Incorporated Oil JVs as Better Funding Alternatives

One of the biggest challenges of Nigeria’s oil and gas industry has been that of funding. The international oil companies (IOCs) in the existing joint venture arrangements have consistently complained that government’s budgetary allocations for cash call purposes have often and chronically fallen short of requirements over the years, thus never permitting exploration and production developments to reach their real potential. This has negatively impacted capital expenditure requirements for increasing exploration and production levels from the existing joint venture fields, thus leaving the industry in a state of stagnation, thus preventing its full contribution to the national economy. Pointedly, this cash call challenge has prevented the national targets of attaining daily production and reserves of four million and 40 billion barrels respectively by 2010 from being realised.

The monthly report on the operations and finances of the Nigerian National Petroleum Corporation (NNPC) for December 2015 has shown that the corporation channelled a total of $4.13 billion into funding its cash call obligations in the various joint venture operations with the IOCs operating in the country. At the close of the year, the joint venture funding has gulped more than 87 per cent of the total proceeds the NNPC made from its export crude oil and gas trade. And as at January 2015, the NNPC was indebted to about $5 billion in cash calls to its joint venture partners. The corporation has also faced consistent challenges meeting its funding obligations.

The NNPC currently maintains up to six joint venture agreements with different oil companies, as follows: NNPC/SHELL/ELF/AGIP with an equity ratio of 55:30:10:5; NNPC/MOBIL – 60:40; NNPC/AGIP/PHILIPS – 60:20:20; NNPC/ELF – 60:40; NNPC/CHEVRONTEXACO – 60:40; and NNPC/PANOCEAN – 60:40.

Under the JV arrangements, all parties contribute to funding oil exploration and production operations in the proportion of their JV equity holdings and receive crude oil produced earnings in the same ratio.

The joint venture cash call obligations arose as a result of Nigeria’s participation in the operations of existing multinational oil companies in the country. Before the joint venture era, Nigeria was only involved in the enforcement of the laws and regulations on petroleum and the collection of taxes therefrom. However, starting in 1973, Nigeria, like other Organisation of Petrol Exporting Countries (OPEC) member countries, decided to take an active part in the exploitation of its oil and gas resources. This was done by Nigeria buying into existing oil and gas concessions of seven IOCs. The percentage of participation in the operations of each concession stands at about 60 per cent (except in the case of Shell where the government equity is 55 per cent, as shown above).

The relationship was governed by a participation agreement as well as a Joint Operating Agreement (JOA). Due to these cash call shortfalls from government, the industry has resorted to rather expensive alternative funding approaches in financing some green field projects. These alternative funding approaches are short term and have not provided acceptable stable solution to the funding problem and cash call crises. Rather, the cash call shortfalls have steadily risen from a few hundred million to the current $5 billion. Joint venture funding is therefore an immediate challenge for which a long-term solution must be sought.

Solution to the joint venture problem will usher in the environment that will permit the exploration and production of oil and gas in Nigeria to attain their real development potential.

Solution to Joint Venture Funding

A long-term solution should involve conversion of all joint ventures to Incorporated Joint Ventures (IJVs), which can obtain loans and/or go to the capital market for funding.

We must convert now to incorporated joint ventures like PDO in Oman or NLNG already in operation in Nigeria.

The IJV will be an entity incorporated under the laws of the Federal Republic of Nigeria, registered with the Corporate Affairs Commission (CAC) of Nigeria, and the incorporation process, including capitalisation and restructuring, will be carried out through negotiations with the respective international oil companies during the reform transition period.

Ownership Structure

The ownership (shareholding) will be held by:

• National Oil Company of Nigeria (NOCN) on behalf of FGN

• International Oil Companies (IOCs) in the current joint ventures (JVs)

For example, for the SPDC JV the ownership on conversion will be: NOCN – 55%, Shell (SPDC) – 30%, Total -15% and Agip – 5%.

The IJV will have a board composition that reflects the ownership (shareholding) structure, and will be operator of the oil and gas operations in the licences awarded to it (with a designated operator), will have the rights to source funds from the capital market, will sell and keep the funds derived from cost oil and cost gas will transfer all other hydrocarbon produced to its shareholders, and employees will be seconded from shareholding companies.

It should be noted that positions will be allocated upon agreement to ensure technical and commercial competence of IJV and proportional control by shareholders. Very importantly, position allocation should allow NOCN to acquire required competences, and direct participation operation by NOCN staff will aid National Content Development implementation.

IJV Cost Oil

• IJV budget agreed annually by board

• Board secures shareholder support of budget

• Board and shareholders approve oil price assumptions for each budget year and approve the cost oil allocation to IJV

• Cost oil assumptions reviewed and adjusted in June of budget year

Assurance on Cost Oil

• It is in the interest of shareholders that cost be kept to a minimum

• IOC staff will aim to minimise Nigeria specific costs, and

• NOCN staff will press to minimise expatriate and affiliate company costs

• This tension will assure cost oil minimisation which is in the interest of all

Operations

• Regulation of operations will be by the regulatory body (PIC)

There should be no requirement for supervision by NAPIMS

• Contracts will be subjected to the IJV tender board review and recommendation made to the IJV board.

• Normal reporting of business performance and risk management to the board

• Monthly reconciliation of cost oil and oil lifting.

Benefits of IJV Structure

• Liberates IJV from funding uncertainty

• NOCN staff will be integrally involved in all aspects of the operations.

• Provides government with a better forecast of net revenue from oil and gas industry

• Permits more efficient operation by removing the layer of supervision done by NAPIMS as well as reducing cost of operations

• Will assure efficiency by tension created by staffing with shareholder employees

• Provides NOCN with direct access:

• To control of operations through seconded employees (and as major shareholder)

• To IOC technology and industry best practices processes

• To patents developed during operations as this will belong to IJV

• Allows IJV to shop globally for best-in-class technical expertise

• Improves transparency of operations.

• Access to all information, both technical and commercial.

Returns to Government

The IJV scenario was modelled and presented in the split of the barrel (attachment) that shows government take to stand at 78 per cent, a significantly robust return when viewed from zero cash call position of the government. It is a significantly better return when compared with the Year 2000 Production Sharing Contract return of 55 per cent.

In light of the above and in consideration of the pertinent funding cash call issues, a long term and stable permanent solution to the cash call problem is the formation of IJV commercial entities that can source its own funding from the capital market. The precedence for the success of such IJVs can be found in PDO Oman, Egypt and NLNG Nigeria.

Such IJVs will also afford NOCN the opportunities for developing competences as well as direct involvement in the management and control of the operations for superior net revenue delivery to government.

In light of the forgoing, the federal government should approve for all existing JVs to be converted to IJVs as soon as practically possible, and to become operational no later than the 2018 budget cycle.

The realisation of the IJVs will bring to an end the perennial headache to government of funding its share of the oil and gas business through cash calls. It will establish more sound and profitable management of our economic resource.

• Dr. Egbogah, a former Special Adviser Petroleum to former President Olusegun Obasanjo, wrote this letter to President Muhammadu Buhari on February 18, 2016