrupted in Nigeria to describe the trade in stolen oil.

But a report carried out on behalf of the Central Bank of Nigeria by Global Financial Integrity, a Washington based NGO specialising in illicit financial flows, and seen by the FT comes up with the most detailed assessment to date. According to its survey, Nigeria lost an estimated 232,000 barrels a day of oil to theft in 2013 — an amount equivalent to double Ghana's official production.

The analysis uses satellite data, interviews with 61 operators in the illegal trade and estimates by industry officials. It then compares Nigeria's export figures with import figures from some of its client states. It estimates that the state lost 84.8m barrels of oil to bunkering in 2013 at a cost of $6.7bn. Satellite imagery shows the illegal trade expanding exponentially between 2008 and 2013, at the same time as artisanal refining was mushrooming across the Niger Delta on an industrial scale.

"Bunkering appears to be reaching unprecedented levels . . . the economy of Nigeria is undermined and the integrity of the state is jeopardised," the report says.

Bunkering became big business during an uprising in the 2000s by militant gangs demanding a greater share of revenues from the oil produced in the Delta region. They sometimes justified the theft as a means of taking ownership of a resource from which the region has benefited little.

The trade requires collaboration between politicians, security forces, gangs and in some cases oil company employees. Stamping it out will be a key priority of the new government.

ft.com