The plummet in crude oil prices has further aggravated the Federal Government’s inability to fund Joint Venture (JV) agreements with international and indigenous oil companies. Prior to the oil glut, payment of cash calls and requests for payment for anticipated future capital projects sent by Joint Venture operators to the Government as non-operating partners had always been a challenge, with payments either being partially made or not at all.
A Joint Venture operation is standard practice in the ownership of assets in Nigeria, it usually takes the form of an agreement between the national oil company, Nigerian National Petroleum Corporation (NNPC), international oil companies (IOCs) and sometimes indigenous oil companies. In the arrangement, all parties contribute to funding oil exploration and production operations in the proportion of their JV equity holdings and receive crude oil produced earnings in the same ratio.
As at January 2015, NNPC owed $5bn in cash calls to its Joint Venture partners. Speaking on this issue, the Managing Director and Chief Executive Officer, Seplat Petroleum Development Plc., Mr. Austin Avuru, had at an industry event in January, raised concerns about the NNPC’s value to the industry. He 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 NNPC; project delays and $5bn of cash calls in arrears that have not been paid to the point where you ask the question: Is NNPC really adding value to the industry today?”
Managing Director/CEO, Total E&P Nigeria, Elizabeth Proust, further buttressed Mr. Austin Avuru’s comment, saying, “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.”
This particular challenge has adversely affected production output by 200,000 barrels per day. Production from JVs, which in the past accounted for about 95 percent of Nigeria’s crude oil output, has continued to decline yearly as international oil companies increasingly shift offshore due to onshore risks including funding, oil theft and sabotage.
According to the Public Relations Officer of PENGASSAN, Emmanuel Ojugbana, “Oil companies are owed billions of dollars in cash call arrears putting the jobs of our members and other workers in the industry in jeopardy as companies easily rationalize disengagement of staff and reduction in welfare packages due to lack of funds.”
Evidently with the continued oil crisis, the NNPC will be unable to meet their JV funding obligation this year. Platts, a US-based publication that provides information on energy and metals data, recently quoted sources at the NNPC as saying “The NNPC has informed its Joint Venture partners that this year’s capital expenditures will be cut 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.”
The government has also come to the realisation that the current JV funding model is not working; over the years series of models have been adopted as a source for alternative funding, which proved futile. In 1993, the PSC model was adopted as the preferred petroleum arrangement with IOCs. Under this arrangement, the concession was held by NNPC and it engaged the IOC or the indigenous company as Contractor to conduct exploration and production activities on behalf of itself and NNPC. The contractor takes on the financing risk and if exploration is successful, the Contractor is entitled to recover its costs on commencement of commercial production. If the operation is not successful, the Contractor bears the loss.
The second model adopted was the service contract. Under this model, the Contractor undertakes exploration, development and production activities for, and on behalf of NNPC, at its own risk. The concession ownership remains entirely with NNPC, and the Contractor has no title to the oil produced. The Contractor is reimbursed cost incurred only from proceeds of oil sold and is paid periodical remuneration in accordance with the formulae stipulated in the contract. The Contractor has the first option to buy back the crude oil produced from the concession.
Industry experts have suggested more appealing alternatives for all concerned parties such as a Modified Carry Arrangement (MCA). The MCA is a financing agreement whereby the IOC will advance a loan to NNPC for the purpose of investing in upstream projects with an understanding that the IOC will be reimbursed through a combination of tax relief and incremental oil production derived from the JV operations.
Another option is reducing the percentage of government equity (usually 60%) in the operations and letting the IOCs and indigenous companies cover exploration and development costs.
Suggesting a way forward, the Head of Energy, Ecobank Capital, Mr. Dolapo Oni, said, “The best option will be to incorporate these Joint Ventures and list them on the Nigerian Stock Exchange (NSE), so that they can raise their funds through equity or debt directly, and also pay dividends to investors.”
To date, alternative funding models adopted by some IOCs has witnessed some success. ExxonMobil has successfully generated about $15billion of alternative capacity through external financing and Modified Carry Agreement. This has accounted for about 70 percent of current JV production. ExxonMobil’s model of external financing entails that commercial banks provide funding for approved JV work program at cost-effective, market driven borrowing rates; the lenders have no recourse to JV assets and the loan is secured by revenues from forward sale of incremental production volumes.