Nigeria's Petroleum Corruption Cleanup

 /  Oct. 1, 2015, 6:33 p.m.


During his twenty months as a military ruler from 1983 to 1985, Nigeria’s Muhammadu Buhari jailed about five hundred politicians, officials, and businessmen as part of a sweeping campaign against corruption and graft. While the campaign gained him a reputation for honesty, rare among Nigerian politicians, it also sparked criticism on grounds of heavy-handedness and oppression. Now Nigeria’s president, Mr. Buhari, who was democratically elected this March, remains resolved to snuff out the corruption that persisted in the administration of his predecessor, Goodluck Jonathan.

While President Buhari faces challenges and opportunities for reform on many fronts, his most visible anti-corruption efforts have targeted the Nigerian National Petroleum Corporation (NNPC), the state’s oil company. A PricewaterhouseCoopers audit that began last year found that the NNPC had been siphoning off nearly half of the proceeds from crude oil sales before they reached the government treasury. Such is the paradox of a country that earns 90 percent of its export earnings from oil, yet consistently fails to generate enough electrical power for its people.

Buhari’s mandate in the NNPC, then, is a dual one. First, he must purge the organization of corrupting forces, including both shady contracts that siphon off revenue and the individuals responsible for such practices. Second, he must make the corporation profitable. As a key source of government revenue, the NNPC’s profitability is critical to growth in the Nigerian economy. With global oil prices down over 50 percent in the past year alone, that profitability must come from internal efficiency.

On this front, the NNPC has significant room for improvement—and three key overhauls that began this summer appear to have the corporation on track for future viability. First, the Buhari-appointed Group Managing Director (GMD), Emmanuel Ibe Kachikwu, is spearheading a purge of the organization’s top brass. Second, the agency is canceling contracts that allowed insiders to siphon off revenues. Third, the NNPC is undertaking much-needed maintenance and capacity upgrades to its refineries. Together, these developments constitute an important first step in reforming the organization; however, to become a sustainable driver of economic growth, the NNPC must safeguard each link in its integrated supply chain against corruption. The government must also commit to the oversight and audits necessary to keep corruption out.

A few factors suggest that Mr. Kachikwu has begun to make progress in achieving these goals. First, he has already made his presence known at the top of the agency’s bureaucracy. A former head of legal counsel at ExxonMobil and a Harvard-educated lawyer, the NNPC’s new GMD strikes a balance between focus on profit and intolerance of fraud that parallels Mr. Buhari’s own campaign promises. For instance, Mr. Kachikwu has promised that the NNPC will publish its financial statements—a globally-accepted business practice among oil companies, but one which the NNPC has not undertaken since 1999. The basic practice of auditing, while not as glamorous as prosecuting fraudsters, will do a great deal for the corporation’s accountability and will allow it to more easily identify origins of graft.

Second, as a businessman with an eye towards the law, Mr. Kachikwu has approached the corporation by breaking its supply chain down into its constituent parts. For a vertically integrated business, that means scrutinizing the contracts that oil its machine. First up for cancellation are the NNPC’s crude-for-product swap agreements with its refineries at Warri, Port Harcourt, and Kaduna. According to a corporation statement, the agreements were deemed “skewed in favor of the companies such that the value of product delivered is significantly lower than the equivalent crude oil allocated for the programme.”

By entering into egregiously mispriced swap contracts with refiners, the NNPC allowed them to skim off handsome profits at the expense of the corporation’s productivity. By cancelling these contracts and forcing a wider group of carefully-screened oil traders to bid for contracts, the corporation will drive swap rates to more competitive levels. Additionally, regular auditing should hold the NNPC accountable for its choices of counterparties and ensure that contracts are won competitively and in the interest of the corporation as a government-owned business.

It is important to note that crude-for-product swaps are but one link in the NNPC’s vertically integrated supply chain. More must be examined in order to clean out corrupt practices throughout the organization. Fortunately, Mr. Kachikwu appears committed to systematically linking auditing and contract evaluation.

Finally, Mr. Kachikwu has called for increased efficiency in the NNPC’s refineries. In the past decade, the four refineries at Warri, Port Harcourt, and Kaduna have operated at just 25 percent of total capacity. Now, Warri’s refinery operates at 80  percent of capacity, Port Harcourt’s two refineries at 60, and Kaduna’s at 70.

Like refineries worldwide, the NNPC refineries’ capacity has been periodically taken offline at each in order to conduct routine maintenance and repairs. However, unlike other refiners, the NNPC has expensed turnaround maintenance for the past twenty years with precious little to show for it. Capacity has remained offline, and the federal government has continued to subsidize importers to meet local consumption needs to the tune of N1.9 trillion ($9.5 billion) per year. Subsidies, then, constituted a glaring inefficiency in previous administrations, as well as another channel through which money could leak out of the organization before reaching government coffers.

Through his efforts to reform the NNPC, Mr. Kachikwu has become a symbol of President Buhari’s promise to Nigeria: rooting out corruption to lead the country to prosperity. The reforms undertaken this summer are both visible and productive in that they pinpoint specific levels of corruption and aim to eliminate specific practices.

However, Mr. Buhari can only be said to have delivered on his campaign promises when Nigeria’s people begin to reap the benefits of reform. Corruption raises energy prices and stifles economic development, but eliminating it does not immediately reverse these trends and impact the lives of ordinary Nigerians. The proof of Mr. Buhari’s and Mr. Kachikwu’s success will come as increased refinery output and competitive contracts allow revenues to flow to the government. This government, too, must manage recovered remittances responsibly: the administration itself must invest in projects, such as Nigeria’s broken infrastructure, that will allow the country to continue to develop. In his four-year mandate, the president has his work cut out for him. But by immediately taking comprehensive steps to fix the NNPC, he has shown a willingness to target corruption and improve the Nigerian government’s service to its people.

The image featured in this article was taken by Chatham House. The original image can be found here.

Dana Scott


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