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Outlook 2008: After joint venture agreements, what next?
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Oil Platform
As part of the restructuring in the oil and gas sector, the administration of President Umaru Musa Yar’Adua had announced that it would review all the joint venture agreements entered into with multi-national oil companies, obviously due to lack of funding
The problem of funding for joint venture projects started in April 2002, when the Supreme Court decided in the case of Attorney General of the Federation vs Attorney General of Abia State that ‘it is unconstitutional for the Federal Government to fund joint venture contracts and the Nigerian National Petroleum Company (NNPC) priority projects by means of a ‘first line charge’ on the Federation Account’.
The implication of the judgment was that NNPC funding could no longer be drawn in priority to the revenue allocations made in favour of the three tiers of government.
The NNPC holds through the National Petroleum Investment Management Services Company (NAPIMS) an average of 57percent equity in six joint venture operations.
These include Shell, Mobil, Chevron, Agip, Elf and Texaco.
The operating costs of each joint venture are financed jointly, between the joint venture partners in accordance with their equity interests by monthly cash calls
Oil and gas experts who spoke on possible funding options maintained that such options could only be viable if enabling legislations are put in place to restructure the NNPC.
This is the major expectation of stakeholders in the restructuring exercise, which is expected to be concluded this year.
According to them, the NNPC as presently structured cannot access most funding options available locally and internationally, due to bureaucratic delays in securing approvals from the government.
The NNPC Act of 1977 does not confer on it powers to borrow beyond nominal amount of money through bank overdraft arrangement.
Section 8 of the Act provides that the corporation must sought and obtain approvals from the President before making substantial borrowings.
Even the NNPC (Projects) Act 1993 No. 94, promulgated to ensure that the Corporation can pledge its money, revenue and assets to obtain loan is limited to accounts and assets set aside by the Corporation for the specific project .
It does not apply to any other account or asset of the corporation.
This makes it impossible for the NNPC to have access to international capital, especially in view of the borrower-lender confidence, which is very low in the country.
This is further worsened by the provisions of section 14 of the NNPC Act.
The Act grants immunity to NNPC property from execution or attachment by court process.
Henry Chukwumah Okolo, vice chairman and chief executive, Dorman Long Engineering Limited said in a chat with BusinessDay that the expectation of the industry players in 2008 is that the government should enact legislation to make the NNPC a national oil company.
“Given the global energy dynamics, the oil and gas business in Nigeria is one of the most lucrative in the world. Financing should not be an issue. Global funds and the country’s viability potential are so deep that the money the government is talking about is a peanut. Investors are hungry to pump money into the sector. The key issue is for NNPC to have appropriate corporate structure. Making it a national oil company is a right step in the right direction,” he said.
Other stakeholders maintained that government investment in the sector in 2008 should be self-financing.
They suggested that if the government could not fund the joint venture projects, the JVs should become a company of itself, with the government holding 60 percent stake.
The experts however warned that it must be allowed to run like a company.
“When we wanted to build the Nigerian Liquefied Natural Gas (NLNG) projects, we did not invite politicians. That is why it is successful. Government officials should not be involved in running this company,” said an industry source.
Other experts advised the government to explore the production sharing contract (PSC) option.
PSC is a contract between a multinational oil company and NNPC, in which the company provides capital investment, in exchange for control over an oilfield, and access to a large share of the revenues from it.
It is an agreement that arose in response to the funding problems faced by joint venture arrangement as well.
The company bears all costs of exploration and production and such costs cannot be refunded if no oil is found in the field.
However, the cost of exploration and production is recovered from sale of crude oil, after deducting tax, royalty and concession rentals, as well as capital investments and operating costs incurred by the company.
The profit is shared between the NNPC and the contractor in an agreed proportion.
Statoil, SNEPCO, Esso, Elf, Nigerian Agip Exploration Limited, Addax, and Conoco Philips are operating PSC in the country.
Other companies include Petrobras, Star Deep Water, Chevron, and Oranto Phillips.
The government had announced plans to review PSCs with these companies because the government did not envisage the present key role of gas as a revenue earner when it entered into the existing PSCs with the companies.
