More Pain May Come for Nigeria's Loss-Making Oil Behemoth

https://www.bloomberg.com/news/articles/2018-05-15/more-pain-may-be-in-store-for-nigeria-s-loss-making-oil-behemoth

• Abuja-based NNPC made operating losses of $246 million in 2017
• Financial woes contrast with state firms from Norway to Saudi

It’s meant to be a cash cow, but the state oil company of Africa’s biggest producer is bleeding money.

Nigerian National Petroleum Corp., the Abuja-based behemoth that dominates the OPEC member’s energy industry, has made losses for at least the last three years, statements on its website show. It will probably register another in 2018, according to Ecobank Transnational Inc., as its refineries and fuel-retailing arm fail to generate profit.

The pain for NNPC, which produces oil and natural gas in partnership with Royal Dutch Shell Plc, Exxon Mobil Corp. and Chevron Corp., comes even as national energy firms from Norway to Saudi Arabia thrive with crude prices recovering from their crash in 2014. And it lays bare President Muhammadu Buhari’s difficulty in fulfilling his pledge to modernize a company that’s been a byword for inefficiency and opacity since its creation in the 1970s.

With oil accounting for more than half of government revenue and 90 percent of export income, the company is a primary target of those seeking access to state funds and is vulnerable to political interference.

Tensions erupted last year between Emmanuel Kachikwu, the chairman of NNPC, and Maikanti Baru, the managing director, over how more than $20 billion of contracts were agreed.

“The very public power tussle shows the difficulties in reforming the organization,” Malte Liewerscheidt, an analyst at Teneo Intelligence, said in an email from Abuja. Until a pending but long-delayed law designed to overhaul the petroleum sector and split up parts of NNPC comes into effect, “political considerations will continue to interfere with vital business needs,” he said.

The state oil company doesn’t publish full financial results, though it releases limited numbers on its operating performance. These include earnings for core units, but exclude items such as taxes and dividends from a 49 percent shareholding in Nigeria LNG Ltd., one of the world’s biggest exporters of liquefied natural gas.

Those numbers show that NNPC made an 82 billion naira ($246 million) operating loss in 2017. That was an improvement from 2015 and 2016, but still far from the operating income it budgeted for of 600 billion naira. In each of the past three years, NNPC forecast a profit and finished in the red.

Higher oil prices have boosted exploration and production, the most profitable part of NNPC and which earned almost $600 million in 2017. But its ill-maintained refineries, which operate at a fraction of their combined capacity of 445,000 barrels a day, lost about $100 million. Even bigger shortfalls came in the fuel-retailing business, which has to contend with the government’s cap on gasoline prices, and the corporate headquarters unit, which lost almost $400 million, more than any other part of the company.

While NNPC’s extraction business will probably improve this year, the refineries and retailing subsidiaries will continue to be a drag, especially if the government maintains the ceiling of $0.40 a liter for gasoline, according to Ecobank. The bank predicts that NNPC will make an operating loss of as much as 80 billion naira in 2018.

Ndu Ughamadu, a spokesman for NNPC, said that while the refineries are struggling to make money, the company’s overall performance will probably be better this year. He declined to say if NNPC was forecasting a return to profit. It made a loss of 1.6 billion naira in January, the latest month for which results have been released.

The problems at NNPC offset the benefits to Nigeria’s struggling economy of Brent crude’s more than 50 percent rise in the past year to almost $80 a barrel. Still, there have been improvements within the company and the country’s overall oil sector, according to Moody’s Investors Service.

NNPC’s reduction of debts owed to joint-venture partners may help increase Nigerian oil production to around 2.5 million barrels a day by 2020 from 2 million today, said Aurelien Mali, an analyst at Moody’s.

“The clearing of arrears is a huge step forward that will unleash extra investment from international oil companies,” Mali said in an interview in Lagos, the commercial capital, on May 9. “NNPC is key for the government. It’s going in the right direction.”

It has some catching up to do. Its financial position contrasts with those of state oil firms in other major producers. Saudi Aramco is gushing cash, making net income of $34 billion in the first half of 2017 alone, according to numbers seen by Bloomberg. Brazil’s Petrobras, Mexico’s Pemex and Norway’s Statoil all improved their results in 2017 and made operating profits. So did Angola’s Sonangol in 2016, when it last published data.