Fixing NNPC: Dangote Business Plan on Steroids

The debate over what to do with the four refineries currently under the control of the federal government is hardly just an economic question: hence, in the examination of the various options available to it (our dubious government) going forward, socio-political implications of all options on the table must be weighed. I shall try to present workable solutions as succinctly and chronological as I can. Anyone familiar with the process of writing project plans and implementing them will tell you it is a very painstaking and difficult process- its probability of success depending more on the personnel charged with delivering the goods than the planner. Hence, it is perfectly possible to have a great plan and still fail.

But half of the problem has been whacked when you acknowledge there is a problem to tackle and begin brainstorming on possible solutions. While this article could be termed pedestrian by professional standards, it should be helpful in drawing the boundaries of the subsets of possible solutions to a perennial national problem. Of any global universe of solution available, the one I will highly recommend is copying the strategy of the competitor. Putting it in few words: since Blue Star must have submitted a business plan before they "won" the refinery bid, is it not high time NNPC start learning by copy cat? May be, I am giving the managers of NNPC too much credit.

It must be noted that when Alhaji Dangote makes entry into a market be it Indomie, Sugar, Cement or even Rice, he shakes it and takes it by storm. Hence, if the government is interested in reforming the petroleum industry in Nigeria it must be shaken to its foundation. The first action will be to investigate and dismantle NNPC as we currently know it. Let this not be one of those shenanigan investigations, which are often groping in the dark; predetermined to fool the unaware public. To avoid an unnecessary wild goose chase, only contracts and deals made after 1990 should be opened up to forensic investigation. This will ease the burden on the investigators and allow for in-depth recovery operation.

The good thing is that there is hardly anyone that partook in the pre-1990 looting that is still not doing so today: same personalities such as Lukman, Kupolokun, Obaseki and Daukoru still dominate the NNPC. The fingers of IBB-OBJ-Abacha and their heirs apparent  will definitely be caught in the cookie jar while it will be a delight to watch Offor, Etete, and Danjuma squirming as their nefarious oil deals are opened up for the world to see. Until the saboteurs of Nigeria's oil industry and their friends are prosecuted, I believe firmly that any reform will be naught. Is it not high time NNPC accounts got audited? Public and private enterprises do so as a matter of routine check on corruption, yet no audit of the NNPC has been done in decades! I am very sure that the bribes for which Halliburton and Wilbros are indicted in the US by the Justice Department was given to someone. The collector is somehow still below Ribadu's radar!

Immediately the investigation is concluded and Ribadu gets to do real police work instead of vain PR and grandstanding, the NNPC as a mater of necessity must be broken up into three integrated petroleum giants with differing strengths but shared capabilities in refining, petrochemicals and oil prospecting. This transitional strategic move does away with the monopoly called NNPC by encouraging government enterprises to compete against one another with dire consequences for the laggards and their management board: Chinese treatment is a perfect strategy in the national emergency we find ourselves. Breaking up the NNPC must be accompanied by an immediate divestiture of NNPC joint venture interests in the upstream sector from NNPC to a new Trust manned with professionals charged to ensure the JV partners live up to their contracts as at when required and negotiate new ones (an alternative is to carve out NAPIMS for this purpose from the current NNPC group structure).

The new integrated national oil companies shall be subsidized at the back end. Meaning crude oil (FG share of JV interests currently allocated to NNPC) should be provided at discounted rates for refining and eventual local sale, allowing refineries to recoup cost of operation and profit by giving them assured market access. This eliminates the corruption of front end subsidies that have encouraged fuel importation. The back end subsidy will be in form of selling crude oil at below international prices, within a budgeted price band, via an auction system that matches local demand to local producers who in turn sell at fix profit margin to the public. This trend will continue to favor local refining and increased economic activity which in turn will fuel a petrochemical revolution that add impetus to the much needed industrial growth that the country need. Ultimately, it will reverse the trend of crude export and refined fuel import in favor of valued added export and efficient use of our natural resources. Instead of using our surplus (a symptom of underdevelopment) to fuel other folk's economic growth we would instead use our crude and export the bye products. While in the near term we will sacrifice cheap foreign exchange for low energy costs locally, it will be more than made up for with export of petrochemical resins and manufactured products.

