$200m Local Content Fund Kindles Hope for Oil Industry Renaissance

Nigeria moves to increase indigenous participation in the oil and gas sector with a $200 million local content support fund, writes Chineme Okafor

The Nigerian Content Intervention Fund, endowed by the Nigerian Content Development Management Board, was recently re-launched with an enlarged pool of $200 million. Available for lending to eligible indigenous players in the country’s oil and gas industry, NCDMB signed a Memorandum of Understanding with the Bank of Industry for the management of the fund. The money is expected to strengthen the hands of indigenous companies and ultimately increase the proportion of the total activities in the oil and gas sector carried out by local operators.
The $200 million intervention fund – also called NCI Fund – would be disbursed directly by the BoI at eight per cent interest rate and repaid within five years.

OBJECTIVE

The objectives include helping to keep indigenous service providers in the oil and gas sector busy with project execution, as well as reduce the costs incurred by operators in the course of carrying out projects.
According to the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, the fund would, in addition to a condensed contracting cycle, contribute to efforts at driving down the cost of producing oil and gas in Nigeria.
At the MoU signing ceremony in Abuja, Kachikwu explained the relevance of the fund to the industry. He spoke of his target to drive the amount up to $1 billion soon, adding that with such capacity, indigenous service providers will be far better.

Kachikwu stated, “I congratulate you, it is a huge milestone. It is our hope that this, as small as it is –$200 million, in the purview of a $16 billion type activities is very small – will ginger everybody to begin to look at how to expand this fund.

“My goal for this fund is $1 billion, and once it is launched today, I will have to set up a team that will work internally to first of all get to BoI and ask what their counterpart support for this is because the fund is not just going to sit in BoI. I expect the BoI to support as well as the oil industry.”

CLOSING THE FUNDING GAP

Speaking on the government’s expectations from the fund, Kachikwu noted that it aimed to achieve geographical and sectoral spread, in addition to being used to fund projects that involve cutting-edge technologies, among others. He explained that the fund should be able to provide indigenous players in the industry some cutting edge solutions to their challenges of finding cheap funds to execute their projects.
According to him, “Today’s event is significant for the oil and gas industry and the Nigerian economy because the NCI Fund being launched today has been long expected and will go a long way in addressing the funding challenges which hamper the growth and success of indigenous manufacturers, service providers and other key players in the sector.”
Kachikwu added, “Over the years, Nigerian companies have found it difficult competing with their counterparts from jurisdictions where funding is accessible for five per cent or less as compared to our market where bank lending rates hover around 20 per cent.”

The minister explained that because Nigerian banks were unable to give out loans to service providers in the sector, as well as understand the operations of the industry, the BoI was chosen to manage the fund and give out loans at discounted rates to jumpstart the industry.

He stated, “Some Nigerian banks are still unable to provide long-term financing required by the local supply chain to build needed capacity; the banks also lack sufficient knowledge of the oil and gas sector. The pedigree and operating model of the Bank of Industry is expected to close this gap.

“It is a known fact that the exorbitant cost of funds in our market is partly responsible for the high cost of service delivery by Nigerian Oil and Gas Service Providers (NOSPs) and this feeds into the unacceptable high cost of our crude oil production.”

IMMEDIATE TARGETS

The Executive Secretary of NCDMB, Mr. Simbi Wabote, disclosed that part of the immediate targets of the intervention fund was to support the efforts of the government to end importation of petrol by 2019, by providing the financial backbone for the fabrications of modular refineries in the country.

Wabote stated that already, the board had engaged Original Equipment Manufacturers (OEMs) on this.
He said, “We have also keyed into the drive of the Minister of State for Petroleum Resources to put a stop to the importation of petroleum products. For us in the NCDMB, our strategic initiative is to achieve 100 per cent local fabrication of our modular refineries.

“We have commenced discussions with OEMs and local fabricators to make this a reality. We have set aside areas in oil and gas back scheme for practical training on operations, maintenance and running of modular refineries as a sustainable business model and for fabrication of the units.”

Kachikwu stated that he expected an effective application of the $200 million fund to contribute positively to Nigeria’s plan to reduce the cost of producing oil from $32 per barrel to $15/b. He explained that at a single-digit lending interest, the fund will address the funding challenges which he said had hampered the growth and success of indigenous manufacturers, service providers and other key players in the country’s oil sector.

Speaking further on the target of the fund, the minister requested oil companies in Nigeria to work hard to cut down their cost of producing oil from the average of $32 per barrel to $15. He maintained that with the availability of cheap finance for service providers, oil companies’ repeated excuses of militancy as part of the reasons for high production costs would no longer be tenable. According to him, Nigeria’s target to produce a barrel of oil at $15 is crucial for it to compete favourably with other members of the Organisation of Petroleum Exporting Countries for oil market share.

Kachikwu said, “A lot of debate about the cost of production is on. $32 was the figure quoted from me, and $23 which the NNPC has quoted. The reality is that production in our offshore is in excess of $32 per barrel, no doubt about that, and production onshore was ranging about $28. NNPC has done a good job of bringing it down to $23, but that is not over yet. Where we are headed is $15 and not $18.

“We must be able to look at our OPEC brothers in the face and be able to compete favourably. If you look at it today, the rundown is that we are the second or third country with the highest production cost figure.
“The issue of militancy and all that, we can no longer explain that. We have had militancy for so long that by now we must have alternatives in defence of that. Oil companies must rise to the challenges of producing oil in this country and we cannot produce oil in an environment we are unable to with certainty say what the pricing is going to be and continue to run a high cost model – it will not work. We must drive those numbers down and so for clarity on this issue, the target is $15 per barrel.”

The minister said that contracting cycle for projects in the industry must come down to within six months to reflect on the production cost, adding, “I have been very frank from day one that there is no reason why this country should have a contracting cycle that is in excess of six months.

“Today, we have moved it from 18 to 24 months, down to 13 to 14 – it is still struggling, but we must put speed to this because it costs money and has a direct linkage with my philosophy that we must reduce the cost of production.”