Afriwise Blog

NNPC Limited: Understanding the Hybrid Identity of Nigeria’s National Oil Company

Written by Olaniwun Ajayi | 28/07/2022

With the historic passage of the Petroleum Industry Act, 2021 (the PIA) there has been an overhaul of the legal and regulatory landscape of the Nigerian oil and gas industry, extending to the establishment of key institutions as regulators of technical and commercial activities in the Nigerian oil and gas industry. One of the significant changes introduced by the PIA, is the provision for the incorporation of the Nigerian National Petroleum Company Limited (NNPC Limited or the Company) under the Companies and Allied Matters Act (CAMA). The PIA contemplates that NNPC Limited and/or its subsidiaries will assume some or all of the assets, interests and liabilities of the Nigerian National Petroleum Corporation (the Corporation), and carry out petroleum operations on a commercial basis, comparable to private companies in Nigeria.

The incorporation of NNPC Limited under the Companies and Allied Matters Act, 2020 (CAMA), appears to be a clear departure from the legal status enjoyed by the Corporation, which is a statutory corporation established under the Nigerian National Petroleum Corporation Act, 2004 (NNPC Act). Under the NNPC Act, the Corporation enjoyed certain statutory shields such as the requirement for a pre-action notice to be served on the Corporation prior to instituting legal proceedings against the Corporation as well as limitation periods for legal proceedings against the Corporation, its Board members and employees. The Corporation also had a governance structure with the Minister of Petroleum Resources as

Chairman of the Board and the Managing Director appointed by the National Council of Ministers. Further, the NNPC Act, to the extent permitted by context, provided that references to the Corporation include its wholly owned subsidiaries, therefore entitling its subsidiaries to benefit from some of the statutory provisions applicable to the Corporation.

In contrast, the PIA provides that NNPC Limited would operate as a limited liability company under the CAMA which will conduct its affairs on a commercial basis without recourse to government funds; declare dividends to its shareholders and retain 20% of its profits as retained earnings to grow its business, and generally be regulated by the CAMA and subject to the governance and other corporate requirements applicable to all entities incorporated under the CAMA.

However, whilst providing for the establishment of NNPC Limited as a CAMA entity, the PIA also sets out certain mandatory provisions applicable to NNPC Limited. For example, ownership of all the shares in NNPC Limited – at the point of incorporation – are vested in the Government to be held by the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated in equal portions on behalf of the Federation. The PIA also has statutorily imposed objects for NNPC Limited, in addition to such other objects as may be stipulated in its memorandum and articles of association (MEMART).

From a governance perspective, the PIA also prescribes matters such as the composition of the board (applicable where NNPC Limited is wholly-owned by the Government); duties and responsibilities of the board; corporate governance standards etc.; with some of these provisions required to be reflected in the memorandum and articles of association of NNPC Limited and its wholly owned subsidiaries.

When the aforementioned mandatory provisions of the PIA (which by effect regulate the affairs of NNPC Limited), are juxtaposed with other provisions of the PIA which stipulate that NNPC Limited should run on a commercial basis comparable to private companies and exclude the applicability of the Public Procurement Act (PPA), Fiscal Responsibility Act (FRA), and Treasure Single Account (TSA) to its affairs, an observer may be forced to ponder on what the status of NNPC Limited is. Reasonably so, as the express exclusion of the PPA, FRA, and TSA further solidifies the position that NNPC Limited should operate as a private company, and essentially causes NNPC to take a more active role in the development of its procurement policies, fiscal responsibility management as well as the management of the inflow and outflow of funds within the ambit of corporate governance and regulatory control applicable to companies within the purview of CAMA.

 

LOOKING AT THE PRESENT: STATUS OF NNPC LIMITED

 

Under our laws, one of the tests that may be applied in determining whether a company registered under the CAMA is a government agency or merely a private entity without more, is the ‘control test’ - that is, whether the Government has controlling shares in such an entity. Where the Government owns controlling shares or interest in a company, such company may be deemed (in the absence of indications to the contrary) to be an agency of the Federal Government.

