NNPC’s N3.3 trillion profit mask deepening crisis in Nigeria’s economy

The Nigerian National Petroleum Company Limited (NNPCL) recently released its 2023 Audited Financial Statement (AFS), reporting a net profit of N3.3 trillion for the fiscal year ending December 2023. This marks a significant increase of N700 billion (28%) compared to the N2.548 trillion net profit in 2022. However, while these numbers suggest progress, a closer examination reveals underlying challenges that need addressing.

Overview of NNPC’s financial performance

NNPC’s net profit has seen significant growth over recent years, rising from N287 billion in 2020 to N3.3 trillion in 2023. This surge is partly due to the Petroleum Industry Act (PIA) of 2021, which provided the company with a more commercial and autonomous framework. Despite this, the company’s profitability is not as robust as it seems.

NNPC’s total revenue was N23.9 trillion, with a gross profit of N7 trillion and a net operating profit of N4.3 trillion. The profit before tax stood at N5.9 trillion, reflecting solid operational performance. However, with a net profit margin of 14% and an operating profit margin of 18%, it is clear that while NNPCL is generating significant revenue, high operational costs and substantial liabilities are eating into its profitability.

Asset growth and liabilities

NNPC’s asset base expanded dramatically from N8 trillion in 2019 to N246 trillion in 2023, largely due to the transfer of Joint Venture (JV) assets and other investments. However, this growth in assets is paralleled by a corresponding increase in liabilities, raising concerns about the company’s financial leverage and long-term sustainability. The financial statement reveals that a significant portion of NNPC’s assets are receivables, which may not be liquid, posing risks to its ability to meet short-term obligations. The current ratio of 1.1% indicates that NNPCL has just enough current assets to cover its current liabilities, underscoring the need for effective cash flow management.

Debt and financing arrangements

NNPC’s financial structure is complex, with substantial debts and pledges. The company has pledged 67,000 barrels per day (bpd) for a $1 billion debt related to the rehabilitation of the Port Harcourt refinery under “Project Yield”. Other significant pledges include 21,000 bpd for a $950 million NEPL loan and 90,000 bpd for a $3.3 billion debt under “Project Gazelle”. These arrangements reflect NNPC’s heavy investment in infrastructure, but they also highlight its high leverage, which could limit its financial flexibility in the future.

Dividend and shareholder returns

A key feature of the 2023 AFS is the declaration of a final dividend of N2.1 trillion, with interim dividends amounting to N536 billion. This 80% payout ratio reflects NNPC’s commitment to returning value to shareholders, consistent with the PIA 2021 provisions. However, the high dividend payout also leaves less room for re-investment in operations or debt reduction. Furthermore, the dividend is being used to subsidize fuel importation, a move that suggests deeper systemic issues within NNPC. This decision deprives Nigerians of the potential benefits of the dividend, which could have been invested in critical sectors like infrastructure, education, or healthcare.

Systemic failures and economic implications

Despite the positive financial figures, NNPC has failed in several key areas. The redirection of dividends towards subsidizing fuel importation underscores a fundamental failure to generate sufficient income for the Nigerian government and its citizens. NNPC’s inability to refine petroleum products domestically, relying instead on imports, highlights a critical operational deficiency. This failure exacerbates Nigeria’s foreign exchange (Forex) crisis, as NNPC contributes significantly to the depletion of the country’s limited FX reserves by spending on fuel imports.

The impact of NNPC’s inefficiency extends beyond the oil sector, contributing directly to the current economic hardship in Nigeria. The high cost of petrol, driven by the need to import rather than refine locally, has led to a spike in prices for goods and services, worsening economic conditions. NNPC’s failure to manage its refineries effectively has devastating effects on the broader economy, including the loss of potential jobs in the oil sector and the diminished value derived from Nigeria’s crude oil.

Crude oil sales in Naira: Strategic shift with challenges

NNPC announced that it would begin selling crude oil to the Dangote Refinery in Naira from October 1, 2024, marking a significant policy shift aimed at enhancing local currency utilization and reducing dependence on foreign exchange. While this move could stabilize the Naira and ease forex pressures, it also presents challenges. Pricing crude oil in Naira could complicate revenue management, given the volatility of the Naira exchange rate and fluctuations in the global oil market.

Allegations of subsidy payments and financial transparency

The 2023 NNPC AFS release has sparked controversy. Former Vice President Atiku Abubakar criticized the government’s handling of oil subsidies and accusing it of opaque governance. While NNPC’s CFO, Umar Ajiya, denies any subsidy payments over the past eight to nine years, the complexities surrounding petrol importation and pricing suggest that the issue is far from resolved. The financial statement indicates that NNPC has been managing shortfalls between the landing cost of imported petrol and the government-mandated pump price, which some interpret as an indirect subsidy. This ongoing debate over subsidy payments and the high costs of petrol importation continue to strain NNPC’s finances.

Conclusion

NNPC’s 2023 Audited Financial Statement highlights significant achievements in profitability and asset growth, reflecting the company’s transformation under the PIA framework. However, beneath these figures lie systemic failures with far-reaching implications for the Nigerian economy. NNPC’s inability to manage its refineries, its contribution to the Forex crisis, and its role in the current economic hardship point to a management crisis that demands urgent attention.

As NNPC navigates these challenges, its ability to implement strategic changes and improve operational efficiency will be crucial for sustaining its financial performance and contributing to the broader national economy.