NNPC’s upstream financing plan: Matters arising

14 October 2015, Lagos – Nigerian National Petroleum Corporation (NNPC) the other day initiated the Accelerated Upstream Financing Programme (AUFP) by borrowing US$1.2 billion from a consortium of indigenous and international lenders in order to supplement the Federal Government’s cash-call commitment to the corporation’s joint venture being operated by Chevron.

NNPC-Towers-AbujaThe NNPC Group Managing Director, Ibe Kachikwu, explained that the AUFP was designed as the alternative contractual model in upstream financing in order to give a wide berth to the “issue of Federation Account (which) must be left sacrosanct and not be toyed with.” Some reports put outstanding cash-call commitment at about $6 billion.

The NNPC’s decision elicits several issues. Firstly, efforts dating back to 2001 to reform and make the petroleum industry to positively impact the economy and the host communities culminated in the Petroleum Industry Bill (PIB). The NNPC’s joint-venture international oil companies (IOCs) opposed the PIB’s fiscal provisions while legislators from a section of the country disagreed with the proposed stakeholding of 10 per cent reserved for host communities in some aspects of the oil industry. The delays and uncertainties that enveloped the PIB, which made potential investors in the sector to adopt a wait-and-see attitude, were possibly the main reason the cash-call arrears piled up prior to the collapse of crude oil prices since June 2014. Do the seeming finality and gusto with which the NNPC announced the AUFP signify the death of the PIB? Does the NNPC have the legal backing to carry on in this manner? Will the joint-venture arrangement with the IOCs continue with the operators managing the AUFP funds opaquely like the cash-call contributions hitherto?

Secondly, concerns about transparency and fair dealing in the petroleum industry immediately spotlight the cost of the proposed project. Being the 60 per cent equity holding, NNPC’s contribution of $1.2 billion means that the total cost of developing the proposed 36 oil well is $2 billion. Is the average of $55.6 million (N10.9 billion) per well a fair cost of the required work on this category of wells? In this connection, the uppermost consideration in recent time is to broaden and deepen local participation in the petroleum industry. Having rushed to sign the loan papers, the NNPC owes the public explicit and demonstrable assurance that provisions of the Nigerian Content Act will guide the financing and execution of the project.

Thirdly, according to the NNPC statement, the loan would help guarantee current crude oil production levels in the short term as well as build depleting oil reserves. In that case, the cued benefits appear to be questionable. For instance, incremental revenue generation of $2 billion to $5 billion is being envisaged. Will the revenue increase come from anticipated rising crude oil price or will it be as a result of the loan putting an end to deduction of cash-call commitment from the Federation Account (FA)? Also the project is billed to produce 61 million barrels of oil equivalence (bce) per day including condensate and associated gas yield. The promised bce daily output by 2018 is 30 times the current average daily crude oil output for export by all oil producers. Is the estimate realistic?

Fourthly, the expected gas output for use in the power sector is deemed to be significant. But considering both the non-availability of pipelines for gas evacuation to feed far-flung power plants and that relatively low volume of gas consumption has constrained investment by IOCs and other promoters (ignoring the PIB for now) in the remaining components of the gas grid contained in the Gas Master Plan, will the NNPC raise another external loan to complete the national gas grid? In effect, will the envisaged gas output not more likely be flared than utilised? And relatedly, will the Transmission Company of Nigeria require a dollar loan in order to string the reinforced power transmission grid that the country sorely needs?

Fifthly, the AUFP loan raises a fundamental issue: why should the NNPC and Nigerian banks repair to London to sign any financing loan amidst over N70 trillion idle bank lending capacity in the economy? Why are the international lenders in the consortium not named? The disclosure is necessary for the sake of transparency and the need to douse any suspicion that this country is the source of the dollar funds borrowed by the NNPC from abroad. What are the full terms of the loan, which the Nigerian people will have to repay?

All in all, it is a national shame that more than 55 years of commercial oil production during which period oil proceeds have accounted for over 50 per cent of the annual budgets on paper since 1974, the Federal Government’s willful but inappropriate handling of the oil proceeds has made the economy today incapable of self-reliantly sustaining the operations of the petroleum industry and providing catalytic infrastructure across the various sectors. The latest manifestation, nay, ploy to exploit at the national expense the weaknesses induced by the inappropriate handling of Federation Account proceeds is the NNPC’s choice of foreign loans to finance upstream oil operations.

Along with projects of other economic sectors based on foreign loans when there exists unutilised ample domestic bank credit capacity, the NNPC’s decision poses economic risks. It is akin to importing toothpick or refusing to consume what it is available or produced locally. Projects financed in that manner do not bear far-reaching linkages and synergies but exploit and transfer abroad significant growth and developmental benefits needed in the (borrowing) country. Such loans sow the seeds of balance of payments difficulties in the future and prove ineffective to eliminate mass poverty.

This newspaper has untiringly pointed out that Nigeria’s chronic economic weakness is caused by the willful excessive fiscal deficits substituted for withheld Federation Account oil proceeds and that the economic malaise will only clear when Federation Account dollar allocations are converted to non-inflationary naira revenue through deposit money banks by means of the managed float system. That way, conducive economic conditions will quickly evolve just as the humongous but idle domestic bank credit potential will begin to be accessed across the board at internationally competitive interest rates thereby laying the foundation for diversified and greatly enhanced non-oil revenue generation.

On its part, the Federal Government will garner healthy volumes of internally generated forex revenue as part of exclusively FG-owned external reserves and so be in a position to foot expenditures such as uninflated cash-call commitments, construction single-handedly of power and gas transmission grids, refurbishment of old and financing of new socio-economic infrastructure projects as well as be able to top up the sovereign wealth fund to boot. It is a great misfortune that successive federal administrations have remained wedded to fiscal and monetary policies that sabotage national economic progress. And the Buhari administration should break the cycle now.

  • The Guardian Newspaper editorial
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