Kachikwu’s funding options for $7bn unpaid JV cash calls

20 June 2016, Abuja – Nigeria’s crude oil production from the Production Sharing Contracts (PSCs) with the international oil companies (IOCs) is known to have grown by over 700 per cent in the last 10 years due to federal government’s non-involvement in funding PSCs. In contrast, the country has lost over 50 per cent of crude oil production from the joint venture (JV) operations during the same period as a result of government’s inability to provide its JV cash calls, which has accumulated to $7 billion. Ejiofor Alike writes that the Minister of State for Petroleum, Dr. Ibe Kachikwu, should pursue vigorously his proposed funding models to liquidate this outstanding obligation

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Dr. Kachikwu

Shortly after assumption of office as the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Dr. Ibe Kachikwu, had unveiled plans to explore alternative funding models to pay the outstanding arrears of NNPC’s obligations to the joint venture companies with the international oil companies (IOCs), which currently stand at about $7 billion.

Before entrenched interests mounted spirited opposition against his reform at the NNPC, Kachikwu’s target was to pay all the arrears, which was then around $6 billion, by the end of December 2015.NNPC

As at that time, the reform was already yielding dividends with the corporation already saving $150 million monthly from the cancellation of certain contracts, while he focused on transparency for the NNPC to get back its credibility.

In the joint venture between the NNPC and the IOCs, each of the partners contribute funding, otherwise called Cash Call, according to their equity holdings in the joint venture company and also lifts crude oil in that proportion.

Under current JV arrangements between the NNPC and the IOCs, the NNPC contributes about 55 per cent of the funding requirement, while the foreign firms provide the remaining 45 per cent.

But the federal government, through the NNPC has over the last 10 years demonstrated lack of financial capacity to fund the JV projects between the NNPC and the IOCs.

In contrast, production from projects under the PSC arrangement, which are solely funded by the IOCs, has risen by about 700 per cent over the same period.

In fact, Nigeria’s crude oil exports are sustained today by huge production from prolific deep offshore fields such as Shell’s Bonga, ExxonMobil’s Erha, Total’s Akpo and Usan; and Chevron’s Agbami, which are all under PSCs.

The IOCs, on the other hand, are selling their stakes in JVs to local entities due partly to government’s inability to provide its own funding to boost investments in JVs.

So, a major challenge of the joint venture system is the inability of the NNPC to meet its cash-call obligations.

This development led to the establishment of a new fiscal regime – PSC, modelled after Indonesia’s Production Sharing Agreement.

Under a PSC, the NNPC does not contribute any fund as the PSC contractor (IOC) provides 100 per cent of the risk capital, as well as technical and manpower requirements.

However, the contractor recoups the investment outlay when it starts the export of crude oil.

But the grave danger in the Nigerian PSC is that the IOC is not refunded the exploration cost if oil is not found in a commercial quantity.

Following the National Assembly’s failure to allocate enough money as cash calls for the NNPC in the country’s budget over the years, the arrears of JV cash calls have accumulated to about $7 billion.

“If you ask for $4 billion; they (National Assembly) will give you $1.5 billion,” Kachikwu had told THISDAY.

For the first time in a very long time, Kachikwu had on assumption of office, introduced a raft of measures to open up the oil and gas sector and enthrone a regime of transparency, due process and accountability in an industry that was run in an opaque and secret nature.

Due to inadequate funding of the JVs by the NNPC, crude oil production by the NNPC JV with Shell, Chevron, Total and ExxonMobil has dropped by 50 per cent in the last 10 years.

According to statistics obtained by THISDAY, the country should have been producing between 500,000 barrels per day and 1 million bpd more than it is producing today if the government had been providing adequate funding.

Kachikwu’s new funding models

Kachikwu achieved a major feat for the JV when he secured$1.2 billion multi-year drilling financing package for 36 offshore/onshore oil wells under the NNPC/Chevron Nigeria Limited Joint Venture as one of the funding models he proposed.

With the restoration of the confidence of local and foreign investors in the sector, a landmark achievement was recorded when the $1.2 billion multi-year drilling financing package was secured in 2015.

