16 November 2016, Abuja – The cash call arrears owed oil companies by the Federal Government have swollen to over $8.5bn (N2.6tn), a development that has seen the government making moves to exit the Joint Venture cash call system.
The nation’s oil and gas production structure is split between JV onshore and in shallow waters with foreign and local companies, and Production Sharing Contracts in deep water offshor
“In 2016 alone, underfunding of the NNPC cash calls is estimated to be about $2.5bn. This is aside the inherited arrears estimated at over $6bn,” Baru said.
He noted that the chronic JV funding shortfalls being experienced in the industry had resulted in declining JV oil production from about one million barrels of oil per day three to five years ago to about 800,000 bpd.
The NNPC GMD said, “This is coupled with the vandalism of critical production infrastructure that have to be repaired as emergency cases at exorbitant costs, at most times, which further compounds the utilisation of the available funds.
“The truth is that it is difficult to deliver the volumes without adequate funding. With an average JV cash call requirement of about $600m a month, coupled with flat low budget levels over the past years, this has led to underfunding of the industry by the government, which has stymied production growth. Consequently, managing these funding issues is part of our most immediate challenge.”
According to him, production from the PSC arrangement, where NNPC does not provide the funding, has increased almost proportionately to the JV production decline over the same period, thereby making national oil production relatively flat.
Baru said, “Unfortunately, unlike the PSC arrangement, 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.
“We are working assiduously with our JV partners to see that we exit the JV cash call system and also clear our funding arrears.”
Noting that the structural funding problem had been worsened by the security challenges in Niger Delta, the NNPC GMD said, “We are exploring an alternative funding mechanism that allows the JV business to 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 joint venture, 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.”