Commodity auctioning within a subsidized price band will result in pseudo deregulation of the retail oil/gas operations (since producers that pay more within the price band will likely have higher prices for refined products and vice versa), while insulating the domestic markets from price shocks of terrorism and international politics that is currently bleeding our economy. It is true that price differential between Nigeria and her less endowed neighbors can encourage smuggling, but this can be curtailed by the use of simple GPS technology combined with inventory management systems by refiners who in turn should be tightly regulated by DPR (who for one should take their regulation mandate serious) to ensure petroleum products destined for local markets do not find their way on to the international market. Dire consequences are prescribed for saboteurs of controlled deregulation and managed privatization. The crime of economic sabotage could be made an equivalent of coup plotting and terrorism!

As I earlier suggested it will suffice to mention that the FG should copy from the Blue Star Consortium model, by bringing in proven world class organizations to straighten out operations of the new companies (which include the refineries) in the interim. This period of transition (five years) should enable the three entities emerge as public traded companies under management in return for about 5% ownership if certain operational benchmarks are met. This proposal should be all or nothing, making the payments to the management organization contingent on consistent execution in those five years. If properly negotiated, this could be a good deal for everyone- including the Chinese!

In view of the fact that even a 100% production rate at current refineries is unlikely to meet future demand; imports within the five years transition should continue to enjoy current subsides pending accelerated construction and start-up of additional capacities of new refineries. JV styled partnership based upon the successful upstream model currently in place with the majors should be pursued to rapidly increase refining capacity with private sector backed partnerships. To this effect, the current administration should start good faith negotiations with Blue Star to build refineries with the cash refunded from the rescinded deal. With additional equity of 750 million dollars from the FG, that is a good chunk of money to put two mega-refineries up and running in three years in a classic joint venture deal that should be a win-win for all; shared risk and capital appreciation.

In every business plan, there must be an exit strategy that allows the owner or financier to cash out. In this case, the FG should sell a fifth (20%) shares of each of the firms in an IPO allowing market forces and the Nigerian people price such shares at premium (hopefully after turn-around) at the end of the five year turn around period. Monies invested by the managing company for the government will be recouped by this method, while the balance is paid into the treasury. It is not unrealistic to expect each of the integrated companies being worth $2b-$5b on the bourse if properly managed.

This should be followed up by an invitation to core investors (doubling as new operators) to pick up 26% equity with the proceeds going into the treasury financing infrastructural development that is badly needed. I look forward to Blue Star or the firms managing the firms in the interim (with guaranteed 5% interest stake) participating at this point, paying fair market value as determined by the stock exchange for these shares (of not just refineries but integrated business). The  49% balance of equity in the  oil concerns are to be held in trust by independent JV management entity (currently NAPIMS) representing the people's continued vested interest in the oil industry alongside the JV partnership with majors in the upstream and downstream sector, replicating the success story in the upstream and LNG sector. This passive ownership approach effectively provides the best middle ground between active government involvement and laissez faire.

There are enormous benefits to Nigeria refining her crude oil. Not only will the multiplier effect of adding value to such product be enormous, but the foreign exchange and employment provided by these activities cannot be discounted. Local refiners and petrochemical companies will also benefit from lower cost of transporting crude (their feed stock) and consequentially higher profit margins when their products get to the international market. This should lead to a steady growth of the downstream sector and increased investment in the upstream sector as well as foreign expansion especially in Africa (Angola, Sao Tome, Congo, Sudan, Equatorial Guinea) led by the new publicly traded oil companies with the benefit of local expertise and international exposure. It is my hope that Dangote and Otedola participate in this process in a fair manner.

