Turning Nigeria’s $8.5bn cash call obligation to gold mine

Operators in Nigeria’s oil and gas sector have lamented the impact of the continuous slide in crude oil prices and its negative toll on their businesses. Currently, Brent crude

is trading at less than $50 a barrel.

But beyond the slide in crude oil prices, the inability of the Federal Government to fund its various Joint Venture (JV) operations is also giving stakeholders a nightmare, as they are worried that unless something urgent was done by government to settle the about $8.5 billion in JV cash call arrears, the sector may stagnate further.

It was in an attempt to address this issue that the Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Mr. Maikanti Baru, did not mince words at the 34th Nigerian Association of Petroleum Explorationists (NAPE) International Conference and Exhibition, which ended in Lagos recently, when he disclosed that for 2016, the corporation had accumulated about $2.5 billion in cash call arrears.

NNPC JV structure

A Joint Venture (JV) operation is a standard practice in the ownership of assets in Nigeria. It usually takes the form of an agreement between the national oil company, in this instance, the NNPC, International Oil Companies (IOCs) and sometimes, indigenous oil companies.

Under the arrangement, all parties contribute to funding oil exploration and production operations in the proportion of their JV equity holdings and receive crude oil produced earnings in the same ratio. Some of the joint venture partners include the Royal Dutch Shell Plc in Shell Pe­troleum Development Com­pany (SPDC), where the corporation has 55 per cent interest, while Shell, Total and Agip have 45 per cent.

In the NNPC/Chevron joint venture, the NNPC has 60 per cent, while the IOCs have 40 per cent. Under its joint venture arrangement in Mobil Producing Nigeria Unlimited, the NNPC has 60 per cent, while the other partners led by ExxonMobil have 40 per cent. Similarly, the NNPC has 60 per cent in the Nigerian Agip Oil Company (NAOC), while Italy’s Agip and other partners have 40 per cent.

Pan Ocean Corporation has a joint venture ar­rangement with the NNPC, with the latter controlling 60 per cent and the former, 40 per cent.

The Constraints/Implications

Despite having several joint venture agreements with IOCs, NNPC has consistently been challenged meeting its funding obligation.

It is believed that if the NNPC can faith­fully meet its obligations in the various joint ventures, the nation might reap bountifully from them through increased crude oil production considering its lion’s share in equity of the various JVs.

But so far, the major constraint facing NNPC and the IOCs is the inability of Nigeria’s oil firm to pro­vide its own share of funding for the joint venture projects.

With majority stake in these projects, the failure of the corporation to meet its cash calls obligation has not only stalled ongoing projects but also affected several other investment decisions in the industry, especially those related to gas projects.

Baru explained that the chronic JV funding shortfalls being experienced in the industry have resulted in declining JV oil production from about 1 million barrels of oil per day (bpd) three to five years ago to about 800,000 bpd.

‘‘This is coupled with the vandalisation of critical production infrastructure that have to be repaired as emergency cases at exorbitant costs, at most times, which further compounds the utilisation of available funds.

“The truth is that it is difficult to deliver the volumes without adequate funding. With average JV cash call requirement of about $600 million a month coupled with flat low budget levels over the past years, this has led to underfunding of the industry by government, which has stymied production growth. Consequently, managing these funding issues is part of our most immediate challenge,’’ he admitted.

In contrast, he noted that production from the Production Sharing Contracts (PSCs) arrangements where NNPC does not provide the funding for the production has increased almost proportionately to the JV production decline over the same period, thereby making the national oil production relatively flat.

‘‘Unfortunately, unlike the PSC arrangements, the JV system provides more revenue to the government through equity liftings and higher royalties and taxes due to the higher fiscal take from onshore and shallow waters fiscal terms. The low crude oil price regime further amplifies this anomaly,’’ he said.

Unlocking the bottlenecks

Minister of State for Petroleum Resources, Mr. Ibe Kachikwu, recently said that the Federal Government has reached an “outline settlement” worth $5 billion with five IOCs to cover outstanding payments for joint exploration and production.

Kachikwu said Royal Dutch Shell, Exxon Mobil, Italy’s ENI, Chevron and France’s Total had “accepted” the $5 billion deal.

He disclosed that the payments would be made in the form of new oil production, adding that there would also be a one-off cash payment.

According to him, the agreement would hopefully be finalised by the end of the year and cover the period from 2010 to 2015, adding that delay in payments has hindered oil and gas investment and worsened a budget crisis as the government seeks to increase spending to get the economy out of recession.

But the outline settlement of $5 billion covering 2010 to 2015 would still leave the country with a debt overhang of $2.5 billion for 2016. How would the country settle this and ensure that there is no carry over of liabilities to 2017 and subsequent years.

But Group Coordinator for Corporate Planning and Strategy and Director of Transformation at NNPC, Mr. Tim Okon, seems to have a permanent solution to the funding challenges. Okon had explained that Independent Joint Venture (IJV) is the way to go.

He disclosed that IJV is a venture which requires creation of a new legal entity in a specific country and allows two or more companies to collaborate and carry out a common activity requiring legal instruments such as by-laws, articles of incorporation and shareholders’ agreement.

He argued that incorporation will allow NNPC to finance its share of JV operations through a balance sheet as against the current JV option where NNPC’s only means of financing its share of investment was through Federal Government cash calls.

He argued that the difference between incorporation and status-quo was NNPC’s ability to raise debt, while the government can still maintain same share of ownership in JV via NNPC share.

