NNPC office in Abuja

President Muhammadu Buhari has taken his first steps towards overhauling the Nigeria’s  troubled state oil firm by giving its exploration joint ventures control over their own budgets as a way to overcome chronic cash shortages.

Corruption and mismanagement at the Nigerian National Petroleum Corporation have hampered an industry that provides 70 percent of state income. NNPC has been accused of failing to account for tens of billions of dollars, while no new exploration blocks have been sold since 2007.

Buhari, who took office on May 29, wants to make reform of the sprawling NNPC a priority at a time when a slump in oil prices is hammering the economy.

The former military ruler has fired the NNPC board and plans to break up the company, whose opaque structures have allowed corruption and oil theft to flourish.

To speed up an often glacial decision making process at NNPC, Buhari has given the green light to revamping several joint ventures involving its poorly managed production and exploration arm, according to a letter by NNPC head Emmanuel Ibe Kachikwu signed by Buhari, a copy of which was reviewed by Reuters.

NNPC did not respond to a request for comment but several oil sources confirmed the authenticity of the letter.

Nigeria produces about 2.2 million barrels per day of oil with foreign and local companies through production sharing contracts and joint ventures (JVs).

But projects have been held up because NNPC needs parliamentary and regulatory approval to spend anything. Officials and lawmakers are often six months late in giving their nod, making proposals irrelevant as costs exceed the original budgets. As a result, unpaid bills have been piling up.

Dr Ibe Kachikwu: NNPC Group MD

According to the letter, the JVs will be turned into firms that control their own budgets. This will be similar to gas firm Nigeria LNG (NLNG), which finds “sources for its own funding, pays taxes and royalties and also pays dividends,” the letter said.

NLNG, in which Shell, Eni and Total have stakes along with NNPC, is one of the few efficient oil operations in Africa’s top crude producer.

There won’t be any immediate impact on oil exploration and production from the new model, so-called incorporated joint-ventures, as it will be tested on a few blocks first. If successful, it could be expanded to other arms of NNPC, an industry source said.

But analysts see the new joint-venture structure as a sign that reforms are finally underway.

“This could be an important early indicator for a key aspect of reformed oil sector policy – how to incentivise and maintain upstream investment by local private companies, and resolve operational issues between them and NNPC,” said Roderick Bruce, West Africa energy analyst at IHS.

To bypass time-consuming parliamentary approval, NNPC is expected to reduce its stake in joint ventures to below 50 percent from 55 percent by selling assets to local firms.

“Now the incorporated JV can raise funding more easily as it’s a model international investors will understand and there will be a balance sheet behind the IJV,” said Kola Karim, chairman of energy company Shoreline.

The letter states that this plan will apply to five oil blocks sold by Shell in 2011-2012 to local companies Shoreline Natural Resources Nigeria Ltd, First Hydrocarbon Nigeria Ltd, ND-Western Ltd, Elcrest E&P Nigeria Ltd and Neconde Energy Ltd.

It also covers West African Exploration and Production Co, which bought two licenses in 2015 from Shell.

SEARCHING FOR INVOICES

Oil traders and executives said dealing with NNPC has become more efficient under Kachikwu, who took over in August. He is expected to become junior oil minister under Buhari, who has retained the oil portfolio for himself, to oversee the industry’s daily operations.

The exploration overhaul is seen as a start to further changes at NNPC after years of relative standstill under Diezani Alison-Madueke, the former oil minister under Buhari’s predecessor, Goodluck Jonathan. She is being investigated by Britain for money laundering but has denied any wrongdoing.

Apart from dealing with stagnating oil production, Buhari needs to shake up the ailing refinery business, which forces the government to rely on expensive imported fuel for 80 percent of its energy needs.

Since his arrival, Kachikwu has been wading through piles of receipts in the four towers of NNPC’s Abuja headquarters to get an idea what the state giant owes foreign firms, part of an audit ordered by Buhari to tackle corruption.

With oil exploration firms working more efficiently under the new model, NNPC hopes to make a small step towards reducing its pile of unpaid bills.

But uncomfortable talks loom as oil firms say they are owed as much as $7.5 billion from the past few years, while NNPC puts the amount at $6 billion.

“During Diezani, the board hardly met, so expenses were not approved. Now NNPC is saying they won’t honour those that weren’t approved … the paper trail did not keep up. There has been a disconnect between expenditure and approval,” a source close to the matter said.

For example, for one joint-venture project worth about $3 billion, NNPC still disagrees over $300 million spent ages ago, an industry source said.

“It’ll take three months to reconcile and another six months at least to figure out how to cover it. The obligations date back three years to 2012,” a banking source said, speaking of the overall debt.

*Reported by Julia Payne/Reuters  in Abuja