Nigerian National Petroleum Corporation Business Information, Profile, and History
Herbert Macaulay Way, Central Business District
The Nigerian National Petroleum Corporation (NNPC) is the driving force behind the economic development of Nigeria, providing fuel and feedstock for the nation's industrial facilities and meeting the energy needs of individual customers and commercial enterprises. NNPC is the major revenue earner for the nation. NNPC's operations span the length and breadth of Nigeria and involve the entire spectrum of the petroleum industry.
History of Nigerian National Petroleum Corporation
The Nigerian National Petroleum Corporation (NNPC) is the holding company that oversees the Nigerian state's interests in the country's oil industry. The company is composed of four main operating units: Refineries and Petrochemicals; Exploration and Production; Finance and Accounts; and Corporate Services. Oil production is the cornerstone of Nigeria's economy--the country ranks as the largest oil producer in Africa. A total of 95 percent of the country's foreign exchange revenue stems from NNPC's operations. Oil operations account for 20 percent of the country's gross domestic product and NNPC is responsible for nearly 65 percent of the government's budgetary revenues. After 16 years of military rule, democratically elected Olusegun Obasanjo took office in 1999. Since that time he has worked to reform the oil and gas industry in the country.
Early History of Oil Industry in Nigeria
Oil was first discovered in Nigeria in 1908, and exploration proceeded during the 1930s in the form of the Shell-BP Petroleum Development Company of Nigeria Ltd. (Shell-BP), under the control of Shell and British Petroleum (BP). Commercial exploitation of the country's reserves, however, did not begin until the late 1950s. The Nigerian government introduced its first regulations governing the taxation of oil industry profits in 1959 whereby profits would be split 50-50 between the government and the oil company in question, and the industry grew during the 1960s as export markets were developed, predominantly in the United Kingdom and Europe. By the mid-1960s, Nigeria began to consider ways in which the resources being exploited by Western oil companies could better be harnessed to the country's development, and formulated its first agreement for taking an equity stake in one of the companies producing there, the Nigerian Agip Oil Company, jointly owned by Agip of Italy and Phillips of the United States. The option to take up an equity stake--in effect the first step toward the creation of the NNPC--was not, however, exercised until April 1971.
By 1971, other factors were pushing the Nigerian government toward taking the stakes in the Western companies that would constitute the basis of the NNPC's holdings. One was the Biafran war of secession, which began in 1967. The support given by one French oil company to Biafra, within whose territory some two-thirds of the country's then-known oil reserves were located, led the federal government to question the contribution of the foreign oil companies to the country's development. So, too, did the companies' unimpressive record in assisting transfer of technology, in social development, and in the employment of indigenous staff. The overriding factor was probably Nigeria's decision to join OPEC in July 1971, obliging the government to take significant stakes in the companies producing in the country.
Formation of Nigerian National Oil Corporation in 1971
This combination of pressures led to the formation of the Nigerian National Oil Corporation (NNOC) on April 1, 1971. The NNOC acquired a 33.33 percent stake in the Nigerian Agip Oil Company and 35 percent in Safrap, the Nigerian arm of the French company Elf. After Nigeria joined OPEC, NNOC acquired 35 percent stakes in Shell-BP, Gulf, and Mobil, on April 1, 1973. Also in 1973 it entered into a production-sharing agreement with Ashland Oil. On April 1, 1974, stakes in Elf, Agip/Phillips, Shell-BP, Gulf, and Mobil were increased to 55 percent and, on May 1, 1975, the NNOC acquired 55 percent of Texaco's operations in Nigeria.
The NNOC had been established under the terms of the government's Decree no. 18 of 1971. Its brief was to "participate in all aspects of petroleum including exploration, production, refining, marketing, transportation, and distribution." More specifically, the corporation was given the task of training indigenous workers; managing oil leases over large areas of the country; encouraging indigenous participation in the development of infrastructure for the industry; managing refineries, only one of which was operational at this time; participating in marketing and ensuring price uniformity across the domestic market; developing a national tanker fleet; constructing pipelines; and investigating allied industries, such as fertilizers.
This was an ambitious set of objectives, several of which were only just beginning to be realized in the 1990s. The problem that the NNOC faced from its inception was that of attempting to manage a highly complex industry without adequate technical and financial resources, problems that were to be dramatically illustrated several times during its subsequent history.
