As Kachikwu Ends JV Cash Calls

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Nigeria’s negotiation of the JV cash call exit policy spearheaded by the Minister of State for Petroleum, Dr. Ibe Kachikwu, has the potential to improve the trajectory of the country’s oil and gas sector, which was retarded by chronic funding shortages, writes Ejiofor Alike

The federal government, through the Nigerian National Petroleum Corporation (NNPC) has over the years, demonstrated lack of financial capacity to provide its cash calls to fund joint venture projects.

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

Poor funding led to declining production in the JV assets, while 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.

It was the failure of the government to provide JV cash calls that actually led to the establishment of Production Sharing Contract (PSC) as an alternative fiscal regime, which was 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, and only recoups the investment outlay when it starts the export of crude oil.

The country had also experimented on the Sole Risk form of fiscal regime before the introduction of PSC.

However, the danger in the Nigerian PSC is that the IOC is not refunded the exploration cost if oil is not found in a commercial quantity.
Nigeria’s crude oil exports are sustained by the 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.
Inadequate funding of the JVs, coupled with the crisis in the Niger Delta, accounted for the country’s inability to meet 4 million barrels per day production capacity and 40 billion barrels reserves target by 2010.

To address the JV funding challenges, which retarded the growth of the sector, the Minister of State for Petroleum, Dr. Ibe Kachikwu had promised to work out new funding models that would enable the country to exit the cash call model and also pay the arrears of unpaid cash calls.
Federal government’s underfunding of the industry through JV Cash Calls stood at $9.125 billion by September 2016, according to data by the petroleum ministry.

Cash call model exit agreement

Kachikwu’s efforts to resolve the funding challenges paid off recently with the successful signing of the cash call exit agreementS between the NNPC and the IOCs.
At the end of the negotiation, the IOCs agreed to be paid their accumulated arrears up to December 2015, over the period of about five years.

The agreements also provide that the payments of the arrears will not be a cash burden on the federal government as they will be made via incremental production from each JV.

The Director of Press at the Ministry of Petroleum Resources, Idang Alibi quoted the minister as saying at the signing ceremony that the consensus in the industry was that with the signing of agreements to exit cash calls, investments would soon flow into the Nigeria’s oil and gas sector.
He argued that if the industry focused on key issues that impede the industry and resolve them, Nigeria’s oil and gas industry would soon be able to compete favourably with its peers across the world.

Explaining the agreements, the Group Managing Director of NNPC, Dr. Maikanti Baru stated that the signing of the exit cash call agreements comprises three components – the process of settling the pre-2016 cash call areas; the process of sustaining the cash call payment from 2017; and agreement and settlement over performance in 2016.

Baru commended Kachikwu for his contribution to exit cash calls in the industry and also acknowledged President Muhammadu Buhari for mustering the political will to exit the troubled funding model.

Baru noted that Kachikwu offered necessary supports to put the framework of the agreement in place and also energised the process when naughty issues capable of derailing negotiations arose.
In his remarks, the Chairman of Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry, who is also the Chairman and Managing Director of Chevron Nigeria Limited, Mr. Clay Neff, said the signing ceremony represented a milestone in the industry.

Neff was optimistic that the agreement would stabilise and also increase upstream production over time, adding that the repayment of the arrears in a sustainable manner is a key enabler to additional investment in the upstream sector in Nigeria.

Benefits of agreements

Under the new arrangement, the entire NNPC equity oil and gas revenues are now to be paid directly into the Federation Account.

Before the signing of the agreements, competition from other appropriated items of expenditure in the federal government’s budget has always limited the deduction of technical cost required to fund the cash calls on monthly basis.

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

However, the execution of this agreement will end the long-standing cash call challenges that have impacted the Nigerian oil and gas industry over the years.
With this new arrangement, the federal government will continue to receive royalties, taxies and profit from its equity share of JV oil and gas production while the cost of operation is deducted upfront.

The agreements provide that the outstanding cash call arrears will be repaid within a period of five years through incremental production revenues without impacting the established based production revenue.

