A Review of the Nigerian Energy Industry

PIB: FG drops controversial joint venture

Dan Ashiekaa

The Petroleum Industry Bill (PIB) has become one of the most important policy instruments of the Federal Government of Nigeria and is a major decider of the future structure of Nigeria’s oil and gas industry. It is also the most controversial. I would like to add that how the Goodluck Jonathan administration concludes this initiative started by the Yar Adua/Jonathan Government will fundamentally define the oil and gas industry and the country going forward.

I would like to focus on the rumoured expunging of the Incorporated Joint Ventures(IJVs) from the PIB which has been in most National Dailies in Nigeria in the past one week and highlight the consequences of such action which I am advised is a fallout of pressure from the International Oil Companies(IOC’s) operating in Nigeria. I really hope the rumour is unfounded but if it is not, it clearly portends some grave consequences. I will explain why.

Background Information
Just to be sure all readers are on the same page, I would like to go back to first principles by defining, in a layman’s way, the relevant terms.

The term Joint Venture (JV) is non technical and is used generically to refer to any form of special purpose business association between two or more persons. It is typically an unincorporated contractual association. In this classic sense, JVs almost invariably have their rules of engagement contained in a document known as a Joint Operating Agreement (JOA). The JOA defines the roles and responsibilities of each partner in the JV. There are two classes of partners (co-venturers) in most JVs – the Operating Partner (Operator) and the Non Operating Partners. The Operator handles the day to day running of the JV based on an approved Work Programme and Budget and issues periodic reports on the state of affairs of the JV. I could write lots on the topic of JVs but hopefully this will give us some insight into what we are talking about when we talk of JVs. This explanation refers to what are termed Unincorporated JVs(UJVs).

On the other hand, in Incorporated Joint Ventures (IJVs), the venturers will form a separate legal entity also known as a Joint Venture Company or JVC and divide its shares between themselves as an equitable way to distribute income from the joint venture. The JVC will manage the overall assets, research and development activity involved in any of the projects. A board of directors will then be established so that there will be a set of people who will manage and decide on the activities of JVC. In forming an incorporated joint venture, there should be first a constitution which will govern the power to appoint the board of directors and restrictions on sharing of capital and transfer of shares. The venturers should all agree and abide with the provisions set out in the said constitution. Also, the companies involved should secure a shareholder’s agreement so that the research and management objectives of the venture are clear to all. Such agreement will include the financial obligations of the companies and some management agreements between the company and the individual venturers.

This concept is not alien to the Nigerian environment. For instance, in 2003, the Nigerian National Petroleum Corporation (NNPC), ConocoPhillips (COP), Eni and ChevronTexaco (CVX) announced the signing of a Heads of Agreement to conduct the front end engineering and design (FEED) work for a new Liquefied Natural Gas (LNG)facility to be constructed in Nigeria’s central Niger Delta. The partners agreed to form an Incorporated Joint Venture, to be known as “Brass LNG Limited,” to undertake this project.

PIB and IJVs
In a keynote address on the proposed Petroleum Industry Bill (PIB) by the then Minister of Petroleum Resources, Dr Rilwanu Lukman, CFR, KBE, stated ‘the PIB combines 16 different Nigerian petroleum laws in a single transparent and coherent document. This is the first time that such a large scale consolidation has happened anywhere in the world’. He said further ‘The bill will change the role of NNPC. Today NNPC is a company that still has very much the character of a government department. All its revenues flow to the government of Nigeria and its funding is then provided by the government. This is not an efficient way to run an oil company. The bill gives NNPC the opportunity to create a viable and self-financing oil company.’ And on the funding aspects, he said: ‘In order to assist the National Oil Company in the financing of new projects, the bill creates a new joint venture structure, called incorporated joint ventures. The National Oil Company and the foreign companies will now join into a single company of which they will be shareholders. The number of shares will reflect the current interest in the joint ventures’.

In a July 2009 presentation entitled ‘An Overview of the PIB’, and specifically on the section dealing with IJVs, the Minister stated that: Interest held by NNPC in the Current JV shall be vested in the NNPC ltd.; Assets and interest in current JV to be transferred to a Limited Liability company; Model Articles of Association to be approved by the Minister; Each IJV to be owned by parties to current JV in proportion as in current JV; Parties to IJV will enter into a shareholders’ agreement; Parties may buy Crude Oil proportionate to equity on the basis of prices determined for Tax and Royalty purpose and Rights of parties guaranteed proportionate to their interests’.

All these are noble objectives aimed at strengthening the industry but most especially the NOC(NNPC) in line with global best practice and for the benefit of Nigerians. The question that follows naturally then is: what changed? Why the sudden about face and the haste to expunge the IJV idea from the PIB pending before the National Assembly? Is it the rumoured over bearing lobby of the IOCs or the anticipated benefits no longer qualify as such?