The NNOC had limited powers as a public corporation. It could sue and be sued, hold or purchase assets, and enter into partnerships. It could not borrow funds or dispose of assets without the specific approval of the commissioner of mines and power, and any surplus funds had to be disposed of at the commissioner's discretion, subject to the approval of the ruling Federal Executive Council. Any activities beyond the scope of Decree no. 18 required government approval, and the government was well represented on the NNOC's board, which was chaired by the permanent secretary of the Ministry of Mines and Power. Other board members included representatives from the ministries of Finance and of Economic Development and Planning, the director of Petroleum Resources in the Ministry of Mines and Power, the general manager of NNOC, and three other representatives with special knowledge of the industry. Thus, from the very start, a body that was seen as crucial to the future prosperity of the nation was subject to close government control, a feature of its operation that has remained throughout its history.
The NNOC operated a number of subsidiaries during the 1970s, including those in exploration and production, refining and petrochemicals, distribution and marketing, transportation, and equipment and supplies. Its success was perhaps most marked in the export field. Boosted by the sharp price rises that followed the first oil shock of 1973, Nigeria saw its oil export earnings rise from NGN 219 million in 1970 to NGN 10.6 billion in 1979, thereby achieving an enviable status as the first tropical African country successfully to exploit its oil reserves.
Becoming a Corporation in 1977
The NNOC was reconstituted as the Nigerian National Petroleum Corporation (NNPC) on April 1, 1977, just six years after it had been set up. One reason for the change may have been the operating failures of the 1970s, which became publicly known at the time of the 1980 Crude Oil Sales Tribunal. This investigation revealed that, for instance, from 1975 to 1978 the NNOC and NNPC had failed to collect some 182.95 million barrels of their equity share of oil being produced by Shell, Mobil, and Gulf--with potential revenue estimated to be in excess of $2 billion. This situation had arisen because NNOC was unable to find buyers for its oil at the price it wanted. It had, however, paid the full share of operating costs to the producers during the period of deemed operation. An additional revelation was that, until forced to do so by the Tribunal, NNOC had not produced audited accounts from 1975 onward.
The NNPC felt the brunt of the Oil Sales Tribunal investigations only three years after it was set up. While some of the criticisms related to events that had occurred before the change in name, the NNPC's practices undoubtedly bore more than a passing resemblance to those of its predecessor. Like the NNOC, the NNPC began life essentially as a holding company. Decree no. 33 vested the assets and liabilities of the NNOC in the NNPC, and conferred on the new body responsibility for some functions of the Ministry of Mines and Power. NNPC also had some additional commercial freedom as the ceiling on contracts that it could award rose 50-fold and it was granted limited borrowing powers. Its board structure was similar to the NNOC's, although the federal commissioner for petroleum replaced the permanent secretary of mines and power as chairman. Judging by the inefficiencies in its record-keeping and its error in overstocking in 1978 in anticipation of oil price rises, greater freedom did not bring with it a greater commercial astuteness.
Also established by Decree no. 33 as part of the NNPC was the Petroleum Inspectorate, which was given responsibility for issuing licenses for various activities, for enforcing the Oil Pipelines Act and the Petroleum Decrees, and for other duties. The chief executive of the division was nevertheless free from control by the NNPC board and reported to the commissioner for petroleum.
In line with the objectives of the government's 1977 Indigenization Decree, the NNPC's holdings in the oil industry operations in Nigeria increased significantly on July 1, 1979, when its stakes in the Nigerian businesses of the following companies were raised to 60 percent: Elf, Agip, Gulf, Mobil, Texaco, and Pan Ocean. NNPC's stake in the Shell venture was raised to 80 percent on August 1, 1979, after BP lost its 20 percent stake following disagreements with the Nigerian government over South Africa. Later that same year a number of accusations originating in the magazine Punch, alleging various forms of misappropriation, broke over the corporation, prompting the newly installed civilian President Alhaji Shagari to broadcast to the nation and establish the tribunal that uncovered the lax management practices referred to previously.
Problems Leading to Reforms in the 1980s
A further setback to the reputation of the Nigerian oil industry occurred at the start of 1980 with the Funiwa-5 incident. A 14-day blowout at an offshore well 60 percent owned by NNPC, but operated by Texaco, spilled 146,000 barrels and may have been responsible for the deaths of 180 people and illnesses among a further 3,000.
