Competing against NNPC
Can NNPC Limited be a fair competitor in the Nigerian oil and gas market?
Nigeria has a competitive oil and gas market and the recent commercialisation of the Nigerian National Petroleum Corporation (‘NNPC’) which has now become NNPC Ltd., makes the competition dynamics in the market even more interesting. NNPC has been commercialised with the objective of making NNPC Ltd. an even more fierce competitor against existing oil and gas companies for oil and gas assets. In consideration of NNPC’s former role, the commercialisation of NNPC, from a competition perspective, is quite noteworthy particularly with Nigeria being an emerging competition enforcement jurisdiction.
Certain thoughts come to mind regarding the now commercialised entity and its ability to compete fairly with existing oil and gas market players. What edge or advantages will NNPC Ltd. have in the market against its competitors like Shell, Chevron, and Mobil? And are these advantages capable of tipping the market in favour of NNPC Ltd. to the point that it becomes anticompetitive? These questions can only be answered by the interplay and unfolding of market forces. Regardless, for the purposes of protecting competition, the Nigerian competition authority needs to be proactive in anticipating antitrust infringements especially in major markets like the Nigerian oil and gas market, being the mainstay of the Nigerian economy. Pending when the market speaks for itself, here a few thoughts on the commercialisation of NNPC from an antitrust perspective.
Status of NNPC Limited: State-Owned Entity or…
The Petroleum Industry Act (‘PIA’) establishes NNPC Ltd. as a limited liability company whose shares at incorporation are vested in the Nigerian government, and held on its behalf by the Ministry of Finance and the Ministry of Petroleum in equal proportions.1 On the surface, NNPC Ltd. is very much a state-owned entity according to Nigerian law due to the government owning 100% shares at incorporation and consequently, control.2 I have in a previous post on Compedia, here, and published on business day, here, written about the potential anticompetitive effects of state-owned entities in private markets, albeit in the transportation sector. However, NNPC Ltd.’s scenario presents a different dynamic,3 as it was initially a national corporation, which has now been commercialised and apparently, there are statutory provisions which confer unfair competitive advantages on NNPC Ltd.
With a focus on commercialisation, NNPC Ltd. is more of a profit-driven entity than a state entity whose foremost objective is the actualisation of state objectives. This line of thinking I would claim raises the bar for competition scrutiny particularly in view of its prospects for future divestment of its shareholding to other entities, which could change its status from a state-owned entity to a full-fledged private organisation.4
Competition Distortions: Quasi Illegal State Aid
In terms of assessing NNPC Ltd.’s function as a state-owned entity, to what extent does the performance of its state public tasks tilt competition in its favour as a commercialised entity competing with private actors?
Section 64(b) of the PIA designates NNPC Ltd. as the national oil company on behalf of the federation. To the extent that PIA signifies the context in which it designates NNPC as the national oil company for example when acting as concessionaire or acting as supplier of last resort, it is clear that this designation is in relation to instances when NNPC Ltd. performs functions that are connected to the affairs of the government, and in furtherance of the government’s policy. In this regard, performance of the state objectives, are separate and distinct from NNPC Ltd.’s objective as a commercial venture competing on the merits with other oil companies. This provision is further bolstered by section 64(c) of the PIA which stipulates that the proceeds from the sale of oil and gas payable to NNPC Ltd. as concessionaire, shall promptly be remitted to the federation. This further emphasises the fact that NNPC Ltd. is acting as a state entity in its capacity as concessionaire.
However, the same section 64(c) posits that the income remitted to the federation should be less 30% for NNPC Ltd.’s management fee and Frontier Exploration Fund. The PIA is silent as to how this management fee is to be applied by NNPC Ltd.5 To the extent NNPC Ltd. is in this regard acting as the national oil company of the federation and not as a commercial venture independent of the state, the 30% deducted must be used exclusively for its purpose as a state-owned entity and not for the advancement of its commercial objectives. To suggest otherwise will imply that the state is funding NNPC Ltd. through this medium, and consequently conferring a commercial statutory advantage as a means of gaining profit, which is otherwise not conferred on other independent oil companies in the market. This is what is meant by quasi-state aid, which in this context will be illegal. A quasi-state aid situation occurs when a commercial entity is able to derive exclusive income from the government not as a result of its commercial investments or innovation, but by reason of its previous status as a national entity.
This position is taken in further in regards to Section 53(7) of the PIA which stipulates that NNPC Ltd. shall conduct their affairs on a commercial basis in a profitable and efficient manner without recourse to government funds. Accordingly, should NNPC Ltd. utilise the 30% obtained by reason of its status as concessionaire, to favour its own commercial activities, this will amount to using state funds, which is indeed an anticompetitive advantage in the form of a quasi-state aid and consequently, should trigger antitrust scrutiny.6 It will however appear unclear whether Nigeria has a state aid regime, which will automatically make this conduct anticompetitive as obtains in the EU. You can check Fola’s previous post on state aid here, for more insights on state aid in Nigeria and Africa in general.