In conclusion, it is very important to dispel the myths making the rounds on the status of Nigeria's refinery. This week, the GMD of NNPC confirmed our worst fears, by stating the obvious that in fact the refineries were somewhat functional and that "only a breached major crude pipeline bringing the feedstock crude oil into then was preventing operations". A refinery operating at 75% capacity is definitely not "scrap" and describing it as such is being economical with the truth. There are capable Nigerian engineers at home and abroad that can turn around the fate of these organizations. Fire sale at the behest of the government is not an option. Are you even aware that your country exported $1.2 billion worth of refined petroleum to the US in 2005? Is this not a country yet to meet local demand and importing feverishly? Such is the paradox of our great country! No problem is too big to solve by 140 million brains thinking.



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Re: Fixing NNPC: Dangote Business Plan on Steroids
Anon posted on 08-02-2007, 12:20:55 PM
QUOTE:
Anon,

Ibeto has always has a license like every other companies in cement to manufacture, not just Dangote that you people like to blame for everything, there are about eight of them.
Ibeto was shut down for failing to comply and was cheating on the extra import concession granted to specifically to the company. Even when others did not even get such concessions.

Why should Ibeto be allowed to import at this time when other investors are already producing with 95% home raw materials. Would it not be counter productive and oppressive to allow one company to continue to import while others are going through the harder route of local manufacturing?

Ibeto should not be allowed to import if others are not. Since his license has been restored he should start local manufacturing like every other companies.


This is quite untrue Tonsonyo and you know it. He had license to import and when government policies were changed to encourage local production, his own application was refused or better still ignored. It's been every paper in the world in the past few weeks. You can't change history by merely writing your own version of it you know. The truth is that Ibeto never got approved in the first place, even though he had put in place machinery to begin his own local production. But if you have any proof that Ibeto failed to comply with the local production of cement please lets have it. If you have proof that he was granted license to produce, and failed to do so, please let's have it. And by the way, he is about to re-open his cement manufacturing factory now that his license is on the way to being approved.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Tonsoyo posted on 08-02-2007, 12:28:12 PM
QUOTE:
You are right butt that is why I used the word \"effectively\" the reason being that the pipelines only serve KPRC and PPMC will rather rot than stiffle their sole customer. See how Russia and Europe san Afghanistan was playing the pipeline game? Remember, Chad now has oil and Exxon can easily uppend PPMC if they play too smart with that asset. I forseee a situation where PPMC is clobbered and the asset equally picked up with the refinery- which will be the only smart move by future owners of KPRC- on the cheap as well. All said and done, KPRC is a not a fourth of PHRC capacity, why then is it fetching a fourth of the price? It is in fact the most up to date on TAM- done in 2002, why then is it be sold off the cheapest?



Busanga,

Kaduna refinery is strategic for the country, but investment wise it is NOT. The pipeline that you are talking about is the reason Kaduna refinery is not worth much. The Chanomy Creek Pipeline that supplies Kaduna Refinery had been attacked and shut down by the militants since around Jaunuary or February 2006 and nothing has been refined there since then. Since you are not going to refine water there, it is a great risk buying the refinery.
As a matter of fact Dokubo boasted when he came out of the prison that they can continue to sell all the refineries, he would like to see how they will operate them, he asked if Kaduna has been able to refine in over a year.

The last TAM on Kaduna was actually 2001 when Total still manages the refinery.

We have heard all this stories and suggestions before it never work, the best thing is for government to get rid of those refineries.
I wonder why you guy can sit down in your sitting rooms and determine the worth of the refineries, when the BPE Auditors put the price at negative.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Busanga posted on 08-02-2007, 12:30:49 PM
QUOTE:
Busanga,

Kaduna refinery is strategic for the country, but investment wise it is NOT. The pipeline that you are talking about is the reason Kaduna refinery is not worth much. The Chanomy Creek Pipeline that supplies Kaduna Refinery had been attacked and shut down by the militants since around Jaunuary or February 2006 and nothing has been refined there since then. Since you are not going to refine water there, it is a great risk buying the refinery.
As a matter of fact Dokubo boasted when he came out of the prison that they can continue to sell all the refineries, he would like to see how they will operate them, he asked if Kaduna has been able to refine in over a year.