Okon further explained that IJV solves funding prob­lem and creates self-sufficient entity by removing the need for cash call and annual fund­ing strategy through a one-off equity injection, adding that JV incorporation raises debt financing by providing a solid balance sheet to be used to raise funds.

To address these funding challenges, he stated that the Petroleum Industry Bill (PIB) has proposed the incorporation of the joint ventures.

On the other hand, Baru disclosed that NNPC is already exploring alternative funding mechanism that allows the JV business finance itself by retaining its Operating Costs and Capital Allowances (Fiscal Costs) in order to sustain and grow the business.

‘‘Where the fiscal costs for any year are not sufficient to fund the budgetary requirements of the JV, part of the profit margin could be retained to fund the budget and where necessary, external financing could also be sought to finance commercially viable and bankable capital projects without recourse to Government treasury.

The import of the above is that the JV will relieve Government of the cash call burden by sourcing for its funds for its operations (estimated at $7-$9 billion annually). In 2016 alone, underfunding of NNPC cash calls is estimated to be about $2.5 billion. This is aside the inherited arrears estimated at over $6 billion.

NIPCO reaffirms commitment to local content growth in gas sector

NIPCO Plc has reaffirmed its commitment to support every initiative aimed at boosting local content in the country’s gas sector.

Managing Director, NIPCO Plc, Mr. Venkataraman Venkatapathy, made the disclosure at a panel session on Nigerian Content and Gas Opportunity during the Nigerian Gas Association (NGA)’s 10th International Conference and Exhibition held in Abuja recently.

Venkatapathy, who was represented by the General Manager, Green Gas Ltd, a Joint Venture (JV) of Nigeria Gas Company (NGC) and NIPCO, Mr. Rajesh Prabhu, disclosed that the diversification of the company’s operations into the natural gas has led to over 6,000 automobiles running on gas.

The NIPCO boss stated that the company was committed to enhancing local content and growing indigenous participation in the Compressed Natural Gas (CNG) initiative, which will revolve around improving indigenous ability in a very pragmatic approach.

According to him, NIPCO has also encouraged technology transfer within its project scope, especially in the realm of CNG operations, with all its CNG stations fully manned and maintained by Nigerians.

He expressed delight in the deliverables of Nigerians running its gas projects, stressing that the company will continue to expose them to series of training programmes to improve their capabilities.

Venkatapathy noted that the CNG revolution, which has offered alternatives for motorists to power their vehicles with gas courtesy of the partnership with NGC, a subsidiary of the Nigerian National Petroleum Corporation (NNPC), has exposed local content to the latest technology in gas compression and conversion of vehicles to use gas instead of liquid fuels.

He said the development of Nigerian Content through plethora of projects tailored around harnessing of human capital remains a central objective of the company in the hydrocarbon industry.

He pointed out that vehicle conversion to enable motorists use gas as auto fuel was now fully manned by Nigerians as the technology has been effectively transferred to them as against when the project took off years back.

‘‘The CNG project is a novel scheme that has enhanced natural gas utilisation as auto fuel with attendant benefits to motorists in particular and the nation in general through savings in foreign exchange that could have been used to import white fuels,’’ he averred.

SNEPCo donates test lab to welding  institute

In order to boost the development of welding technology in Nigeria, Shell Nigeria Exploration and Production Company (SNEPCo) and its co-venturers (ExxonMobil, Total and ENI) have donated facilities including a modern test laboratory to the Nigerian Institute of Welding (NIW) at Imasabor-Ologbo, Benin City in Edo State.

Speaking at the commissioning of the laboratory centre, Country Chair, Shell Companies in Nigeria and Managing Director of Shell Petroleum Development Company of Nigeria Ltd (SPDC), Osagie Osunbor, who was represented by General Manager, Nigerian Content Development, SPDC, Chiedu Oba, said the test centre had huge potential to build and retain the welding capacity for the oil and gas industry, adding that Shell companies are committed to develop local manufactured products.

“The test centre has huge potential to build and retain the much-needed welding capacity for the oil and gas industry and Shell Companies in Nigeria are committed to Nigerian content development and will continue to pursue opportunities to develop and deploy more locally manufactured products in their operations,” he said.

Echoing his remarks, Managing Director, SNEPCo, Bayo Ojulari, commended the National Petroleum Investment Services (NAPIMS), the co-ventures, the NIW and the community for their support in the implementation of the project.

The President of the Nigerian Institute of Welding, Solomon Edebiri, thanked SNEPCo and its co-venturers for the services rendered and appealed for more support for effective utilisation of the NIW in the promotion of welding technology and practice in Nigeria.

Stakeholders who presented goodwill messages at the commissioning of the laboratory included, Total E & P, Nigerian Ship Owners Association of Nigeria, Nigerdock Limited, Dorman Long Nigeria Ltd, Ladol Nigeria Ltd, Industrial Training Fund, Petroleum Technology Development Fund, Petroleum Training Institute, Effurun-Warri,  University of Lagos and Chief Oliha, the Oliha of Benin Kingdom.

SNEPCo  had agreed to support the promotion of welding technology through the NIW after it applied for waivers from the Nigerian Content Development and Monitoring Board (NCDMB) for Welding Procedure Specification (WPS) and/Weld Qualification Tests (WQT) due to a dearth of such capacity at that time. Among other facilities, SNEPCo provided utilities – power and water, internal roads and perimeter fencing at the Nigerian Institute of Welding.

The establishment of the centre is the latest milestone in efforts by Shell Companies in Nigeria to encourage Nigerian content development in its operations.