We think it’s worth taking a second look at NNPC Limited’s planned IPO, with consideration given to deferring the process. Below, we highlight some of the key strategic considerations informing this perspective.
- Transition Considerations
It is our view that NNPC Limited is in a delicate phase of transition. So, also is the broader Nigerian economy and the legal framework for investing in the Nigerian Oil & Gas sector. Thus, launching an IPO at this stage and in the current environment could introduce short-term market pressures and stringent compliance obligations that may distract the NNPC Limited from its core mission of full commercialization and potentially result in a misrepresentation of its true market value. As NNPC Limited prepares to operate in a more competitive and commercially driven landscape, it is critical that governance and transparency, which lie at the heart of public markets regulations, become deeply embedded in its operations. The Board should be allowed to set its agenda and priorities as well as the form of corporate financing which best serves the NNPC Limited, in transition.
- Critical National Asset Considerations
It is our view that the oil and gas assets to be managed by the NNPCL should remain and continue to be operated as strategic national assets. Thus, the Federal Government should continue to retain full ownership and strategic control of NNPC Limited to safeguard Nigeria’s sovereign interests in the oil and gas sector. Especially in light of the rise of trade protectionism globally, full divestiture by NNPC Limited could constrain the Government’s ability to act decisively in times of crisis, whether through fuel subsidies, energy security measures, or emergency policy shifts and also, diminish Nigeria’s influence, over international oil companies operating domestically, or within the OPEC.
- Constitutional Considerations
Following its commercialisation, the NNPC Limited will now operate like any private company, paying dividends to its shareholders. Its revenues will no longer automatically be remitted to the Federation Account for distribution as per section 162(1) of the Nigerian Constitution. Constitutionally, oil and gas assets are vested in the Government of the Federation, making it, the right collector of oil revenues. Given that, post-IPO, a significant share of oil revenue will begin to flow to domestic and foreign private shareholders and oil earnings would now be treated as corporate income, not public revenue, it is our view that the IPO is open to legal challenge from State Governments on the basis of the 162(1) of the Nigerian Constitution, which requires such revenues to be collected into the Federation Account and shared between the Federal, State and Local governments. As per the case of A.G. Federation vs A.G. Abia and Ors, petroleum assets and income derivable therefrom belong to the Federation Government and should be controlled on behalf of the entire country.
- Historical Liabilities
It appears that the Petroleum Industry Act (“PIA”) does not mandate an independent audit of NNPC’s liabilities prior to the asset and liability transfers envisaged in section 54, leaving room for opaque decisions and possibly, politicised selection of liabilities. A review of the choice and the actual transfer of assets and liabilities, from NNPC to NNPC Limited may therefore be strategic. The need to ring fence NNPC Limited’s balance sheet from unexpected claims post-IPO and, to determine the existence and/or adequacy of the scope of any forward-looking Federal Government guarantees and indemnities covering the asset and liability transfers, are some of the reasons why an immediate review is necessary. Overall, it does not appear that the PIA sufficiently protects NNPC Ltd from successor liability claims, especially under international arbitration rules and bilateral investment treaties.
Additionally, given that the liabilities and assets of NNPC were acquired when NNPC enjoyed some level of statutory protection and political influence, we are of the view that NNPCL Limited should continue to enjoy the statutory protections previously afforded to NNPC, particularly in relation to contracts entered into by NNPC prior to the transfer contemplated under section 54 or prior to the incorporation of NNPC Limited. As an example, we think that NNPC Limited should continue to enjoy the protections enjoyed by the NNPC in sections 12 (1) ( claim limitation) and (2) (pre-action notification) of the NNPC Act, with respect to claims arising before the transfer. There appears to be no clear provision for this level of protection in the PIA.
Looking Ahead
We conclude with the view that immediate efforts should be directed at making NNPC Limited more competitive, transparent and commercialised without full divestment. That NNPC Limited should prioritise resolving historical liabilities, restructuring and modernising operations, completing refinery rehabilitation and pipeline upgrades, strengthening ESG and governance practices and navigating competitive threats. As an example, we expect that the Federal Government would continue to retain a controlling or majority stake until all legacy liabilities are fully identified, disclosed, independently audited and quantified and addressed through a clear and enforceable government resolution mechanism. For the purposes of an IPO, we expect that the Board will stipulate specific, measurable benchmarks or criteria for determining when NNPC Limited has been “fully commercialized” and thus ready, for an IPO.
The information provided in this article is for general informational purposes only and does not constitute legal advice. The content is intended to be a general overview of the subject matter. You should consult a qualified attorney or legal professional for advice regarding your specific legal situation. You may also reach out to your usual Balogun Harold contact or via bhlegalsupport@balogunharold.com