The last TAM on Kaduna was actually 2001 when Total still manages the refinery.

We have heard all this stories and suggestions before it never work, the best thing is for government to get rid of those refineries.
I wonder why you guy can sit down in your sitting rooms and determine the worth of the refineries, when the BPE Auditors put the price at negative.


Oh get rid o f the refineries? So their sudden change in ownership will suddenly give Dokubo a change of mind? or make them operational? That is a wrong premise my brother. We have heard suggestions, but they hardly have been implemented. Let us take the next step. Me says, take Nero Africanus ideas on the refineries..it is a workable idea that should be given a shot. If you want to deal with the bigger problem of NNPC- go my route amongst many others on the table. Selling out for cheap will only give us emotional satisfaction- it makes no business or socio-political sense. Let us be reasonable.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Tonsoyo posted on 08-02-2007, 12:34:49 PM
QUOTE:
This is quite untrue Tonsonyo and you know it. He had license to import and when government policies were changed to encourage local production, his own application was refused or better still ignored. It's been every paper in the world in the past few weeks. You can't change history by merely writing your own version of it you know. The truth is that Ibeto never got approved in the first place, even though he had put in place machinery to begin his own local production. But if you have any proof that Ibeto failed to comply with the local production of cement please lets have it. If you have proof that he was granted license to produce, and failed to do so, please let's have it. And by the way, he is about to re-open his cement manufacturing factory now that his license is on the way to being approved.



Anon,
It is you that is creating a phantom version of the story. The simple question that you need to ask yourself is why Ibeto license, of about 8 major players in the field got revoked?

They all had a deadline for local manufacturing, local manufacturing was a new policy directive that did not require a new license, they were all already licensed to do cement business.
First of all, Ibeto got special concessions to bring in already ordered cement, but tried to cheat by bringing in more while others had been effectively blocked, that prompted one of them to petition the Presidency, that was the reason his license was taken away Anon.

Find out the truth and stick with it.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Busanga posted on 08-02-2007, 12:37:31 PM
QUOTE:
This is quite untrue Tonsonyo and you know it. He had license to import and when government policies were changed to encourage local production, his own application was refused or better still ignored. It's been every paper in the world in the past few weeks. You can't change history by merely writing your own version of it you know. The truth is that Ibeto never got approved in the first place, even though he had put in place machinery to begin his own local production. But if you have any proof that Ibeto failed to comply with the local production of cement please lets have it. If you have proof that he was granted license to produce, and failed to do so, please let's have it. And by the way, he is about to re-open his cement manufacturing factory now that his license is on the way to being approved.


Anon, am surprised by Tonsonyo stand. Does it make sense for a government that want to encourage employment to simply shut down industrial operations that employ hundreds? It is stupidity in the highest order. You don't cure cancer by injecting yourself with HIV blood. The appropriate action to take even if Ibeto was contravening a deal or trend is to encourage increased local production by say lowering the cost of production thus making local production a lot attractive eg. by providing cheap energy to local producers in compliance. Shutting Ibeto is antithetical to the claims of free market and private sector driven economy and amounts to government intervention in commerce. if Ibeto wants to continue bagging, so be it. If the government make laws and implement policies to discourage importing in a free market, Ibeto will have no choice but to comply and revert to local production instead of importing.-But of course, this is not without consequence cos the same government is too cowardly to harm the biggest importer off many other products who also happens to be the main financier of their political party! Ibeto did not disobey any law..a policy direction by government to privately run corporation is communism at best and speaks against the privatization business pointing to the fact that this is just driven to put govt. monopolies in few chosen private hands
Re: Fixing NNPC: Dangote Business Plan on Steroids
Skanbroy posted on 08-02-2007, 12:43:17 PM
QUOTE:
This is quite untrue Tonsonyo and you know it. He had license to import and when government policies were changed to encourage local production, his own application was refused or better still ignored. It's been every paper in the world in the past few weeks. You can't change history by merely writing your own version of it you know. The truth is that Ibeto never got approved in the first place, even though he had put in place machinery to begin his own local production. But if you have any proof that Ibeto failed to comply with the local production of cement please lets have it. If you have proof that he was granted license to produce, and failed to do so, please let's have it. And by the way, he is about to re-open his cement manufacturing factory now that his license is on the way to being approved.