NNPC has also projected that it would increase production from the current 2.2million barrels per day to 2.5mbpd by 2019, and also reduce Unit Technical Costs from $27.96 per barrel of oil equivalent (boe) to $18 per boe.

According to government’s projection, the net payments to the Federation Account is expected to double from about $7 billion to over $14 billion by 2020 as the immediate effect of the new cash call or will increase net federal government revenue per annum by about $2 billion.

This arrangement will guarantee payments of statutory oil and gas royalties and taxes by NNPC and its JV partners as well as profit from its investments in the JVs.

It is projected that at the $42.5 per barrel oil price which the 2017 budget is predicated on and $24 per barrel fiscal cost recovery proposed for 2017 in the Medium Term Expenditure Framework (MTEF) recently submitted to National Assembly, over $13 per barrel will accrue to government as royalties and taxes from JV oil and gas production apart from $2.8 per barrel estimated as government share of profit, at 57 per cent equity.

Security as key to investments

Despite the resolution of the JV funding challenges, Nigeria’s oil and gas sector is still faced with security challenges as a result of the renewed militancy in the Niger Delta.
Nigeria’s crude oil production had hit 2.5 million barrels per day in the pre-militancy days before the attacks on oil and gas facilities, as well as kidnapping of expatriate oil workers for ransom, wrecked the industry.

It was the security challenges in the Niger Delta, which escalated in 2005 that largely led to the inability of the country to attain the four million barrels per day production and 40 billion barrels reserves targets, which was set for 2010 by the administration of former President Olusegun Obasanjo.

Militancy has also crippled power generation and led to abysmal performance of the refineries as vandalism disrupted gas and crude oil supplies to power stations and the refineries, respectively.

A frightening statistics by the Vice-Chairman of the Security Subcommittee of the Oil Producers Trade Section (OPTS) of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Shina Bankole, showed that Nigeria lost over 130 million barrels of crude oil from January to November this year to the activities of 32 militant groups in the Niger Delta region.

Speaking in Lagos recently at the 17th Health Safety and Environment (HSE) Biennial Conference on the Oil and Gas Industry in Nigeria organised by the Department of Petroleum Resources (DPR), Bankole, who is also the General Manager in charge of Security at Chevron Nigeria Limited, had noted that insecurity in the Niger Delta had led to the proliferation of several militant groups, as well as small arms and weapons.

Bankole added that between January and November, 58 incidents of sabotage were recorded where oil and gas facilities belonging to the oil companies were vandalised.

“Again, within the same period, the rate of sabotage on oil and gas assets has led to lost production opportunities by the oil companies. As of today, more than 130 million barrels of crude oil have been lost due to the inability of the oil companies to produce as a result of the activities of the militants,” he added.

He said with the rehabilitation of about 30,000 ex-agitators, the Amnesty Programme introduced in 2009 by the federal government had successfully restored normalcy to the oil-producing region until 2015 when new militant groups began to emerge.

“The resurgence of militancy since 2015 has led to the proliferation of militant groups. As of today, no fewer than 32 of such groups have emerged in the Niger Delta – some with possible ethnic agenda, while others came with a criminal agenda,” he said.
Bankole disclosed that of the over 275 cases of kidnappings recorded across 29 states between January and November, 45 cases were related to oil and gas industry personnel and their dependants.

According to him, of the 99 incidents of sea robberies and pirates recorded within the same period, 19 cases involved the oil and gas industry.
However, Kachikwu, who was represented by his Senior Technical Adviser on Fiscal and Regulatory Matters, Dr. Tim Okon, had assured that President Muhammadu Buhari’s Petroleum Industry Roadmap, better known as the “7 Big Wins”, would stabilise the region for oil and gas business.
The minister acknowledged that the insecurity in the Niger Delta had raised the cost of security by six times over the past

10 years and put the entire ecosystem of Niger Delta under threat as a result of the oil spills caused by vandalism of facilities by militants.
Now that the country has exited the cash call model, stakeholders should focus on the security challenges in the Niger Delta.