Monday, September 28, 2015

NNPC Not Broke, Despite Huge Debts — Kachikwu


GMD, NNPC, Dr Emmanuel Ibe Kachikwu with Journalists during his working visit to Kaduna Refinery on Wednesday. (Photo: Olu Ajayi; Image source: Vanguard)

The Nigerian National Petroleum Corporation, NNPC, said, weekend, that despite losing 230billion annually from marketing and refining operations, the Corporation was not broke. It also disclosed that it owes over US$6 billion in cash call arrears. NNPC insisted that there was no way the Corporation can be broke, given its assets base and equity holding in the petroleum industry.

The Group Managing Director, NNPC, Dr. Emmanuel Ibe Kachikwu, who reassured of the Corporation’s solvency in Lagos, during a question and answer session with journalists, said what was wrong with the establishment was cash flow management.

Specifically, while admitting that the Corporation owes about US$6 billion in Joint Venture, JV cash call obligations, he also disclosed that NNPC was losing annually over ₦200 billion through the Pipeline and Products Marketing Company, PPMC and additional ₦10billion from each of the nation’s refineries. This brings the yearly losses to more than ₦230billion.
Vanguard report continues:

Kachikwu, who was responding to the constant speculations that NNPC is broke, and as the main purse of the Federal Government that by extension, Nigeria too is broke, maintained that such assertions are not true.

NNPC not broke

He said: “No, I don’t think we are broke. We can never be broke because our assets base is so strong. You know that about 60 per cent of 1.2 million barrels of oil a day, plus another almost 100 per cent ownership of NPDC assets; oil on ground not even allocated and gas resources, we really could never be broke.

It is a cash flow issue as opposed to asset resource. We are not broke, we’re going to manage our cash flow better, we are going to see what falls in to enable us to inject money into the economy and do the things that we need to do. We are going to be more efficient.”

Explaining the pile up of the Joint Venture, JV cash call arrears of about US$6 billion, Kachikwu said: “The US$6 billion arose from very many factors; one is for PSCs (Production Sharing Contracts). There you don’t have these issues, but for the JVs, you have them because every year the Assembly comes out and says, you need US$4billion and they give you US$1.5 billion. So the gaps have been accumulating over time and that is the arrears, and when those gaps came, we did not get aggressive with trying to look for alternative funding to cover those gaps.

“At some point we became even so suspicious of these alternative funding. How much are we really making from them? And so they preferred to hold back. But if we were addressing it from year to year, those gaps really shouldn’t be there. What is key is ensuring that whatever it is that you can alternatively fund has a real time value addition to national income stream. So we are not broke, we are just going to manage our systems better.”

The NNPC boss also said managing the system better characterizes the ongoing reform of the Corporation, which is already yielding positive results with huge savings of about US$150million monthly through contract cancellations.

Contract cancellations yield US$150m

Kachikwu said that the contract cancellations was not about calling a dog a bad name in order to kill it, but ones that fell short of procedures and did not have the best yield.

According to him, “If a contract does not give a good financial yield for the country and for the company, I cancel it. It is not to say that the individual who is operating that contract is bad. What it simply calls for is you open it up and ask others to give you an alternative. If an individual comes up and he is the best alternative, so be it.

“So the first bullish effort that we did was to cancel all the former contracts we felt had challenges or issues. That is not to say that the contracting parties were bad. Again, I pay less emphasis on individuals and institutions. I pay more attention on processes and outcomes. It is not for me to say a company is bad or good. I am not a judge.

“If you look at the contracts we have cancelled, we have saved an average of US$150 million a month, just that some of those contracts were cancelled and were being given new models, even for the interim period. In December, obviously we are going to have the crude bids. We are going to have the coastal bids. We are going to have the OPA bids. They will be thrown out to the entire world. Hopefully, we end up with a sequence of results that will only save money, improve efficiency and be seen as transparent.”

Reiterating the essence of systems transparency, Kachikwu noted that NNPC, had hitherto been perceived as being very opaque, and as such needed to do away with such negative perceptions and open up its operations to public scrutiny.