I hope you catch your own contradictions with what you just wrote up there. Which serious business person "put in place machinery to begin his own local production" without first obtaining approval if one is needed. The truth is that Mr Ibeto and his likes are not ready to start any serious local production, importation is what they do and hope to continue doing unless compelled by strong government policies.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Busanga posted on 08-02-2007, 12:48:34 PM
QUOTE:
I hope you catch your own contradictions with what you just wrote up there. Which serious business person \"put in place machinery to begin his own local production\" without first obtaining approval if one is needed. The truth is that Mr Ibeto and his likes are not ready to start any serious local production, importation is what they do and hope to continue doing unless compelled by strong government policies.


I believe shutting them down is not good policy..in fact it is does not make sense. If they are doing business, employing people and their products harms no one then only carefully aimed policies and/or moral suasion will encourage them to change their business model. The question should be asked- why are they importing rather than producing locally? For one I know govt failings in providing constant electricity is one of them! SO will govt. shut themselves down? I for one will be grateful if they did, cos they are for the most part the problem. Shutting down businesses only appeals to our non-thinking military mentality that discuorages out of the box thinking when shaping government policies in favor of fire brigade approach that fails in the long term
Re: Fixing NNPC: Dangote Business Plan on Steroids
Tonsoyo posted on 08-02-2007, 12:49:32 PM
QUOTE:
Oh get rid o f the refineries? So their sudden change in ownership will suddenly give Dokubo a change of mind? or make them operational? That is a wrong premise my brother. We have heard suggestions, but they hardly have been implemented. Let us take the next step. Me says, take Nero Africanus on the refineries..it is a workable idea that should be given a shot. Let us be reasonable.



I do not think that Dokubo will have a change of mind by change of ownership, this is why I queried the wisdom behind acquiring same by Bluestar.
But the major problem of management will be solved if operated by private investors under government regulations.

Handing over the refineries to managers has been stalled like the sale by labor because they are afraid of losing their jobs.

This is why government cannot afford to play politics with it like Yar'adua is doing now, we only be back to square one. Not just the refineries, Nigeria as a whole is one bad investment.
Re: Fixing NNPC: Dangote Business Plan on Steroids
Tonsoyo posted on 08-02-2007, 12:51:35 PM
QUOTE:
I believe shutting them down is not good policy..in fact it is does not make sense. If they are doing business, employing people and their products harms no one then only carefully aimed policies and/or moral suasion will encourage them to change their business model. The question should be asked- why are they importing rather than producing locally? Shutting down only appeals to our non-thinking military mentality that disocurages out of the box thinking when shaping government policies in favor of fire brigade approach that fails in the long term



I don't get what you are saying here, if they continue to import and bag instead of manufacturing and they are not shut down. what is going to compel them to stop importation which is counter productive?
Re: Fixing NNPC: Dangote Business Plan on Steroids
Busanga posted on 08-02-2007, 12:54:13 PM
QUOTE:
I do not think that Dokubo will have a change of mind by change of ownership, this is why I queried the wisdom behind acquiring same by Bluestar.
But the major problem of management will be solved if operated by private investors under government regulations.

Handing over the refineries to managers has been stalled like the sale by labor because they are afraid of losing their jobs.

This is why government cannot afford to play politics with it like Yar'adua is doing now, we only be back to square one. Not just the refineries, Nigeria as a whole is one bad investment.


For one, you sound like someone who don't even believe in your country..so where I for start? Good things can and will happen to Nigeria. Only if we believe and work hard..thinking outside the box..not proving the white men right and messing things up and then selling to our colonial masters. Outsource the refinery management to the private sector and retain ownership is awefully smart way to proceed.
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