Over the years, there have been considerable challenges on the part of the National Oil Company (NNPC) in honouring cash calls obligations. Reasons range from inefficient management of the NOC, integrity issues between the NOC (NNPC) and the IOCs, and what Segun Adeniyi recently(in his piece ‘Where the Governors Got it Wrong’ 30 Jun 2011 THISDAY) termed creative accounting of the NNPC, etc. The IJV vehicle was expected to run as a purely commercial enterprise with responsibility to raise capital in the normal course of business as any commercial enterprise and thus eliminate the bottlenecks associated with cash calls and other payment obligations from NNPC.

Apart from the obvious advantages highlighted by Dr Rilwanu Lukman which have been equally re-echoed by the indefatigable Mrs Diezani Allison-Madueke(who by the way is being unjustly vilified and blackmailed for her patriotic stance on issues affecting the sector), there are other obvious advantages. Aside from the fact that the JVC can implement the desired projects of the participating companies, the liability of shareholders within an incorporated joint venture is generally limited to the capital that they have invested in the company as shares. Accordingly, a third party cannot generally claim against a shareholder in an incorporated joint venture beyond its stake in the IJV. The JVC can enter a contract on its own because it is a separate legal entity and can sue and be sued in its own name. The assets of the company belong to the company, not the shareholder companies, and the profits of the company are shared by the shareholders in proportion to their shares. The provisions of the Companies Act, which impose obligations and restrictions on companies, apply to joint venture companies (IJVs). Such obligations include strict disclosure requirements meaning the activities of the IJVs will be subject to public scrutiny as is the case of incorporated companies thus promoting much needed transparency in the oil and gas industry.

There will also be no problem in structuring the contribution shares and returns of the participating companies because of the flexibility of the IJV. In case there are additional companies who want to farm-in as new venturers then this is easily achievable because the procedures in doing so are not complex at all. It is much easier to transfer shares to incoming parties which is a big advantage of an incorporated joint venture. The corporate and management structure is typically simple and familiar. On funding, if the parties want to use collective financing and grant security over the joint venture assets, an incorporated joint venture company can be an advantage as has been the case with some of the IJVs in the Middle East where syndicated loans were taken to construct some of the mega LNG trains. The advantages are limitless.

I would like to state categorically that no significant reform in the Oil and Gas sector in Nigeria can happen successfully with the NOC (NNPC) in its present state. There too many entrenched interests and attitudes. And only a fundamental paradigm shift in thinking and action can create the desired step change. We cannot continue financing the inefficiencies in the NNPC’s current structure and expect a different result. Sounds like the old definition of madness which is doing the same thing over and over and expecting a different result. It will not work.

So What Next?
Countries that have adopted the IJV model have seen incredible transformation in the entire Oil and Gas value chain. Qatar is a case in point. From 2005, Qatar has embarked on an ambitious Oil and Gas sector transformation agenda by creating IJVs using the Operating Company (OPCO) model which delivered expansion projects that have added eight new LNG trains giving Qatar an annual LNG production capacity of 77million tons and effectively launching the small Arab Peninsula with a population of only 1.6million people as the LNG Headquarters of the world. These projects were developed in partnership with the leading companies in the industry including ExxonMobil, Total, ConocoPhillips, Shell, Marubeni, Dolphin Energy and Mitsui.

Simply, the OPCO model created an Operating Company(itself an IJV) to oversee multiple IJVs each of which had its own Shareholders’ Agreement, Board of Directors, Memorandum and Articles of Association and other requirements of a normal commercial enterprise. The OPCO itself was simply an Agent and Operator for the Participants with zero participating interest. If we can visualise an imaginary line, the OPCO sits above the line and superintends over multiple IJVs involved in the construction and operation of multiple LNG Trains, LNG Terminals and Re-gasification plants, Refineries and other Common or Shared Facilities.

In one peculiar case, one IJV(let’s call it Q2) had two different types of ownership. The IJV called Q2 for our purposes here had the responsibility for construction and operation of two LNG trains. Train 1 is owned by the NOC and a Contractor Company, an oil major in a 70%:30% split while Train 2 of the same IJV(Q2) is owned by the NOC and two Contractor Companies, all oil majors, in a 65%:18.3%:16.7% split. Since these arrangements are purely commercial enterprises, each of the Parties in the IJVs have the responsibility to individually or collectively source for funding for the various projects. Both trains are already operational. This is how it should be and this also is international best practice around the world now. Even SAP AG, the German Software giant that provides software to support the classic unincorporated joint ventures is modifying its systems to accommodate the new IJV regime.

