Lessons for Nigeria from Saudi Aramco

The Chinese National Offshore Oil Company (CNOOC) offered $50 billion (Fifty Billion USD) in 2009 to the Federal Government of Nigeria (FGN) for the acquisition of six billion barrels of proven crude oil reserves in Nigeria’s onshore and deep offshore portfolios.

Nigeria rejected that offer; $50 billion for 6 billion barrels translated to about $8.33 a barrel as oil in 2009 (Crude Oil price then was average $60 in 2009, according to Statista). Should the Nigerian Government have taken the offer?

In hindsight, in my opinion, yes. Why? Because it was a chance to get cash “today” and invest in projects that diversify future government revenues.

With $50b cash in the bank, the FGN could have created new streams of income to compliment oil and gas revenues and reduce the dependence on fossil-fueled earnings. Case in point, one of China’s biggest foreign infrastructure deal to date was issued in Nigeria — the 1,402 km, $12 billion coastal railway from Lagos to Calabar, projected to be a 120km/h high-speed train passed through 10 states with 22 stops, creating 200,000 jobs just to build it. Government will reap massively from VAT on ticket sales, advertisements, etc.

With the balance of the $38 billion, Nigeria could have financed the construction of the Mambilla and Zunguru Dams, completed the East to West Road, a 10-lane Lagos to Maiduguri Express road, and a Calabar to Sokoto road. Nigeria would still have a balance to build five new petrol refineries, a new mega port in Calabar, and light rail system in Lagos, Rivers and Abuja States plus solar irrigation plants, and solar-powered silos across the North. We could have still had funds for rural roads and agricultural zero-digit loan plus reimbursements for schools to teach IT. These investments have the cumulative effect of increasing productivity, boosting commerce, thus boosting future government fiscal revenues (a lot, I know).

If Nigeria had taken a cash payment of $50 billion in 2009 and reinvested in Nigeria, the country would not feel the need to borrow $30 billion with interest cost in 2019.

The bigger question is really about the NNPC. Why is the NNPC not able to generate pure net revenues for the FGN, even with subsidy payments? With her legacy assets and monopoly in many value chain operations including imports, why is the NNPC beset with ageing and ineffective assets?

So again, with the benefit of hindsight, of what use is that Six billion barrels today? When opportunities come, we take them after due consideration of options.

The Saudi Aramco (the Saudi NNPC) is, in my mind, the best example of how a state-owned energy company should be run. Saudi Aramco thinks ahead, plans… we should just tell the NNPC to copy everything that Saudi Aramco does. Case in point, Saudi Aramco bought the sprawling Port Arthur refinery in Texas. This refinery, the largest in North America, can process 600,000 bpd. Saudi Aramco also acquired 24 distribution terminals and the exclusive right to sell Shell-branded gasoline and diesel in Georgia, North Carolina, South Carolina, Virginia, Maryland, the eastern half of Texas and the majority of Florida. Huge!

So, as the US reduced imports of Nigerian oil, Saudi oil exports to the US were stable…why? Well, Saudi Aramco drills oil, transports to America, refines in its own refinery and has the exclusive right to sell in 7 states to American consumers. Saudi Aramco is employing the same strategy in Asia, buying refineries in Korea, Japan, etc. NNPC made no such strategic investments in any large market.

When Iran was sanctioned from selling crude oil, the NNPC had an opportunity to lock in the Asian markets. This is difficult to do without supertankers that can hold crude near major Asian refineries, especially near India.

However, Saudi Arabia plans to sell equity of about 1.5% or 3 billion shares of Saudi Aramco valued at $1.7 trillion (with a T). This is the real game-changer. This IPO gives the Kingdom about $25 billion that it would transfer to its Sovereign Wealth Fund, which would then start to buy up wonderful companies overseas. It is diversifying its economic base, reducing dependence on oil by investing in Tesla and Uber, for example, and infrastructure deals in the US. 

Why can’t NNPC copy Saudi Aramco?

The crude oil leases in Nigeria are owned 60% by NNPC and 40% by the oil majors, e.g. ExxonMobil. Why can’t we still offer 50% of our 60% stake in the Joint Ventures to investors? If the Nigerian federation can get even $10 billion, that can still be earmarked to the Nigerian Sovereign Wealth Authority, and it can also invest to diversify, like what Saudi Arabia is doing.

The Nigerian Sovereign Investment Authority should be given a mandate to invest in non-oil and gas businesses, diversify the revenue streams of the Consolidated Revenue Fund, so each year, the CRF receives more USD earning from nonoil sources than oil.

Keep in mind again, even if we sell 100% of NNPC’s JV, we will still earn VAT and Petroleum Taxes after the sale.

The clear positive is that we get out of the forex cash draining business of Joint Ventures, we diversify our revenue base, we own fantastic companies abroad, we can even lobby to set up a local manufacturing plant locally, and we retain our FX earning ability at really technically no cost.

Selling means the Nigerian Government will finally be out of the active oil business, imports, storage and price control, and become a passive receiver of fiscal revenues… as she should be.

Time is running out, Tesla launched its Model 3 electric car, i.e. no petrol; it costs $35,000. The car had orders of $7.5 billion in presale in one week! The world is sending oil-funded economies a message — if cars and houses can be powered without crude oil, then we better leverage our oil reserves, while we have the chance.

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