Applying the control test to NNPC Limited, seeing as the ownership of all the shares in NNPC Limited – at the point of incorporation – is vested in the Government (held by the Ministry of Finance Incorporated and the Ministry of Petroleum Incorporated), this would imply that NNPC Limited is a government agency.

However, other judicial authorities favour the view that the control test alone is not conclusive, and that it is important to also test whether the functions of the company are aimed at effecting the policy of the Federal Government or its functions are connected with the affairs or the running of the Federal Government (the functions test).

However, in the absence of sufficient clarity (based on judicial decisions) on what qualifies as an objective index to ascertain which functions may be regarded as being in connection with the affairs or the running of the government or are aimed at effecting the policy of the government, this would need to be determined on a case-by-case basis.

The above said, some of the objectives of NNPC Limited as laid down by the PIA are suggestive of the fact that NNPC Limited will perform functions that are connected to the affairs of the Government and in furtherance of the Government’s policy. For instance, the PIA vests NNPC Limited as the concessionaire of all Production Sharing Contracts (PSC), Profit Sharing and Risk Service Contract as the National oil company on behalf of the Federation. NNPC Limited is also vested with the obligation to act as supplier of last resort for security reasons.

Clearly therefore, while based on the ‘control test’, NNPC Limited can be regarded as an agency of the Federal Government; when the ‘functions tests’ as articulated above is applied, this position would not be so clear, as a good number of the objects of NNPC Limited are at least, indicative of the fact that it is meant to operate as other private entities, commercially-driven and devoid of the characteristics associated with many statutory corporations.

Where the view is taken that NNPC Limited qualifies as an agency of Government, the inevitable conclusion would be that it would trigger the applicability of certain principles/laws, for example - the Code of Conduct Act, to the employees of NNPC Limited. This is based on the definition of public officers under the Act as inter alia, “Chairmen and members of the Boards of other government bodies and staff of statutory corporations and of companies in which the Federal or any State Government has controlling interests”.

 

LOOKING TO THE FUTURE: POTENTIAL CHANGE IN STATUS


While the current position is that NNPC Limited is wholly Government owned, the PIA permits the transfer or divestment of the shares held by the Government, subject to certain pre-requisites e.g., the approval of the Government and endorsement of the National Economic Council on behalf of the Federation, and such sale or transfer of shares is also required to be at fair market value and subject to an open, transparent, and competitive bidding process.

Where such divestment occurs, NNPC Limited would no longer be subject to certain provisions of the PIA, For instance, with respect to the composition of the Board - the PIA grants powers to the “shareholders” of NNPC Limited to determine the composition of the Board where NNPC Limited is not “wholly-owned by the Government”.

Further, to the extent that such divestment – where it occurs – will whittle down the interest of the Government in NNPC Limited such that the Government no longer has controlling interest, this would render the Code of Conduct Act inapplicable to NNPC Limited’s employees as they would no longer be regarded as public officers, amongst others.

 

CONCLUSION


From the foregoing, it is clear that by the PIA, a hybrid status has been created with the Government retaining ownership while allowing NNPC Limited to run as a company similar to other private companies.

Hence, NNPC Limited as the national oil company carrying out functions that affect the affairs of the Government is properly optimized to achieve its objectives as set out in the PIA and its MEMART, especially as it is now incorporated under CAMA, to be run commercially like other private companies and is exempt from the PPA, FRA, and TSA customarily applicable to the Ministries, Departments, and Agencies of the Government.

Of course, as is expected, the identity of NNPC Limited as a government agency operating as a private company, will cause more legal issues to arise. For instance, whether the Public Officers Protection Act will be applicable to its employees on the basis that they are public officers, acting in pursuance of the PIA, by giving effect to the objectives spelt out in the PIA.

In subsequent publications, we shall drill further into these legal issues, in a bid to aid the understanding of an observer on various dynamics of the transition process.

 

 

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Read the original publication at Olaniwun Ajayi.