By and large, stakeholders view PSC as a viable alternative to joint venture agreement.
Major oila companies operating in the country have been asking for an extra $4 billion (N508 billion) as government’s yearly cash obligations on joint venture projects.
This figure is in addition to $ 4.5 billion the government pays these companies yearly for onshore projects.
The Federal Government through the Nigerian National Petroleum Corporation (NNPC) owns more than 49 percent stakes in multinational oil companies’ projects.
Femi Odumagbo, Chevron’s general manager, Government and Public Affairs said in a chat with Business Day that there was actually, a shortfall in government funding of joint venture projects and this had affected the ability of the company to execute projects.
He maintained that the funding challenge was beyond the industry operators.
In a recent chat with Business Day, Tony Okonedo, manager, Communication and Media, Shell Nigeria Exploration and Production Company Limited (SNEPCO) also lamented over government’s inability to provide funding for joint venture projects.
He hinted that the failure of the government to fund projects might affect the ability of Shell to meet the January 2008 zero flare deadline.
Malcolm Brinded, head exploration and production, Shell Group disclosed that the company had spent $3 billion (N381 billion) for the construction of gas-gathering projects in the Niger Delta, without government’s cash obligation.
The Federal Government had maintained that the companies should use excess profit from the sale of crude oil to fund these projects.
The government also argued that when the joint venture agreements were entered into with these companies, it was not envisaged that the prices of crude oil would hit the roof top.
But Peter Voser, Shell’s chief financial officer said the company’s profit from the Niger Delta, was $3 to $4 a barrel as against $20 a barrel in the United States.
Despite the inability of the government to provide its counterpart funding, the government wanted oil companies to grow the country’s daily output capacity and reserves to four million barrels and 40 billion barrels, respectively by 2010.
These growths which will increase to five million barrels a day and 50 billion barrels by 2020 are expected to come from deep offshore projects.
The geological potential of the country is very promising but operators fear that the inability of government to meet its obligations may hinder onshore/shallow prospects.
It is estimated that the total reserve size of the seven world-class discoveries from the deep offshore - Bonga, Agbami, Erha, Akpo, Bonga South West, Chorta, and Nwa/Doro, are more than three billion barrels of oil and 16.2 trillion cubic feet of gas.
How the government create enabling environment to help stakeholders access alternative funding will determine the early completion of some of these projects.
The implication of the judgment was that NNPC funding could no longer be drawn in priority to the revenue allocations made in favour of the three tiers of government.
The NNPC holds through the National Petroleum Investment Management Services Company (NAPIMS) an average of 57percent equity in six joint venture operations.
These include Shell, Mobil, Chevron, Agip, Elf and Texaco.
The operating costs of each joint venture are financed jointly, between the joint venture partners in accordance with their equity interests by monthly cash calls
Oil and gas experts who spoke on possible funding options maintained that such options could only be viable if enabling legislations are put in place to restructure the NNPC.
This is the major expectation of stakeholders in the restructuring exercise, which is expected to be concluded this year.
According to them, the NNPC as presently structured cannot access most funding options available locally and internationally, due to bureaucratic delays in securing approvals from the government.
The NNPC Act of 1977 does not confer on it powers to borrow beyond nominal amount of money through bank overdraft arrangement.
Section 8 of the Act provides that the corporation must sought and obtain approvals from the President before making substantial borrowings.
Even the NNPC (Projects) Act 1993 No. 94, promulgated to ensure that the Corporation can pledge its money, revenue and assets to obtain loan is limited to accounts and assets set aside by the Corporation for the specific project .
It does not apply to any other account or asset of the corporation.
This makes it impossible for the NNPC to have access to international capital, especially in view of the borrower-lender confidence, which is very low in the country.
This is further worsened by the provisions of section 14 of the NNPC Act.
The Act grants immunity to NNPC property from execution or attachment by court process.
Henry Chukwumah Okolo, vice chairman and chief executive, Dorman Long Engineering Limited said in a chat with BusinessDay that the expectation of the industry players in 2008 is that the government should enact legislation to make the NNPC a national oil company.