The outcome of the Oil Sales Tribunal was a series of reforms designed to decentralize the NNPC. Nine subsidiaries were established in 1981: the Nigerian Petroleum Exploration and Exploitation Company; the Nigerian Petroleum Refining Company, Kaduna Ltd.; the Nigerian Petroleum Refining, Company, Warri Ltd.; the Nigerian Petroleum Refining Company, Port Harcourt Ltd.; the Nigerian Petroleum Products Pipelines and Depots Company Ltd.; the Nigerian Petro Chemicals Company; the Nigerian Gas Company Ltd.; the Nigerian Petroleum Marine Transportation Company Ltd.; and the Petroleum Research and Engineering Company Ltd. The decentralization of Nigeria's three refineries, two of which had been built in the late 1970s and early 1980s, was intended to promote competition and the establishment of this number of subsidiaries was designed to instill a more commercial approach in a more diversified corporation. The goal of diversification was, however, one that the NNPC was slow to realize.
The 1980s did not see an end to close government control and to controversy over the performance of the NNPC. The oil sector took a beating in the 1982 oil glut, when the oil companies' offensive against OPEC targeted Nigeria as the weakest of the producing nations. There were self-inflicted problems as well. Once again, management of the corporation was tainted by scandal, this time involving the former Petroleum Resources Minister Tam David-West, who was jailed at the end of 1990 for his part in another dispute over foreign oil companies. David-West's bad relations with the government were partly responsible for the imposition of direct control of the NNPC by the Ministry of Petroleum Resources between 1986 and 1989. Relations with the foreign oil companies were marked by the 1986 Memorandum of Understanding, which set a profit limit of $2 per barrel.
The end of the 1980s saw a number of initiatives that had the potential to see the NNPC established on a more commercially oriented footing. In March 1988, another new structure was unveiled for the corporation, described by Nigerian President General Ibrahim Babangida as establishing the NNPC as a "financially autonomous" and "commercially integrated" oil company. Petroleum Resources Minister Rilwanu Lukman defined three areas of responsibility for the corporation--corporate services, operations, and petroleum investment management services--and 11 subsidiary companies: the Nigerian Petroleum Development Company, the Warri Refining and Petrochemicals Company, the Kaduna Refining and Petrochemicals Company, the Pipeline and Products Marketing Company, the Hydrocarbon Services of Nigeria Company, the Engineering Company of Nigeria, the Nigerian Gas Development Company, the LNG Company, the Port Harcourt Refining Company, the Eleme Petrochemicals Company, and the Integrated Data Services Company. At the same time, a new sales policy was introduced, eliminating middlemen and setting out three types of purchasers to which the NNPC could sell its products: joint venture producing companies, foreign refineries in which Nigeria has a holding, and indigenous and foreign firms exploring in Nigeria. Aret Adams was appointed as the group managing director and, in February 1989, a new board was constituted, headed by Lukman.
The determination to eradicate subsidies to NNPC and to have it function commercially, rather than as a revenue-raising and development corporation, was apparent in the decision in June 1989 to sell 20 percent of its holding in the Shell joint venture. NNPC reduced its holding to 60 percent, selling 10 percent to Shell and 5 percent apiece to Elf and Agip, in a deal that may have netted the corporation as much as $2 billion. The money raised from the equity sale was to underpin the expansion in reserves (to 20 billion barrels a day) and in output (to 2.5 million barrels a day), to which Nigeria was committed up to 1995. These targets, however, were likely to require the divestment of further holdings to raise cash, and such divestments could not be assured in the uncertain political future faced by Nigeria. As a 60 percent stakeholder, NNPC had persistent problems in raising its share of any development costs.
One positive development was the increasing involvement of the corporation in the development of Nigeria's gas resources. Having been granted a monopoly over gas transmission, the NNPC was well placed to participate in the gas industry. Its 60 percent holding in the LNG Company (Shell owned 20 percent, and Agip and Elf each owned 10 percent) was the springboard for an ambitious $2.5 billion liquefaction project. In addition, Nigeria's fourth refinery, at Eleme, was commissioned early in 1989 and provided the basis for the expansion of a petrochemicals and plastics industry during the 1990s. In its core activity of oil production, NNPC's partner Mobil was developing the large 500-million-barrel Oso oil field, and Nigeria stood to benefit from the environmental attractions of its low-sulfur oil product.
The period since 1988 was not entirely positive for the NNPC. The plan to market oil products through co-owned refineries overseas did not fully mature. Only one joint venture deal was signed in 1989, with Farmland Industries of the United States, enabling NNPC to make use of a 60,000-barrels-per-day refinery at Coffeyville in Kansas. This was a landlocked site, however, that was not entirely suitable for operations. Of greater concern was the strong possibility that the state did not relinquish its desire to exercise control over NNPC's operations. Managing director Adams and his counterpart at the LNG Company were suspended late in 1989, apparently for refusing to accept government appointees to the LNG Company. In April 1990, Thomas John took over as managing director.
