FG exits JV contracts in January as debts hit $8.5bn

The Federal Government will exit her Joint Ventures (JV) contracts with Shell, Chevron, ExxonMobil, Total  and Eni by January 2017, as the chronic cash call debts it owes the partners hit $8.5 billion mark.

Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Dr. Maikanti Baru, disclosed this in a keynote address at the 2016 Annual Conference and Exhibition of the Nigerian Association of Petroleum Explorationists (NAPE) in Lagos yesterday.

He, however, promised the government’s commitment to offset the JV cash call debts. Noting that underfund ing   of NNPC Cash Calls was estimated to be about $2.5 billion in 2016 alone, asides the inherited arrears estimated at over $6 billion, Baru maintained  that the JV cash call exit model the corporation is pursuing guarantees the government most of the revenue that normally accrues to it from the JV operations by lifting the Royalty and Tax Oil upfront.

These developments came as the government, in a document by the Ministry of Petroleum Resources entitled: “Short term policy document,” sighted by our correspondent yesterday, also set a new 3 million barrels daily oil production target and a 7.5 billion cubic feet additional gas production with an inflow of foreign investment in the range of $100 billion.

Nigeria’s oil production, which has remained stagnant for years due, dipped to below 1 million barrels daily during the heat of the Niger Delta militancy, which started last February.

T he chronic JV funding shortfalls being experienced in the industry, Baru said, have resulted in declining JV oil production from about 1 million barrels of oil per day 3-5 years ago to about 800,000 barrels of oil per day.

“This is coupled with the vandalism of critical production infrastructure that have to be repaired as emergency cases at exorbitant costs, at most times, which further compounds the utilisation of the available funds,” he said. “The truth is that, it is difficult to deliver the volumes without adequate funding.

With an average JV cash call requirement of about $600 million a month coupled with flat low budget levels over the past years, this had led to underfunding of the industry by government, which has stymied production growth. “Consequently, managing these funding issues is part of our most immediate challenge.”

In contrast, according to the NNPC helmsman, production from the Production Sharing Contracts (PSCs) arrangements where NNPC does not provide the funding for the production has increased almost proportionately to the JV production decline over the same period, thereby making the national oil production relatively flat.

He said: “Unfortunately, unlike the PSC arrangements, the JV system provides more revenue to the government through equity lifting and higher royalties and taxes due to the higher fiscal take from onshore and shallow waters fiscal terms.

The low crude oil price regime further amplifies this anomaly. “What are we doing to tackle the reality of challenges highlighted above? As stated by the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, and myself at different fora, we are working assiduously with our Joint Venture partners to see that we exit the JV cash call system and also clear our funding arrears.”

To address this structural funding problem, which is further compounded by the security challenges in Niger Delta, Baru said: “We are exploring alternative funding mechanism that allows the Joint Venture Business finance itself by retaining its Operating Costs and Capital Allowances (Fiscal Costs) in order to sustain and grow the business.

Where the fiscal costs for any year are not sufficient to fund the budgetary requirements of the Joint Venture, part of the profit margin could be retained to fund the budget and where necessary, external financing could also be sought to finance commercially viable and bankable capital projects without recourse to government treasury.

“The import of the above is that the Joint Ventures will relieve government of the cash call burden by sourcing for its funds for its operations (estimated at $7-$9 billion annually). In 2016 alone, underfunding of NNPC Cash Calls is estimated to be about $2.5 billion. This is aside the inherited arrears estimated at over $6 billion.

“The JV cash call exit model we are pursuing guarantees government most of the revenue that normally accrues to it from the JV operations by lifting the Royalty and Tax Oil upfront. This contributes 75% to 85% of the accruable revenues to Government. Consequently, the effect on government take would be minimised.

We are working assiduously to kick start this from 1st January, 2017.” In the same vein, the government, the Ministry of Petroleum Resources’ document showed, “intends to completely overhaul the oil sector, from reviewing policies to introducing robust fiscal instruments and regulations that will attract huge investment opportunities in infrastructure development.”

This aims to increase its crude oil output to 2.8 million barrels per day by 2019 and to 3 million barrels per day by 2020 from the current average of 2 million barrels per day. Gas output was targeted to surge to 10 Bcf/day by 2019 from the current 2.5 Bcf/d.

“This is expected to encourage an influx of potential investors into a portfolio of high-value projects of $100 billion with healthy and diversified returns,” the ministry said in the document.