In his opinion, “If NNPC must get back its credibility; it must be on the altar of transparency,” adding, “it is an entitlement of the country. It is not a privilege for people to know how their oil money is obtained, how contracts are done, how the income is spent. NNPC, not being a private company, we must be very open.”

PPMC losses

Kachikwu disclosed that to improve systemic efficiency, the PPMC is being unbundled into three companies because as it is, the marketing company records the highest losses in the NNPC system.

According to him: “My greatest loss historical from the system that I have seen is PPMC; we’re losing about ₦200+billion a year. So PPMC contributes 87 per cent of my loss factor. So any CEO must sit down and say, if I want to be profitable, all I need to do is to yank off PPMC and say I don’t want that business. But if we sit down with PPMC, we will see that part of what is coming from pipeline vandalism, subsidy, obviously from lack of efficiency, assets that have become dilapidated, all kinds of stuff. But, of the elements is also fraud. No doubt about it.”

Against this background, he continued: “First, you take the pipelines, and like I said, we are creating a pipeline company. It’s going to function like a pipeline ownership company like any other in the world. So it is in their interest to be profitable and to make the pipelines work. While security is a key issue, security is only one of the impediments that we are going to solve. We will obviously move people to focus on that away from the head office.

“Then you will have a storage company, there are lots of indigenous operators who are doing throughput today, and they survive by their throughput arrangement. So why should I not run probably one of the depots that is maybe the largest facility in the country profitably? So there is a company that is focusing on that. And if I need to do a joint venture, in terms of having a storage on the deep sea port somewhere, so I don’t have to be lighting vessels and paying demurrage, then I need to do that. Again, the storage company will focus on that.

“Then there is the marketing company, I give you an example, AGO that is produced by one of the refineries was locked up in the refinery for so long because somebody had fixed a price for the AGO during the time when AGO hadn’t become deregulated that was very high.

“So we had a very expensive AGO sitting in the tanks, and people were bringing AGO cheaper to sell, and we just left it there. I don’t think it requires a Ph.D. in Harvard to know that you need to reduce the price and sell the damn stuff and move on.”

Refining losses

Kachikwu further said that management has also been the biggest problem with the nation’s refineries, as they were not being run as profitable business models but on sentiments, which is resulting in huge losses.

Notwithstanding that the engineers at the refineries are doing a yeoman’s job by running facilities of over 30 years, without proper maintenance and spare parts, which he described as a “ miracle,” the NNPC boss insisted that the refinery models were faulty.

He said: “The reality is, if you give me 450,000 barrels of allocation, the models must be straight forward. I go out and process them and get a better yield and the government makes profit out of that yield and I keep back what I will use to run the refineries. It is a straight forward deal.

“But the model we have been running is you throw in the barrels, either for reasons of pipeline issues or for reasons of aging facilities in the refineries, I throw in a US$40 barrel oil and get US$50 result. You are dead before you start, because you are already unprofitable.

“As at last Monday, my records showed that we are losing about ₦10 billion annually for each of those refineries. That is why we need to move from the areas of emotion to the areas of the business.

“Sometimes people say that I am a lot of business, instead of social services, no, not as a Corporation. The day NNPC is called NNPC Social Services, then I would not have to have this conversation. But if it is called a Corporation, it means that the country expects them to make a yield, make profit and manage the company profitably so that people can benefit.

“What we need to do to have is some level of independence, be able to shut down and do our TAM (turn around maintenance) when they are due, be able to fund the refineries, and be able to create a contractual model that makes the business profitable. Right now we are losing quite a lot.”
In terms of capacity, Kachikwu admitted, “There are lots of skilled people in NNPC. Some of the best engineers in Nigeria are found in NNPC. The fact they have continued to maintain refineries that are about 30 years old, some with no spare parts, no turn around maintenance for over 15 years, is share miracle. It is unbelievable. Every international team you call tells to scrap them, but our people continue to maintain the refineries. So, we must respect their intelligence.”

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