The Operating Company Model used by Qatar, which is a variant of the IJV concept, has several benefits. Aside from efficiently providing services to an increasing number of trains and shareholders, the operating company structure allows the Qatar projects to achieve maximum synergies. The role of the Operating Company is that of a service provider with no equity interest.

Writing in The Nation Online on 29th June 2011, one Emeka Ugwuanyi, quoted an unidentified source that had discussed the issue of dropping the IJVs idea from the PIB with Petroleum and Natural Gas Senior Staff of Nigeria (PENGASSAN). ‘According to them, the National Petroleum Investment Management Services (NAPIMS), an arm of the NNPC, which foresees government investment in the JVs, would be irrelevant if the IJV is put in place and the implication would be massive loss of jobs. They also noted that members of PENGASSAN and other workers in the employ of the IOCs as a result of the JV might also lose their jobs because the IJVs would be 100 per cent commercially driven and the primary focus would be value creation for the shareholders of the various multinational companies.

‘Besides, except the NNPC would be fully severed from the government, there is no guarantee that the IJVs would get the independence they require. With the IJV, NNPC being the senior partner with 60 and 55 per cent stakes would fill the boards of the companies with their people as boards’ chairmen and would want to manage operations that they (IOCs) believe are better handled by them.’

This position simply shows a lack of understandings of the workings of the IJVs. First, the various presentations made during the PIB road show propose a massive restructuring of the entire NNPC creating multiple organizations and this, rather than constrict, will create more headroom for redeployment of NNPC personnel. So the postulation that the National Petroleum Investment Management Services (NAPIMS), an arm of the NNPC, which oversees the current JVs will become redundant falls flat on its head. Again the claim that members of PENGASSAN and other workers in the employ of the IOCs might also lose their jobs as a result of the IJVs is unfounded. The whole idea of the IJVs is to create separate legal entities different from the partnering legal entities. This is why the ‘Brass LNG Ltd’ was created distinct from the partnering legal entities – the Nigerian National Petroleum Corporation (NNPC), ConocoPhillips (COP), Eni and ChevronTexaco (CVX). On the charge of NNPC lacking independence, this is explicitly the point Dr Lukman made in his address at the PIB Consultative Forum (Road Show) which I referred to above.

With the highlighted advantages and the strong business case that was made by the Petroleum Resources Ministry in the course of putting together the PIB document, is there any plausible explanation as to why that provision requiring formation of IJVs has disappeared from the latest copy of the PIB that is awaiting approval? Whose interest is being represented with such a move? Is it the collective corporate interests of Nigeria or that of the IOCs?

Finally, let me advise that the transformation which the PIB embodies, if midwifed patriotically (again whatever anyone might say, I strongly believe Mrs Diezani Allison-Madueke is on the right tract), will present unlimited opportunities to Nigeria. The NOC (Qatar Petroleum, QP) in the State of Qatar is investing heavily in oil and gas assets offshore through its international arm, Qatar Petroleum International Ltd (QPI). According to information available on the Qatar Petroleum website, ‘Qatar Petroleum International (QPI) has been established to make strategic commercial investments across the energy value chain around the world and is currently 100% owned by Qatar Petroleum (QP). QPI currently manages a multibillion dollar portfolio of investments including, but not limited to: upstream, gas & power, refining/petrochemicals, and other midstream/downstream activities’. This is in spite of the fact that Qatar’s gas reserves are estimated to last over 200hundred years. Ditto for the Indian Oil and Natural Gas Company (ONGC) through ONGC Videsh Ltd, the International Petroleum Company of India. China is doing same. Thailand’s NOC, PTTEP (PTT Exploration and Production Public Company Ltd) has investments in Thailand, Malaysia, Indonesia, Cambodia, Myanmar, Vietnam, Oman, Egypt, Algeria, Bahrain, Australia, New Zealand and Canada. NNPC can take a cue from these. Mine is a call to action.

I attended an LNG Overview Course in Doha, Qatar, in 2008 run by the world renowned LNG Consultant Andy Flower, President of Andy Flower LNG Associates. At that time, the debate was which of two countries, Nigeria and Qatar, will take LNG leadership in the world. Qatar, with focused investment and deliberate transformation including use of IJVs, pushed through its reforms and through various expansion projects became the LNG Headquarters of the world by December 2010. Nigeria has the potential to beat that record. A reformed and transformed NNPC using IJVs as a key driver can lead that charge. And the PIB with the IJV initiative is the elixir.

The Author, Dan Ashiekaa, B.Sc, LL.B, ACA, ACTI, PMP
Expert Joint Venture and Production Sharing Accounting Consultant, Doha, Qatar.
( Dashiekaa@worldenergyconsult.com )

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