“Given the global energy dynamics, the oil and gas business in Nigeria is one of the most lucrative in the world. Financing should not be an issue. Global funds and the country’s viability potential are so deep that the money the government is talking about is a peanut. Investors are hungry to pump money into the sector. The key issue is for NNPC to have appropriate corporate structure. Making it a national oil company is a right step in the right direction,” he said.
Other stakeholders maintained that government investment in the sector in 2008 should be self-financing.
They suggested that if the government could not fund the joint venture projects, the JVs should become a company of itself, with the government holding 60 percent stake.
The experts however warned that it must be allowed to run like a company.
“When we wanted to build the Nigerian Liquefied Natural Gas (NLNG) projects, we did not invite politicians. That is why it is successful. Government officials should not be involved in running this company,” said an industry source.
Other experts advised the government to explore the production sharing contract (PSC) option.
PSC is a contract between a multinational oil company and NNPC, in which the company provides capital investment, in exchange for control over an oilfield, and access to a large share of the revenues from it.
It is an agreement that arose in response to the funding problems faced by joint venture arrangement as well.
The company bears all costs of exploration and production and such costs cannot be refunded if no oil is found in the field.
However, the cost of exploration and production is recovered from sale of crude oil, after deducting tax, royalty and concession rentals, as well as capital investments and operating costs incurred by the company.
The profit is shared between the NNPC and the contractor in an agreed proportion.
Statoil, SNEPCO, Esso, Elf, Nigerian Agip Exploration Limited, Addax, and Conoco Philips are operating PSC in the country.
Other companies include Petrobras, Star Deep Water, Chevron, and Oranto Phillips.
The government had announced plans to review PSCs with these companies because the government did not envisage the present key role of gas as a revenue earner when it entered into the existing PSCs with the companies.
By and large, stakeholders view PSC as a viable alternative to joint venture agreement.
Major oila companies operating in the country have been asking for an extra $4 billion (N508 billion) as government’s yearly cash obligations on joint venture projects.
This figure is in addition to $ 4.5 billion the government pays these companies yearly for onshore projects.
The Federal Government through the Nigerian National Petroleum Corporation (NNPC) owns more than 49 percent stakes in multinational oil companies’ projects.
Femi Odumagbo, Chevron’s general manager, Government and Public Affairs said in a chat with Business Day that there was actually, a shortfall in government funding of joint venture projects and this had affected the ability of the company to execute projects.
He maintained that the funding challenge was beyond the industry operators.
In a recent chat with Business Day, Tony Okonedo, manager, Communication and Media, Shell Nigeria Exploration and Production Company Limited (SNEPCO) also lamented over government’s inability to provide funding for joint venture projects.
He hinted that the failure of the government to fund projects might affect the ability of Shell to meet the January 2008 zero flare deadline.
Malcolm Brinded, head exploration and production, Shell Group disclosed that the company had spent $3 billion (N381 billion) for the construction of gas-gathering projects in the Niger Delta, without government’s cash obligation.
The Federal Government had maintained that the companies should use excess profit from the sale of crude oil to fund these projects.
The government also argued that when the joint venture agreements were entered into with these companies, it was not envisaged that the prices of crude oil would hit the roof top.
But Peter Voser, Shell’s chief financial officer said the company’s profit from the Niger Delta, was $3 to $4 a barrel as against $20 a barrel in the United States.
Despite the inability of the government to provide its counterpart funding, the government wanted oil companies to grow the country’s daily output capacity and reserves to four million barrels and 40 billion barrels, respectively by 2010.
These growths which will increase to five million barrels a day and 50 billion barrels by 2020 are expected to come from deep offshore projects.
The geological potential of the country is very promising but operators fear that the inability of government to meet its obligations may hinder onshore/shallow prospects.
It is estimated that the total reserve size of the seven world-class discoveries from the deep offshore - Bonga, Agbami, Erha, Akpo, Bonga South West, Chorta, and Nwa/Doro, are more than three billion barrels of oil and 16.2 trillion cubic feet of gas.
How the government create enabling environment to help stakeholders access alternative funding will determine the early completion of some of these projects.
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