NNPC Limited – Old Wine in New Bottle?

INTRODUCTION

It is no longer news in the Nigerian jurisdiction that the Petroleum Industry Act (PIA) has introduced significant changes to the Nigerian oil and gas landscape with far reaching implications on hydrocarbon business in Nigeria. In mid-July 2022, the Nigerian Government publicly unveiled the NNPC Limited as a private limited liability company further to the provisions of Section 53(1) of the PIA which mandates the Minister of Petroleum Resources (who also happens to be the current President of the Federal Republic of Nigeria, President Muhammadu Buhari) to incorporate NNPC Limited within six months from the commencement of the PIA.

With the change of the name of Nigeria’s National Oil Company from the Nigerian National Petroleum Corporation to Nigerian National Petroleum Company Limited, some proponents have taken the skeptic view that despite the name change and the incorporation of the Nigerian National Petroleum Company Limited (NNPC Limited), status quo remains with regards to the “old order” of how the National Oil Company will be administered due to the fact that the shareholders of the NNPC Limited are the Ministry of Petroleum Incorporated and the Ministry of Finance Incorporated which are government owned entities. While these concerns are not unfounded, it is necessary to mention that the establishment of NNPC Limited may be the first step in ensuring a viable National Oil Company. The succeeding paragraphs highlight some of our thoughts on some of the provisions of the PIA as it relates to the NNPC Limited.

NNPC LIMITED AS A COMMERCIALLY VIABLE ENTITY

The PIA mandates NNPC Limited to conduct its affairs on a commercial basis in a profitable and efficient manner without recourse to government funds. The PIA further obligates NNPC Limited to declare dividends to its shareholders with 20% of profits to be retained for the company’s growth. The mandate assumes that apart from the initial capitalisation[1] of the NNPC, no further recourse shall be made to government funds with respect to NNPC Limited’s operations. While the PIA sets the tone with respect to the mandate of the NNPC to be commercially viable, it is necessary to mention that from a company law perspective, where a company is unable to fund its operations, the company can (apart from debt financing from third parties) raise further equity from its existing shareholders. Therefore, the provisions of Section 53(7) appear to foreclose the ability of the NNPC Limited to call on additional equity capital from the Nigerian government. While this is a plausible interpretation of the provisions of Section 53(7) of the PIA, it is necessary to mention that Nigerian company law does not prevent a company from seeking additional capital from its existing shareholders. Therefore, the pertinent question is “Will NNPC Limited be regarded as being in contravention of applicable law in the event of recourse to government funds through request for additional capital?” A hurried response may be “Yes”! on the basis of the provisions of Section 53(7) of the PIA, which provides that: “NNPC Limited and any of its subsidiaries shall conduct their affairs on a commercial basis in a profitable and efficient manner without recourse to government funds…”

A cursory response will be that nothing prevents the NNPC Limited under company law from requesting for additional equity funding from its existing shareholders. This position is further bolstered by the provisions of Section 53(4) of the PIA which provides that “the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated in consultation with the Government, may increase the equity capital of NNPC Limited.”

ANY FRAMEWORK FOR PRIVATIZATION/SALE OF SHARES?

While NNPC Limited is a private limited liability company, its shares are held equally by two government-owned entities. The PIA provides that shares held by the government are not transferable except approved by the Nigerian government and endorsed by the National Economic Council on behalf of the Federation. Furthermore, any proposed sale of government-owned shares in NNPC Limited shall be subject to an open bid process. A useful question to answer will be whether the sale of NNPC Limited’s shares by government will be subject to the provisions of the Public Enterprises (Privatisation and Commercialisation) Act (the “Privatisation Act”)? While NNPC Limited will qualify as a “Public Enterprise” within the context of the Privatisation Act, it is necessary to mention that the Privatisation Act lists the entities that are to be privatized. Bearing in mind that NNPC Limited is a creation of the PIA which is a statute later in time, the Privatisation Act will not apply. That said, it is necessary to mention that Section 1(3) of the Privatisation Act provides that the National Council on Privatisation may from time to time by order published in a gazette, alter, add, delete or amend the list of entities to be Privatised. Therefore, where the Nigerian Government takes a decision to privatise NNPC Limited, such may be done through the framework of the Privatisation Act subject to inclusion of NNPC Limited in the list of entities to be privatized.

