Shakeup in Nigerian Oil Sector Not a Simple Matter

LONDON Sep 4, 2007 (Dow Jones Newswires)

Nigerian President Umaru Yar'Adua's plans to break up the state-owned Nigerian National Petroleum Corp. and restructure the state energy sector has prompted largely positive reactions, but it's also left analysts with more questions than answers.

"This is a serious proposal, to allow it (NNPC) to become a serious player along the Saudi Arabia Oil Company model, but my only critique is that there is no policy platform with details and analysis," said Sebastian Spio-Garbrah, Africa and Middle East analyst at Eurasia Group.

Yar'Adua took office in April following a general election condemned by both domestic and international observers. He has pledged to overhaul the oil industry in Nigeria, Africa's largest crude producer, and his latest move to reform bureaucracy and improve the stability of the energy sector is viewed as a step in the right direction.

"The most significant aspect of the forthcoming changes seems to be that President Yar'Adua has decided to listen to his advisers and the petroleum experts," said Global Insight analyst Thomas Pearmain.

Yar'Adua's predecessor, Olusegun Obasanjo, rejected recommendations from the Gas Reform Committee and the National Council on Privatization to restructure the industry.

"Obasanjo said all the right things eight years ago but (there's) not much to show for it," said a London-based trader of West African crude. "It's early days, but, yes, Yar'Adua appears to mean business and wants to be seen as his own man."

"Yar'Adua has staked his presidency on turning around the country's energy sector by taking on responsibility for the Energy Ministry," Pearmain said.

Global Insight's analysts expect Yar'Adua to push for the development and export of the country's gas supplies and to call a state of emergency in the power sector, he added.

The restructuring of the NNPC would further decentralize the industry, which is such a crucial part of the economy and hopefully will make the sector more efficient and stamp out corruption, Spio-Garbrah of Eurasia Group said. Global Insight's latest figures show Nigeria's energy sector provides over 85% of foreign export earnings and about 60% of government revenues.

A reorganized and restructured NNPC would be a much better joint-venture partner for the major oil companies working in Nigeria, but in the longer term there may be disadvantages for them.

"If the new National Oil Company of Nigeria becomes a strong player, which the NNPC never has been, the oil majors may face stiff competition," he said.

"If the new NOC begins to want to bid on oil blocks and other exploration and production projects against a Royal Dutch Shell PLC (RDSB.LN) or an Exxon Mobil Corp. (XOM), clearly they are going to win out," Eurasia Group's Spio-Garbrah said.

"The worse-case scenario could be like what happened with Saudi Arabia Oil Company, where in the long run the government says we want to buy you out, or reduce your stake in the joint ventures," he added.

The government plans to replace the NNPC with five independent entities to separately handle exploration, production, distribution, domestic fuel pricing and the awarding of oil licenses.

The NNPC is the biggest company controlled wholly or partly by the Nigerian government, owning 57% of joint-venture business in upstream operations.

In a bid to emphasize the seriousness of the government's intentions, the president, vice president and other senior ministers will sit on a newly formed National Energy Council, set up to implement the new policy within six months.

Under the new structure, the NNPC's core roles of exploration and production will fall to the NOC, which is to be empowered to conduct itself like any other oil and gas company, Minister of State for Petroleum Odein Ajumogobia said Wednesday.

The old Department of Petroleum Resources - formerly a part of the Energy Ministry - which in the past oversaw the often controversial awarding of oil licenses and blocks, will now be an independent entity known as the Petroleum Inspectorate Commission.

The Energy Ministry itself will now become the National Petroleum Directorate, which alongside the NOC will be overseen by the newly created National Oil and Gas Assets Holding and Management Committee.

On the domestic front, the responsibilities of the Petroleum Products Prices Regulatory Agency, which currently fixes domestic fuel prices, will fall to the Petroleum Products Distribution Agency.

However, the actual implementation of these plans may not be as straightforward as stated, Spio-Garbrah said.

"On paper they can separate the companies, but whether they will become financially viable as stand-alone entities at the moment is doubtful," he said.

What's more, with all the other problems in the country at the moment, having the president, vice president and other senior ministers overseeing the new framework via the National Energy Council may not be practical.

"The finer details of this plan means that you actually need people who can focus their attention on this for the next few months, and I don't think that they will have the time to dedicate to it while at the same time dealing with the economy and the Niger Delta situation," Spio-Garbrah said, referring to unrest that has hit all the oil companies operating in the area.

"I think that in six months the legal details can be rearranged, but it will probably take a year or two at the very best to really get these new entities functional, with budgets and asset inventories, and an assessment of current NNPC liabilities."

Also, the Niger Delta States have seen increased oil revenues, but unrest there has slowed the development of the infrastructure and caused frequent refinery outages.

"It's a laudable plan. I think it will shake up the energy sector there eventually, but I think the details are too hazy to know how successful this will be," Spio-Garbrah said.

Copyright (c) 2007 Dow Jones & Company, Inc.

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