Thus the NNPC entered the last decade of the century as a young company still trying to carve out an identity for itself, independent of political control, and still learning how to master the technological and commercial complexities of the oil industry. It did have a more developed diversification strategy than ever before in its history, however, and, for the moment, a government that was willing to dilute its holdings in the industry as the price for supporting the corporation's growth.
The Late 1990s and Beyond
Throughout most of the 1990s, Nigeria and NNPC dealt with civil unrest, political instability, border disputes, corruption at the highest levels, and poor governance. Even so, international oil companies looked to Nigeria as a lucrative investment opportunity related to upstream oil exploration. Especially attractive was the sedimentary basin of the Niger Delta, as well as the Anambra Basin, the Benue Trough, the Chad Basin, and the Benin Basin.
Although NNPC management had been promising changes for years, company efforts had been slow at best and many Nigerians looked at NNPC with disdain. New reforms, however, were on the horizon for the new millennium. After 16 years of military rule, Nigeria held democratic elections in 1999. Olusegun Obasanjo was elected president and immediately set out to reorganize the country's oil and gas sector. As part of his restructuring efforts, President Obasanjo placed a strong emphasis on natural gas development. At the time, most of the country's natural gas was being flared, a very wasteful and environmentally unfriendly process. As such, a mandate was set forth that called for the termination of gas flare, a focus on environmental cleanup, and the realization of economic gains from natural gas in both the import and export market so that gas revenues equaled oil revenues by 2010. Nigeria had secured a position as a significant exporter of natural gas through the Nigeria liquefied natural gas (LNG) Plant in Bonny by 2005. In December 2004, NNPC management set plans in motion to launch the West African Gas Pipeline, which would supply gas from Nigeria to West Africa including Ghana, Benin, and Togo.
In February 2005, the government set plans in motion to host a three-day public hearing in the capital city of Abuja. The hearing was designed to create changes in the oil industry that would bring about higher revenues and new jobs. In March of that year, the Hart Group was appointed to conduct a five-year audit of Nigeria's oil and gas operations. Another reform set forth was the hotly contested privatization of certain segments of the oil and gas industry. In 2003, the government began to deregulate fuel prices and announced that its four major oil refineries would be privatized. NNPC was slow to respond to this mandate, unsure of how privatization would affect its business.
Led by managing director Funsho Kupolokun, NNPC launched a series of job cuts in the early years of the new millennium. Massive layoffs began in 2003 and approximately 2,355 employees were let go in 2005. The company also made several key partnerships at this time. Working with Chevron Texaco and British Gas, NNPC developed a LNG project in the border town of Olokola. It was expected that the project would gross $57.4 billion in its lifetime. In February 2005, NNPC signed a $1 billion contract with Chevron Texaco Nigeria to construct the Floating, Production, Storage, and Offloading Vessel (FPSO) for the Agbami deep offshore oil field. The FPSO was expected to process 250,000 barrels per day of crude oil and 450 million standard cubic feet of gas per day.
Although NNPC looked to be on a positive path for the future, it continued to face issues related to civil unrest and corruption. Kupolokun faced a tough road ahead, but there were no doubts that NNPC would remain a fixture in Nigeria's oil and gas sector for years to come.
Principal Subsidiaries: Duke Oil Ltd.; Eleme Petrochemicals Company Ltd. (EPCL); Integrated Data Services Ltd. (IDSL); Kaduna Refining and Petrochemicals Company Ltd. (KRPC); National Engineering and Technical Company (NETCO); Nigerian Gas Company (NGC); Nigerian Petroleum Development Company Ltd. (NPDC); Pipelines and Products Marketing Company Ltd. (PPMC); Port Harcourt Refining and Petrochemicals Company Ltd. (PHRC); Warri Refining and Petrochemicals Company Ltd. (WRPC).
Principal Competitors: National Iranian Oil Company; Petróleos de Venezuela S.A.; Saudi Arabian Oil Company.
- Key Dates:
- 1908: Oil is discovered in Nigeria.
- 1971: Nigeria decides to join OPEC; Nigerian National Oil Corp. (NNOC) is created.
- 1977: NNOC becomes Nigerian National Petroleum Corp. (NNPC).
- 1981: NNPC decentralizes into nine subsidiaries.
- 1999: Nigeria adopts a new constitution; democratically elected president Olusegun Obasanjo is inaugurated.
- 2003: The government begins to deregulate fuel prices and announces that its four major oil refineries will eventually be privatized.
- 2005: The company signs a $1 billion contract with Chevron Texaco Nigeria to construct the Floating, Production, Storage, and Offloading Vessel (FPSO) for the Agbami deep offshore oil field.
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