TRANSFER OF ASSETS AND LIABILITIES OF NNPC – UNCERTAINTIES FOR CREDITORS?

The PIA obligates the Minister of Petroleum Resources and the Minister of Finance to, within 18 months of commencement of the PIA determine the assets, interests and liabilities of the NNPC to be transferred to NNPC Limited. The PIA further provides that assets and liabilities not transferred to NNPC Limited shall remain with the NNPC until such assets and liabilities are extinguished or transferred to the Nigerian Government. It is necessary to mention that within 6 months following determination by the Minister of Petroleum Resources and the Minister of Finance of the assets and liabilities to be transferred or retained, the Attorney General of the Federation and the above-mentioned Ministers are expected to develop a framework for the payment of liabilities not transferred to NNPC Limited. In the event the determination of assets or liabilities to be transferred to NNPC Limited is not completed within the stipulated time frame (i.e. 18 months from the effective date of the PIA), the assets and liabilities of NNPC shall be deemed to have been transferred to NNPC Limited.

The PIA has preserved the rights and interests of existing creditors of the NNPC by making provisions for the transfer of existing liabilities to NNPC Limited or retention of same with the NNPC wherein such liabilities shall be defrayed by the Nigerian government. These provisions guarantee that the transition of NNPC to NNPC Limited will not jeopardise the interests of existing creditors of NNPC. Furthermore, the PIA envisages scenarios where the Nigerian Government may provide guarantees to creditors with respect to liabilities of the NNPC that are transferred to NNPC Limited.[2] That said, the timing of payment may differ subject to how the Minister of Petroleum Resources and Minister of Finance make determinations with respect to assets to be transferred to NNPC Limited or retained with the NNPC.

A seeming lacuna with respect to the provisions on transfer of assets and liabilities is what happens where the Minister of Petroleum Resources and the Minister of Finance make the necessary determinations of assets and liabilities to be transferred within the time frame stipulated by the PIA but the framework for actual payment of the liabilities not transferred is not completed within the 18 months period stipulated by the PIA? Does this mean the liabilities will be deemed to be transferred to NNPC Limited? The PIA appears unclear in this regard. We say this based on our interpretation of Section 94(2) of the PIA which appears to limit the deemed transfer to failure to make determination of which assets and liabilities are to be transferred and not actual payment of the said liabilities. For ease of reference, we have reproduced the provisions of Section 54(2) as follows: “assets, interests and liabilities of NNPC not transferred to NNPC Limited or its subsidiary under subsection (1), shall remain the assets, interests and liabilities of NNPC until they become extinguished or transferred to the Government and six months following the determination under section 54(1) of this Act, the Minister, the Minister of Finance and the Attorney-General of the Federation shall develop a framework for the payment of the liabilities not transferred to NNPC Limited and if such determination of which assets, interests and liabilities to be transferred has not been concluded within the stipulated period of 18 months, all the assets, interests, liabilities of NNPC is deemed to be transferred to NNPC Limited after 18 months from the effective date.”

Another plausible argument is that the framework for payment of liabilities come under the determination of transfer of assets and liabilities and failure to complete the framework for payment of liabilities within the stipulated time frame under the PIA will make the deemed transfer provisions apply.

A PUSH FOR BETTER GOVERNANCE

The PIA imposes Corporate Governance obligations on the board of directors of NNPC Limited.[3] Furthermore, it states that shareholder(s) holding not less than 10% of the voting interests in NNPC Limited can request for a comprehensive written explanation of any action or decision taken by the Board of NNPC Limited to its shareholders. This right is however limited where NNPC Limited is under a duty of confidentiality to a third party to withhold an explanation. In our view, this restrictive provision of the PIA defeats the purpose of good governance as standard agreements typically have confidentiality clauses which may be an easy basis for the board of directors to avoid the disclosure requirements stipulated under the PIA.

CONCLUSION

While skeptics may believe that the new NNPC Limited is old wine in a new bottle, it is our hope that the provisions of the PIA if strictly complied with, may make the Nigerian National Oil Company a commercially viable venture with a strong governance structure.