The funding package, which is being financed by a consortium of Nigerian and international lenders, is an integral part of the Accelerated Upstream Financing Programme initiated by Kachikwu to address the perennial challenge experienced by the federal government in providing its counter-part funding of JV upstream activities.

A breakdown of the NNPC/ Chevron JV deal, which was executed at a signing-ceremony in London, showed that the $1.2 billion is to be channelled into the development of 23 onshore and 13 offshore wells on Oil Mining Leases (OMLs) 49, 90 and 95 in two stages over 2015- 2018.

Stage one, comprising 19 wells is projected to deliver 21, 000 barrels of crude oil and condensate per day alongside 120 million standard cubic feet of gas per day, mmscf/d, over 2015 and 2016.

Stage two, comprising 17 wells is projected to yield 20, 000 barrels of crude oil and condensate per day alongside gas production of seven mmscf/d of gas between 2016 and 2018.

It is envisaged that both stages of the project would generate $2 billion to $5 billion of incremental revenue to the Federation Account.

Beyond the contribution to the national treasury, the projected peak incremental gas production of 127 million standard cubic feet per day (mmscf/d), which is the electricity equivalent of 400 megawatts, would help boost the Federal Government’s domestic gas aspirations with expectant positive effect on power supply.

Kachikwu had described the new alternative funding arrangement as the new contractual model in upstream financing which would serve as a template for future initiative to supplement the federal government’s joint venture Cash Call commitment.

While commending the NNPC/ Chevron Joint Finance Team and the consortium of local and international lenders led by Standard Chartered Bank and UBA, the minister had noted that NNPC would not relent in the renewed effort to restore probity and transparency to the process of generation, collection and remittance of crude oil proceeds.

He encouraged the other IOCs to come up with funding models that would be favourable to the joint venture partners.

Exploring Funding Options

The minister has consistently restated that rather than waiting for the federal government’s budgetary allocations, there are viable alternative funding options for the JV projects if the government and the IOCs could sit on a negotiating table.

As the then Executive Vice Chairman and General Counsel of ExxonMobil (Africa), Kachikwu had prepared the legal framework for the successful raising of about $15 billion in recent years by the joint venture between the NNPC and Mobil Producing Nigeria (MPN).

As the Minister of State for Petroleum, he should therefore be allowed by entrenched political interests to implement his vision for alternative funding options such as External Financing (EF); and Alternative Funding (AF) or Modify Carry Agreement (MCA).

Having been given a free hand by President Muhammadu Buhari to implement the Change Agenda in the oil and gas industry, he should not be distracted in implementing the administration’s dreams. As a global business run in line with global best practices, Nigeria’s oil and gas business should not be mixed with local politics.

“I am grateful to be working with the President, who has done everything that you would expect in terms of giving you the latitude to bring the issues on the table; discuss with him; and reach decisions that will be fruitful to this industry.

So, if you see the speed with which we are moving, it is because he has given me the free hand and is willing to work with me to sanitise the company. The President is very emotional about the poor people,” Kachikwu had explained.

External financing will relieve the federal government of its obligations to the JVs.

In external financing, commercial banks provide funding for approved JV work programmes at cost-effective and market-driven borrowing rates.

External financing is structured in a way that the lenders have no recourse to the JV assets, as the loan is secured from forward sale of incremental volumes.

Under Alternative Funding or Modified Carry Arrangement, the IOC funds the NNPC share of the approved JV work programme.

The IOC receives agreed after-tax Internal Rate of Return (IRR), while the loan is repaid via tax relief and crude oil liftings.

As pointed out earlier, the joint venture between the NNPC and Mobil Producing Nigeria had successfully raised $15 billion through these alternative funding options in recent years.

Shell has also raised billions of dollars under Modified Carry Arrangement to fund NNPC’s share of JV work programmes.

The federal government should therefore provide all the enablers for the IOCs to use alternative funding options to finance NNPC cash calls, so as to solve the problem of the inability of the corporation to fund the JV, which has constrained Nigeria’s overall oil production growth.

Alternative funding has provided viable options for funding JV projects, especially during this period of plummeting crude oil price.

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