Imperatives of Sale of Nigeria’s JV Assets

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Since the federal government’s earnings from the oil joint ventures is not largely determined by Nigeria’s equity in the assets, Ejiofor Alike suggests that the divestment of NNPC’s stake has become imperative to resolve the corporation’s inability to meet its cash call obligations, which have accumulated to arrears of $7 billion

Inadequate budgetary allocations have weakened the capacity of the Nigerian National Petroleum Corporation (NNPC) to meet its funding obligations in the joint ventures (JVs) with the international oil companies (IOCs).

In the JVs, each of the partners lifts crude oil and contributes funding, otherwise called cash-call, according to their equity holdings in the joint venture company.
NNPC holds either 60 per cent or 55 per cent in the current JVs with the IOCs, and thus contributes the equivalent funding requirement, while the IOCs provide the balance.
However, over the last 10 years, the federal government has demonstrated lack of financial capacity to fund the JV projects between the NNPC and the IOCs.

While crude oil production from JVs has dropped drastically, production from projects under the Production Sharing Contract (PSC) arrangement, which are solely funded by the IOCs, has risen by an estimated 500 per cent over the same period, according to industry statistics.

With the chronic funding shortages to meet NNPC’s cash call obligations, coupled with the attacks on onshore facilities by militant groups, Nigeria’s crude oil exports are currently sustained largely by the 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 attacks on the traditional shallow water and onshore terrains, coupled with the chronic funding challenges had prompted a wave of divestments of onshore assets by the IOCs to Nigerian independents.

A major challenge of the JV system, therefore, is the inability of the NNPC to meet its cash-call obligations.
This had led to the establishment of a new fiscal regime – PSC, modeled 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.

Dangers of funding shortages on JVs

The inability of the country to meet the 4 million barrels per day production and 40 billion reserves targets in 2010 was largely caused by the funding challenges in the JVs.
Apart from the declining JV production and its attendant negative effects on revenues, the funding constraints have also reduced the country’s competitiveness in the oil and gas business, as investors seek to take their money elsewhere.

As Nigeria’s competitiveness is being eroded, there is declining investment and employment opportunities, potentially increasing the risk of social disorder as evident in militancy, Boko Haram insurgency and other violent agitations.

The position of the IOCs shows that the cash call challenge has also led to declining fiscal buffers –foreign exchange, reserves and social safety net, in addition to increasing financial exposures, which manifested in the allegation of crude over-lifts, which is a subject of litigation before the courts.

Industry statistics indicate that in 2005, Nigeria’s crude oil production averaged 2.5 million barrels per day and the JVs accounted for 2 million barrels per day.
However, by 2016, funding challenge has forced the JV production to drop by over 50 per cent to less than one million barrels per day.

At the same period, PSC production has grown by over 500 per cent due to non-involvement of government in the funding.
It is estimated that Nigeria should have been producing between 500,000 barrels per day and one million barrels per day more than it is currently producing from the JVs if the NNPC was paying its cash calls.

By January 1, 2016, the cash call arrears was $5.5 billion and by May 2016, it grew by additional $400 million, according to the NNPC.
THISDAY gathered that even if the government pays NNPC’s cash calls under this current inadequate funding level, JV production will still decline by 200,000 barrels per day by 2020
But the federal government has not even been paying NNPC’s cash calls, thus leading to the accumulation of the arrears to about $7 billion.

It has also been argued that if the arrears continue to accumulate at this rate, the country will lose 400,000 barrels per day from the JVs by 2020 and 700,000 barrels per day by 2025.
THISDAY’s investigation also revealed that apart from the outright failure of the NNPC to pay its cash call, the corporation has also delayed the budget of the JVs with none of the IOCs being privy to the budget until half of the year has gone.

This budget delay, it was learnt, is contrary to the provision of the Joint Operating Agreement (JOA), which stipulates that by October of the prior year, all the parties in the JVs should have agreed on the budget, which they will sign by December, prior to the beginning of the year.
The budget delay has no doubt impacted negatively in the execution of business plans, which also accelerated the astronomical decline in JV production.

According to industry statistics, Nigeria’s JVs are crippled by cash call arrears; about $3 billion funding shortfall yearly; mutual mistrust between the IOCs and the government; $10 billion dispute before the courts; contracts not being respected; multiple taxes; security concerns; and long contracting cycle.

