Buhari’s plan for the oil sector focuses simultaneously on boosting earnings from petroleum to funding government operations and diversification, as well as achieving sustainable financing for oil and gas operations in the long-term, writes Joseph Terpase Namor
Few can dispute this fact: Dr. Emmanuel Ibe Kachikwu has with the support and backing of the President, Muhammadu Buhari at several levels more than lived up to the hype that greeted his appointment to lead the President’s reform agenda in the oil and gas industry. He has proven himself as a private sector technocrat and change agent for Nigeria’s oil and gas industry by initiating structural and institutional reforms which have had wide-ranging impact on the industry.
Anyone familiar with what is happening in the Nigerian oil and gas industry will agree that the former Exxon Mobil Vice Chairman has fundamentally changed things. The past two years of the industry under his leadership have witnessed some of the most positive and profound developments in the last three decades. A few examples: Breaking with the long-standing tradition of opaqueness in the oil industry by making public the full operational accounts of the NNPC and doing away with the contentious fuel subsidy program. Also the historic restructuring of the NNPC into six strategic business units and implementation of a series of wide ranging reforms which have succeeded in putting the corporation back on the path of profitability after decades of operating at a loss. t is no surprise a consensus of opinion is that the Kachikwu leadership is moving the industry in the right direction.
At a time when government revenues have drastically declined as a result of the crash in global oil prices, the Minister has been doing a commendable job of ensuring steady increase in revenues from oil to help get the country out of recession. This is because, even though the government’s plan to diversify the economy is the right one given the historic turbulence that defines the global oil industry and the painful effects on our local economy, diversification, as the experience of other countries shows, does not happen overnight. It requires focus, consistency and lots of time. That is why oil and gas still represents Nigeria’s best route out of the current economic crisis. As President Muhammadu put it during the recent launch of the new oil industry roadmap, 7 Big Wins in Abuja: “The golden era of high oil prices may not be here now but oil and gas still remains… a critical enabler for budget implementation as well as source of funds for laying a strong foundation for a new and more diversified economy”. In a pithy reinforcement of the same point, Kachikwu said recently at the launch of the Hydrocarbon Committee in Abuja: “Oil got us where we are now, it will get us out”.
The new focus is in line with the Minister’s thought leadership and an innovative approach to solving perennial problems in the sector. He has been consistent in churning out strategic measures to boost investment in the oil and gas sector while addressing the long term imperatives of building a sustainable foundation for the sector. The key objective is clear: to significantly reduce the burden of financing on government and create a conducive environment that can attract private sector finance for accelerated growth.
On the 17th of November, the Minister recorded a historic milestone in the country’s efforts to tackle this perennial problem of inadequate funds for financing oil and gas operations in the country when he announced the elimination of cash call financing regime which has been in existence for several decades. This followed the National Economic Council’s (NEC) approval of his proposal for a new private sector-led funding regime for Joint Venture (JV) oil and gas operations in the country.
The new funding regime is remarkably different from the previous arrangement. For one, it puts the private sector in the driving seat of financing oil and gas operations from the year 2017. The government will no longer directly contribute to the JV projects. Rather, government contribution will be funded by the financial sector under an arrangement that will allow the banks to recover their monies while the federal government will only collect dividends from the profits. This will free-up the government from the annual ordeal of budgetary cash call obligations and increase the money available for budget financing.
Two, the alternative funding mechanism is projected to increase investment into the oil and gas industry while driving down the cost of oil production. According to the Minister, about $15 billion fresh investment is expected to flow into the country as a result of this measure. The technical cost of oil production is also expected to come down from about $27 to $18 per barrel thereby significantly increasing government revenues.
The new arrangement is assured to scale up investments in the oil and gas sector, while also boosting production output and revenue significantly.
“For instance, net payment from oil production to the Federation Account is expected to peak under the new arrangement to about $18 billion by year 2020, while raising output to 3 million barrels per day,” Mr. Kachikwu explained.
Under the previous arrangement, the burden of financing oil and gas exploration and production lay heavily on the government through budgetary provisions. It was such that the Nigerian National Petroleum Corporation (NNPC) which holds the government’s interest in the six JV operations with International Oil Companies (60% with ExxonMobil, Chevron, Total, Agip and Elf, and 55 per cent in the JV operated by Shell) was required to contribute to the approved annual budget for all programmes in accordance to its equity holding, while profits and losses were similarly shared.
Of course, for all kinds of reasons, this arrangement never worked as planned. Though designed as a convenient tool for partners, the system was abused by politicians and vested interests and mired in all kinds of controversies. Even during the golden era of global oil prices, when prices hovered within the range of $110 to $140 per barrel, the country consistently failed to pay up on its obligation to the JV partners. As a result it racked up a cumulative cash call arrears of over $6.8 billion from 2010 to 2015. The defaults also forced IOCs to drastically scale down explorations and production plans which significantly slowed down development and growth in the sector due to inadequate finances. Besides, the government in addition to handling current obligations had to make annual budgetary provisions running into billions for the payment of the cash call arrears. The abuse of the program actually ended up turning it into a monster with a choking grip on the development of the industry. It is therefore highly commendable that Kachikwu summoned the courage to tackle it frontally.
Not done with re-setting the financing framework, Kachikwu has also championed a historic settlement of the $6.8billion cash call arrears with international oil companies in a landmark deal that will save the country about $1.7 billion. This reduces the total owed IOCs to $5.1billion.
Under the terms of the settlement, Nigeria will only pay western energy companies (Shell, ExxonMobil, Eni, Chevron and Total) $5.1bn to cover arrears of exploration and production costs between 2010 and 2015. The amount is to be paid within five years at zero interest. Another sweetener extracted in the landmark agreement is that the payment will only come from additional barrels generated, not from the 2.2 million barrels. Once the agreement kicks in, it is expected that it will attract over $15billion of investment
The deal which is to be finalized before the end of the year will bring to an amicable end the protracted dispute over the arrears between the country and the oil majors and create a conducive environment for greater foreign investment in the sector.
Kachikwu has been very pro-active and nimble in his response to the challenges that the country is facing. The $15billion cash-raising oil deal with India is a good example of his capacity to leverage what we have to get immediate cash to make up for the huge hole in national revenues. While the deal is far from concluded, the idea is for the Indian government – a long time buyer of Nigeria’s crude – to make an upfront payment to Nigeria for crude purchases.
This, is to be repaid on the basis of firm term crude contracts over some years and in consideration for Indian companies collaborating in the refining sector as well as exploration and production activities on a government-to-government basis. In pursuit of the plan, the minister embarked on a three-day visit to India and held bilateral meeting with his Indian counterpart, Shri Dharmendra Pradhan. An MoU is expected to be firmed up in December 2016 to this effect.
It is a notable development because in 2014, India took over from the United States as the largest importer of Nigerian oil. While India’s imports had gone up to 30 per cent of Nigeria’s crude, the U.S., which initially reduced its oil demand from Nigeria to 250,000 barrels per day, later completely stopped oil imports from Nigeria due to increased domestic shale gas and oil production.
Although a lot of these initiatives are yet to take off fully, the quality of thinking that has evidently gone into them and the huge potential impact on the sector provides proof that the oil sector is finally beginning to work for Nigeria as opposed to a few wealthy persons and multinationals. It demonstrates what the focused leadership of the minister and strong political support of the President can achieve for the country. And it also confirms that the sector is still very capable of attracting more finance and revenues that the country needs to get out of the present recession.
- Namor is a public policy analyst based in Abuja