A Review of the Nigerian Energy Industry

Poor funding threatens NNPC joint ventures

06 April 2015, Abuja – With the inability of the Nigerian National Petroleum Corporation, NNPC, to meet its cash call obligation to joint venture partners now exacerbated by the significant fall in oil revenue, the need to do away with the JV arrangement has been brought to the fore.

NNPC-logo-335x270According to industry players and analysts, the combination of reduced funding from the NNPC, cut in oil firms’ capital expenditures and rising technical costs may put a damper on several JV projects.

Technical cost in the Nigerian oil industry is said to have been increasing by 10 per cent in the last few years and is now a big cause for concern for industry players.

The fall in global oil prices by more than 60 per cent between June 2014 and January 2015 had resulted in the decline in the country’s revenue from the sector and prompted oil companies to cut their capital expenditure budgets for this year.

Prior to the slump in oil prices, payment of cash calls by the NNPC to joint venture partners for the development and exploration of oil assets had over the years been a major issue.

The nation’s oil and gas production structure is majorly split between joint venture with NNPC onshore and in shallow water, and production-sharing contracts in deepwater offshore.

There are several joint ventures between the NNPC and International Oil Companies, including Shell, ExxonMobil, Chevron, Total and Eni.

The NNPC owns between 55 per cent (for JVs with Shell) and 60 per cent (for all others) and the JVs are jointly funded by the oil majors and the government through NNPC.

Cash calls are requests for payment for anticipated future capital and operating expenditures, sent by joint venture operators to non-operating partners.

The NNPC was in January said to have not paid its joint venture partners $5bn as cash calls.

The Chief Executive Officer, Jalz Energy Limited, Lois Machunga, said, “When the government is a party to investment in the oil sector, it is usually difficult sometimes because of the manner in which approvals are given. They indirectly add to the cost base by the slow decision-making and approval process.

“Nigeria is probably one of the members remaining in the OPEC that are having this kind of traditional joint venture arrangement of paying cash calls.”

The Head of Energy, Ecobank Capital, Mr. Dolapo Oni, said it would be difficult for the government to meet up with JV cash calls this year because revenue had reduced and would likely continue to reduce.

He said, “Over the last seven months, government revenue has fallen by 28 per cent, and by our estimate, we are likely to see about 30 to 35 per cent fall in revenue this year.

“Going forward, even if our revenue improves, because of oil prices recovering, paying cash calls will still be a challenge. That is why over the last few years, government has adopted the option of modified carry arrangement.”

The modified carry agreement model requires one party to pay all the cost incurred for approved JV operations on behalf of the other party, but with an understanding that the first party will be reimbursed through a combination of tax relief and incremental oil production derived from the JV operations.

Oni said, “That’s one way the government has done it in recent times and I think that is what is going to happen again.

“But the best option will be to incorporate those joint ventures and list them on the stock exchange, so that they can raise their funds through equity or debt directly, and also pay dividends to the investors.”

He added that with incorporation, the NNPC would have to divest large portion of its holdings.

Asked if the NNPC should continue to have JV operations with oil firms, Oni said, “Around the world, they don’t use JVs anymore. They use production-sharing contracts. So, as an IOC sells an asset to another company, the company owns the field and can sell part of it if it wants; but most importantly, it will handle all the costs associated with that field.

“I think we are likely to see a shrink in production next year but not this year. If the cash calls are not paid this year, then most likely, some development projects can be affected and most of those projects are meant to ramp up production from existing fields.”

The Managing Director and Chief Executive Officer, Seplat Petroleum Development Plc, Mr. Austin Avuru, had at an industry event in January, raised concerns that the NNPC was not adding value to the industry.

He had said, “The cost of operation in the upstream sector has soared. Two critical factors account for this – security issues in the Niger Delta and bottlenecks in the NNPC; project delays and $5bn of cash calls in arrears that have not been paid to the point now where you ask the question: Is NNPC really adding value to the industry today?

“We should accept that it is time to look inwards and accept the truth. Government and its agencies must withdraw from the industry and restrict itself to proper revenue collection and management of the revenue for the interest of this and future generations.”

Amid the decline in global crude prices, IOCs have announced plans to curb their capital spending this year, a development that may drive down their investment in Nigeria.

Shell said it was deferring spending in many areas and this should result in reduction of potential capital investment for 2015-17 of over $15bn.

Chevron Corporation announced a $35bn capital and exploratory investment programme for 2015; 13 per cent lower than the total investments for 2014.

ExxonMobil said it would slash its capital spending by 12 per cent to $34bn from about $38.5bn last year, while French oil major, Total, is expected to cut capital spending by $2bn to $3bn from last year’s total of $26.4bn.

The Federal Government is reducing its capital budget for joint venture oil operations by 40 per cent this year to $8.1bn due to the slump in crude prices, Platts, a US-based publication that provides information on energy and metals data recently quoted sources at the NNPC as saying.

The source was quoted as saying, “The NNPC has informed the joint venture partners that this year’s capital expenditures will be cut down by 40 per cent from the initial proposed budget of $13.5bn.

“The $13.5bn has been the level that has been maintained in the past three years, but because of the drastic decline in oil prices, that level cannot be sustained this year.”

Initially, the government had proposed N1.22tn ($7.5bn) to fund its share of the oil joint venture operations this year, with the foreign oil firms providing the balance of $6bn.

“But since this budget was agreed in the last quarter of 2014, there have been drastic changes in the parameters considered by the partners,” another NNPC source said.

The Group Managing Director, NNPC, Dr. Joseph Dawha, had in January said the challenge for the Nigerian oil and gas industry was how to manage major projects through both price and fiscal uncertainties.

“A number of deepwater projects may suffer delays or cancellation, including one in Angola, three in Nigeria and one in Ghana; while in shallow waters, two projects in Angola, one in Nigeria and two in Ghana may suffer delays,” he had said.

The Managing Director and Chief Executive Officer, Total E&P Nigeria, Elizabeth Proust, said at a recent conference in Lagos that the lack of adequate JV funding was limiting growth in gas development and production.

“Resolving JV funding could increase production by 2.8 billion cubic feet per day by 2020. Government and industry need to implement a sustainable solution to deliver vital funding for gas.”

Femi Asu, Punch

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