Government’s take

Despite NNPC’s inability to meet its financial obligations to the JVs, the JVs have remained the most profitable to the government.
Though the federal government, through the NNPC has 55 per cent or 60 per cent stake in the JVs, government’s earnings are not largely determined by the amount of equity in the JVs but is derived from taxes and levies.

THISDAY gathered that after deducting the expenses/NNPC’s indebtedness, the IOCs pays 85 per cent of the profit from the JVs as tax.
Apart from the Company Income Tax (CITA) paid by companies, the IOCs also pay other taxes and levies, thus increasing government’s earnings, irrespective of the amount of equity held by the NNPC.

Some of the levies include: Niger Delta Development Commission (NDDC); Nigerian Maritime Administration and Safety Agency (NIMASA) levy; Education Levy/tax; Nigerian Content Development Fund (NCDF) levy; Maritime Logistics Cabotage; Coastal and Inland Cabotage; Vessel and PersonalCabotage; Cargo Fees; Air Traffic Control Fees; Pilotage; Offshore Safety Permit; and various tariffs for radioactive equipment.

Other payments include: Oil Mining Lease (OML) rentals; gas penalty fees; NESS fees; EIA registration; royalties and PPT.

After the addition of the levies and taxes applicable to JVs, government takes over 90 per cent of the profit and this is independent of NNPC’s 55 per cent or 60 per cent stake in the JVs.
Therefore, the revenues the federal government derives from the current JVs are not largely dependent on the NNPC’s equity, unlike in incorporated JVs where government’s share of dividends will be according to the proportion of NNPC’s equity.

Sale of stake as panacea

Nigeria will potentially face the Venezuelan experience if the current trend in the JV business continues in the next couple of years.

To wriggle out of the current funding challenges in the JVs, the federal government should reduce NNPC’s exposure in the business by taking several deliberate and systematic measures in the medium and long terms.

For medium term, government can privatise the NNPC, sell equity or issue JV bonds.
In the long term, the federal government can also convert some of the JVs to PSCs, commercialise NNPC or incorporate the JVs, thus removing them from the national asset, so that the corporation can keep its own revenue and pay dividend to the federal government.

However, with the current economic recession in the country where external reserves have been depleted and the value of the naira at an all-time low, the country is in dire need of capital to finance the 2016 budget, especially with the dwindling oil revenues.

It is therefore imperative that the sale of part of NNPC’s stake in the JVs should be the most plausible option.

For instance, despite having $582 billion in foreign exchange reserves, which can enable it to weather a few more years of low prices, Saudi Arabia is planning to divest a stake in the country’s state oil company, Aramco, which is NNPC’s equivalent.

Also apart from planning to sell five per cent stake in Aramco to generate about $120 billion, the kingdom is also planning to tap the bond market late this year to raise funds.
Multiple sources within Shell, ExxonMobil, Chevron, Total and Nigerian Agip Oil Company (NAOC) had told THISDAY that the sale of NNPC’s stake in the JVs to the IOCs would free the government from the challenges and boost production.

The last time the federal government sold NNPC’s stake to a JV partner was in 1993, when the JV partners signed the sixth participation agreement that reduced NNPC’s stake from 60 per cent in the third equity participation agreement to 55 per cent.

One of the sources had told THISDAY that the partners would insist on acquiring the assets to reduce their exposure to the NNPC in the areas of the corporation’s persistent failure to meet its cash call obligations in the joint ventures.

“NNPC has 55 per cent stake in the JVs but cannot provide 55 per cent of the cash calls. This exposes the IOCs to financial risks of sourcing for funds to meet the JV obligations. If NNPC sells part of its stake to the IOCs, the risk faced by the IOCs will reduce,” he said.

To increase its participation in the oil and gas business, the federal government had in April 1973 acquired 35 per cent shares in the oil companies operating in the country.
By 1974, the second participation agreement, which increased government’s stake to 55 per cent, was signed.

In 1979, the third equity participation agreement was signed, retaining government’s equity in the joint ventures to 60 per cent.

However, a fifth participation agreement in 1989 retained NNPC’s stake in the JV at 60 per cent, with Shell controlling 30 per cent, while Elf and Agip took five per cent each.
But in 1993, the joint venture partners also signed the sixth participation agreement reducing NNPC’s stake to 55per cent in 1993, with Elf, acquiring the five per cent offloaded by the NNPC.