The long-standing inability of the government-owned Nigerian National Petroleum Corporation (NNPC) to fund its own share of joint venture (JV) projects with oil companies has prompted calls for an arrangement similar to what obtains in production-sharing contracts for JV projects to address the funding problem.
This is as NNPC’s inability to fulfil its financial obligation is affecting the activities of the partners and taking a toll on local contractors, as projects are being held up.
Nigeria’s oil and gas production structure is mainly split between JV with NNPC onshore and in shallow water, and production sharing contracts (PSC) in deepwater offshore.
In JVs, NNPC owns between 55 percent (for JVs with Shell) and 60 percent (for all others) of the venture. Under PSCs, NNPC is the oil licence holder, but engages oil firms as contractors that bear all risk and recover costs through a share of production at a tax rate of 50 percent.
JVs are jointly funded by the oil majors and government, but over the years NNPC’s consistent shortfall in funding its share of onshore JVs has been a major challenge, pulling the plug on investment by oil majors.
“This has been an old problem in the industry. Given the fact that there is so much to be done and the amount required in the oil industry is huge, we cannot continue to rely on government to fund the oil sector. This is why we need to find a solution because it is affecting the economy,” Samuel Egube, energy expert and director, corporate banking, Diamond Bank, told BusinessDay.
“Since investments are not going in because of the budget constraints, it is affecting the industry value chain. Contractors are suffering because contracts will not be signed when investments have not been made. Their businesses are going under. We need to rise up and work harder to get the PIB passed,” he added.
The PIB, six years after the Nigerian government came up with it to repeal all the existing oil and gas laws in Nigeria (with exception of the NOSDRA Act), is still struggling to become law in the National Assembly.
The regulatory uncertainty occasioned by the delay in the passage of the vital legislation is also putting the plug on massive investment in oil and gas exploration and production.
Production from JVs, which in the past accounted for about 95 percent of Nigeria’s crude oil output, has continued to decline yearly as international oil companies increasingly shift offshore due to onshore risks including funding, oil theft and sabotage.
Crude oil production from JVs in 2012 was down to 314,740,436 barrels, from 348,509,885 barrels in 2011 and 364,717,172 barrels in 2010, excluding the production from alternative funding. In 2004, the production was 722,797,513 barrels, according to data from NNPC.
Production from PSCs, which in 2003 was a mere 16,718,964 barrels, rose to 320,434,163 barrels in 2012. PSC’s crude oil production per day increased by 1,198 percent from 66,848 barrels per day (bpd) in 2004 to 868,013 bpd in 2013, said BusinessDay Research and Intelligent Unit (BRIU) 2014 Oil and Gas Industry Report.
The report added that the PSC production had been on steady growth since 2004 and recorded its peak production of 875,503 in 2012 due to world-class projects worth over $40 billion in investment into the deepwater production in 2012.
“We have major challenge with JV funding. In PSC, you hardly hear anybody talking about funding problem. There is no issue in PSC because we had to look for the money,” said Bayo Ojulari, general manager, development, Shell Petroleum Development Company (SPDC).
He said if the country could move from JV to PSC that would be like the privatisation seen in the power sector, and that would be a fantastic solution.
“More PSCs and then no more funding issue for the oil industry. If you look at some of the major strides Shell has made recently in Nigeria both in domestic and export gas, they were not from JV funding. Gbaran-Ubie, which is the largest onshore gas development in Nigeria, was built through creative solution or what we called modified carry agreement with government. If we were sitting and waiting for government to come up with solution, we would not have it in place today,” Ojulari told BusinessDay.
Elizabeth Proust, managing director/CEO, Total E&P Nigeria, said recently that lack of adequate JV funding was limiting growth in gas development and production.
“Resolving JV funding could increase production by 2.8 billion cubic feet per day by 2020. Government and industry need to implement a sustainable solution to deliver vital funding for gas,” said Proust at a recent conference in Lagos.
“Nigeria’s domestic gas market has significant potential that requires investment across the value chain to realise growth and achieve economies of scale. Gas resource potential is sufficient to meet the growing domestic demand and of high-value export market,” she said.
The carry agreement/modified carry agreements model requires one party to pay all the cost incurred for approved JV operations on behalf of another party, but with an understanding that the first party will be reimbursed through a combination of tax relief and incremental oil production derived from the JV operations.
JVs are due to be phased out over the medium term under the planned Petroleum Industry Bill (PIB), while fiscal terms for PSCs will be significantly raised.
Upon the passage of the PIB, NNPC will be broken up and commercialised, as part of efforts to solve capital crunch where NNPC is unable to fund its share of JVs.
“Moving NNPC into public ownership, which is what the PIB seeks to do, is another solution. It will be able to list on the Stock Exchange and raise equity,” said Egube.