Competition Distortions: Unfair Competition & Exclusivity
Another anticompetitive advantage conferred on NNPC Ltd. may be gleaned from the provisions of Sections 9(2) and 9(3) of the PIA. These provisions stipulate that where data acquired and interpreted under a petroleum exploration licence, in the judgment of the commission for frontier basin requires testing and drilling of identifiable prospects and leads, and no commercial entity has publicly expressed intention of testing or drilling such prospects, the commission for frontier basin shall request the services of NNPC Ltd. to drill or test such prospects on a service fee basis to be charged to the Frontier Exploration Fund.
This provision, by itself, raises no anticompetitive concerns particularly as in this instance, NNPC Ltd. is acting as a state-owned entity in furtherance of state objectives to promote exploration of the frontier basins of Nigeria. Particularly, the 30% utilised by NNPC Ltd. to conduct such exploration activities, is generated from performing functions that are connected to the affairs of the Government in its capacity as concessionaire. However, where an anticompetitive conduct is triggered is in the provisions of subsection (3) which provides that where a commercial discovery is made under subsection (2), NNPC Ltd. shall have the first right of refusal in the award of the acreage for subsequent development and other petroleum operations in such frontier acreages under the PIA. To my mind, this provision confers undue benefit on NNPC Ltd. for the reasons already explained above and further described below.
This is a situation in which the state’s resources are being used to confer an unfair anticompetitive advantage on NNPC Ltd. in contradiction of Section 53(7) as the 30% in this regard should be applied exclusively to state objectives. However, in this instant, the state assets are being used to confer an exclusive advantage on NNPC Ltd. This type of asset exploration advantage will undoubtedly distort competition in the market as acquisition and exploration of oil assets is competition on the merits in the oil and gas industry, for which all industry players should have the right to compete on the merits. On the basis that NNPC Ltd. has explored the new frontier basin in its capacity as a state-owned entity on the instruction of the Commission, utilising assets it has access only by reason of its previous status as a national corporation, and not by reason of its investment or innovation as a commercial venture, raises anticompetitive concerns.
Whilst there are other instances in the PIA that could be considered to raise anticompetitive concerns, for instance section 64(d), 64(f), and more, this section already has a long analysis for a blogpost and it may be best to address other anticompetitive concerns in a different fora.
Corporate Governance and State-Owned Entities
Competition law provides the basic framework for ensuring competitive neutrality and for minimising distortions of competition by entities that function to perform state objectives and pursue profit-making objectives. The prohibition of anti-competitive agreements and abuses of a dominant position, as set out in the Federal Competition and Consumer Protection Act, 2018, in sections 59 and 70, as relating to commercial activities of ‘undertakings’ apply regardless of the form of the enterprise’s ownership. Thus, state-owned enterprises are subject to the same competition law framework as private firms where they engage in commercial activities.7
For NNPC Ltd. as discussed above, the entity has two expressions. The pursuit of state objectives on the one hand and profit making on the other. The PIA confers on the board of NNPC Ltd. the responsibility for the strategic guidance and determining the business structure of NNPC Ltd. in line with best international petroleum industry practices.8 Ensuring the performance and revenue split between the state objective and profit-oriented aspects of the business is essentially a function of corporate governance. Competition compliance forms part of best petroleum international practices and in this regard, I will posit that it is fundamental that a robust corporate governance framework that emphasises competition neutrality is put in place to caution some of the potential anticompetitive conducts identified above, even though some may be statutory.
As usual, it would be exciting to see how the provisions of the PIA are tested in the court for anticompetitive infringements, and consequently, an opportunity to grow antitrust jurisprudence in Nigeria.
Section 53(3) of the PIA.
Adekoye & 6 Ors. v. N.S.P.M.C. Ltd. [2009] 5 NWLR (Pt. 1134) 322 at 342.
A closer look at the functions of NNPC limited however suggests that its objectives are not exclusive to the furtherance of state policies and objects as they are also of a very commercial nature.
Section 54(5) and (6) of the PIA.
Under EU competition law, a public authority that carries out economic activities becomes an undertaking that is prohibited under Article 107 (1) TFEU. When the same authority receives funds to manage its obligations in its capacity as a public authority, then it is necessary to identify the dividing line between its public tasks and its economic activities. The economic activity of the relevant entity must be distinguished from the non -economic activity for the purposes of application of the state aid received.
Servizio Elettrico Nazionale SpA and Others v Autorità Garante della Concorrenza e del Mercato and Others, Case C-377/20 where similar situations occurred. In this instant, market sensitive information which came to the custody of a liberalised entity whilst it was a national entity was used to obtain commercial advantages, to exclusion and detriment of other market players.
ICN Recommended Practices on State-Created Monopolies Analysis Pursuant to Unilateral Conduct Laws, available here.
Section 63 (a & e) of the PIA.