Emeka Eboagwu
A ten-year review of The Nigerian National Petroleum Corporation has revealed an unprofitable national oil company evidenced by reports from BudGIT and NEITI.
These records prove that NNPC’s activities have been over time deluged with so many operational inefficiencies and to a large extent, social and regulatory bottlenecks.
It is imperative to state that at various times, different leadership of the organisation have made efforts in reducing these losses; however, their approaches haven’t effectively curbed this menace.
Think of an organisation seen in the negative brackets of its finances and operations, its business will not be sustainable and in no time will be defunct. One can cite that as the perfect case of the NNPC.
The report also maintains that the operational loss of the NNPC in 2018 culminated in over $1b loss in one subsidiary. While in other subsidiaries there are cases of price and cost escalations of projects and leading to an increase in the production cost of crude.
It’s important to ask: “Is anyone constantly reviewing these escalations?”
Taking a comparative view of other National Oil Companies (NOC) using a balanced scorecard approach, which is an integrated approach for measuring a company’s performance using a combination of different performance indices to show the health status of a company, NNPC would be adjudged as one of the lowest-performing NOC’s amongst its peers. Also, when compared with new national entrants like Ghana, Kenya and Ivory Coast. NNPC should be a point of reference for other companies, owing to its balance sheet.
The financial health of any organization largely depends on the differential between its revenue base and the spend / operational cost. While the NNPC revenue base has been sinusoidal over time, it is alarming to state that its operational cost has been on the upper trend of the line.
These operational costs are reasons NNPC has been in the negative region of its finances. Whilst we may associate some of these operational costs with social and regulatory bottlenecks (subsidy, deregulation and managing moribund refineries), there should be corporate intent to have a strategic cost management approach to reducing these cost.
A big poser is this: “Why is the cost per barrel for Nigeria’s crude one of the highest globally?”
It’s important to state that the bulk of these losses are from inefficiencies in the downstream sector coupled with activities related to Joint Ventures operations, Production Sharing Contracts, EPCI‘s, Gas and Power projects.
Contract management processes are key to the entire financial health status of the NNPC.
The spend structure and spend management approach has been seen as the critical path to ensuring that the operational costs are well managed.
One of the critical issues raised in recent times is how contracts are managed within the NNPC. What sequence underlies the award process and project execution? Are there reasons to believe that there is a deliberate attempt to undermine Nigeria interest in large-scale contract process and awards?
How is NNPC structured to manage its spend of over $30B annually? What lesson have we learnt with contract issues with the P&ID gas sales agreements? Are there reasons to review power agreements being signed with project partners, pipeline laying construction agreements, crude swap agreements, offshore FPSO and Platforms Operating and Maintenance Contracts (POMC), manpower agreements, EPCI contracts?
And a lot more all shrouded in processes not aligning with the National Procurement Act (BPP) which itself doesn’t align with best global practice in the oil and gas industry. The BPP Act itself hasn’t taken into context the nature of the oil & gas business in its execution and there is a misalignment with execution within the NNPC thus leading to a case where activities are carried out without recourse to how to the BPP Act works.
While a lot of Nigerians do not understand how these contracts which translate into billions of dollars are awarded, it’s crucial that those who have been entrusted with the responsibility to manage the commonwealth of the people must be accountable and show good examples of financial discipline.
One of the pivotal components of optimizing any institution is to ensure that the institution streamlines its operational cost for profitability. There are several ways to make this happen. However, for the NNPC a critical pathway to achieving this is through the application of an effective supply chain management of its processes.
The supply chain of an organization is the unit responsible for the end to end process of ensuring that goods and services are delivered at the optimal price, in good quality and right on time.
For NNPC, the flowchart of this process is some worth a myriad of complexity.
Taking the oil and gas value chain into perspective, NNPC supply chain is one of the most complex operations you can think of, as the upstream, midstream and downstream operations have its peculiar supply chain process.
Decentralized supply chain management (DCM) styles have their own unique challenges. It doesn’t allow the units or subsidiaries to see the big picture of the organization, leading to over or under-spending, non-coordination of SCM activities such as inventory management and control. It also doesn’t help with having the right mix of procurement personnel, as they are all straight-jacketed in their approach to the buying process.
Also, it is biased in its contracting process, as it vests the local managers with too many powers and often skews the procurement process for their personal gains. For example, one of the main revenue-generating subsidiaries of the NNPC has been nicknamed a family Contract Centre where contract portfolios are created and awarded to a few Nigerians. We must applaud the work of the new GMD of the NNPC, who restructured the organization to ensure some level of transparency in the contract creation and award process.
What kind of SCM structure best fit the NNPC as an organization? The choice of a structure largely depends on the overall cooperative aim of the group and its alignment with its procurement strategy.
Following Kraljic principle of categorizing different spend structure, I recommend a hybrid structure, combining both centralized and decentralized patterns.
It allows for collaborative work between stakeholders subsidiaries, finance, legal teams and risk management team to ensure that value for money is received for all procurement process.
Today, in NNPC especially with NAPIMS and NPDC whose activities, are strategic to NNPC balance sheet, a review of the spend structure using the strategy above would be of great benefit to the organization.
For a poser, does the NNPC know the five years spend trend for the Christmas trees, sub-sea wellheads, manifolds, compressors, structural steel and all critical spares in the industry? Is there a comparative review of drilling cost for both onshore and offshore activities? Are we getting value for money for all this cost? Are there options to review low-cost country initiatives for critical spends?
To bring it home, NNPC SCM organization should be reorganized to encourage category management of it spends.
Category management is the creation and execution of a strategy that guides the application of different procurement tactics to generate value in a spend area. In category management products or services that have similar characteristics and are bought from similar supply markets are grouped together and treated as a discrete group or category.
These categories are then more manageable from a sourcing perspective because the items in a category require similar supplier market intelligence, similar sourcing strategies and similar supplier relationship management programmes. They should structure this extensive review process to challenge what they have done before, sought and implement breakthrough opportunities that will generate significant value for NNPC.
- Eboagwu is an energy economist and a supply chain consultant based in Lagos.
