FEC Caps FG’s Oil Revenue Expenditure, Portion to be Moved to SWF

•  Policy proposes NNPC exits JVs by end of 2017, conversion to PSCs

Chineme Okafor in Abuja

The Federal Executive Council (FEC) has approved a new National Petroleum Policy initiated by the Ministry of Petroleum Resources, which would place a cap on the proportion of oil revenue that can be spent by the federal government.

A statement from the petroleum ministry said that the policy was approved at Wednesday’s FEC meeting, held in Abuja.

Key highlights of the policy showed that it seeks to limit the amount of oil revenue that can be spent by the federal government, while a certain percentage would be swept into the Sovereign Wealth Fund (SWF) for future generations and funding of key infrastructure projects.

The policy also said the government may consider conversion of some oil Joint Venture (JV) operations to Production Sharing Contracts (PSCs) as part of its plan to exit the JVs by the end of 2017.

“Under the petroleum policy, the government will agree to a cap on the proportion of petroleum revenue that can be spent on current expenditure. From the remainder, the government will put aside an agreed percentage of petroleum revenue to the Sovereign Wealth Fund, to be dedicated for capital items and for future generations.

“The government will explore mechanisms by which petroleum revenue can be managed for the benefit of future generations. The intention is for Nigeria to commit to two principles: To put a cap on the proportion of petroleum revenue that can be spent on current national expenditure; to put an agreed proportion of petroleum revenue into the Sovereign Wealth Fund, to be used for underpinning major infrastructure projects within Nigeria; put aside or invested for the benefit of future generations,” the policy states.

On the JV cash calls, it said the challenges of the Nigerian National Petroleum Corporation (NNPC) with meeting its obligations would be addressed with the proper capitalisation of the state-run oil firm, with a structure that allows for project and balance sheet financing.

It equally stated that the government will participate less in financing operations in the sector, except on rare occasions where it would be required to make pioneer investments to enable private investors take up huge interests going forward.
“The difficulty of monitoring and checking the costs that the operator (IOCs or international partners) present is not unique to only the JVs but it is even more prevalent in the PSCs.

“The solution may be incorporating the JVs and using fiscal tools to incentivise cost reduction. It must also be said that contracting cycles, government mandates and bureaucracy are also important factors in cost escalation in the Nigerian petroleum industry.
“An unincorporated JV does not have a legal presence (it is not incorporated) and so it cannot raise funds from the financial markets to finance activities, thus leading to the partners having to fund all operations and the cash call situation.

“Under the new petroleum policy, government’s interest in the upstream will consist of IJVs, PSCs currently under the 20-year production phases and PSCs at exploration phases.

“It is the intention of the petroleum policy to evaluate existing PSCs at the end of their exploration and production phases in order to determine the appropriate financing structure and risk reward matrix needed for any proposed renewals,” it explained.

It further noted: “Under the new petroleum policy, the government may consider the conversion of some JVs to Production Sharing Contracts. However, such potential conversions need to meet the requirement that the historical equity capital contributions to the resource must be recognised and the risk reward profile must be significantly beneficial to the state.

“Under the petroleum policy, all cash call arrangements under the NNPC JVs will be exited, with a target of exiting all of them by the end of 2017,” the document stated.

Also on the Niger Delta, it said the government recognises that the region has suffered from the petroleum exploration and production operations and that the region must share in the benefits from the hydrocarbons exploitation.

According to the policy, “The government will develop a Niger Delta-wide model with the intention of involving Niger Delta communities directly in infrastructure, social and petroleum developments in their local community area.

“Concepts can include, among others – to identify small and marginal fields which it may be possible to develop in partnership with local communities; to explore mechanisms whereby local communities can be integrated into project developments; to explore models for community-based trust funds; engaging local communities in projects in their local area; small equity holdings for communities in oil operations in their areas.”

In the statement, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, stated that the policy would guarantee Nigeria some fluidity in pricing and price uncertainty for crude oil, adding that the ministry was also looking to move Nigeria away from exporting crude oil to refining of petroleum products by guaranteeing a stable environment to support investments in refining.

He said the policy defined the strategy of the government with respect to Nigeria’s oil resources and establishes the medium to long-term targets for oil reserves growth and utilisation, as well as strategies to be pursued to ensure the successful implementation of the policy in accordance with Nigeria’s national socio-economic development priorities.