NNPC’s contracting bottlenecks blow up cash call debt

The backlog of joint venture (JV) cash call debt which stands at about $6bn, blamed on the Nigerian National Petroleum Corporation’s  (NNPC)  unwieldy contracting process is taking a heavy toll on the country’s economy.

Prior to the recent pronouncement by Ibe Kachikwu, minister of state for Petroleum Resources, that it was reducing its contracting cycle to six months,  the NNPC’s contracting cycle stretched between two and four years.

Analysts have long blamed the long gestation period of the contracting circle as partly responsible for loss of jobs and increasing cost of oil sector contracts, as inflation, labour crises and other issues often set in during such delays.

Other African oil producing countries usually have a four-month contracting cycle, BusinessDay checks show.

Also,  Nigeria’s contracting hiccup is worsened by a multiplicity of bidders, application of manual tools in bid evaluation and divergent tender requirements by approving entities such as the Nigerian Content Development and Monitoring Board (NCDMB), National Petroleum Investment and Management Services (NAPIMS) and the International Oil Companies (IOCs).

Industry operators say this development does not augur well for the national oil company as huge funds are wasted in administrative costs arising from the protracted process which further creates loopholes exploited by unscrupulous officials. 

“NNPC is not adding value when it makes contract cycle cumbersome and lengthy. This has caused project delays and contributes to over $5billion cash call debt,” said Austin Avuru, MD/CEO Seplat Petroleum Development Plc.

“Cost of operation in the upstream sector has soared due to security issues in the Niger Delta and bottlenecks in the NNPC.”

In its half year 2015 financial report,  Seplat Petroleum Development Plc reported a receivable balance (cash call arrears) of over $5oom in its joint venture with the Nigerian Petroleum Development Company (NPDC) the operating arm of the state hydrocarbon company NNPC, in Oil Mining Leases (OMLs) 4, 38 and 41, in the western Niger Delta Basin.

Olu Akinola, a Lagos-based lawyer said it is time for the NNPC to streamline its operations to achieve efficiency.

“It is better to sign a small tenured contract with limited contracting cycle than a long and unwieldy one. If you sign a contract, whether it is supply, employment or other types; it is easier to disengage from the contract with a short tenure that is failing than a drawn-out one,” Akinola said.

The Federal Government has resorted to settling its cash call debts from borrowing and crude oil exchange arrangements.

In 2009, it said it would partly fund its debt by borrowing funds from its joint venture partners – Shell, Total, ExxonMobil, Agip and Chevron.

In December 2015 during an interactive session with Nigerians living in Vienna Austria, Ibe Kachikwu, said high level discussions are underway with local and international investors to bridge the perennial JV cash call funding gap through borrowing funds.

Past administrations have entered all kinds of arrangements, including foregoing 16 percent of Nigeria’s total oil production to the IOC’s to repay cash call debt.

After posting a N267bn loss in 2015, NNPC’s operations report for November showed that out of $4.5bn crude export sale revenues made between January and November 2015, $3.9bn was used to pay JV cash calls debt, reducing remittance to the Federation Account to a paltry $608 million.

The impact of this reduced income to the Federal Government means that the government cannot fund its vital obligations to Nigerian citizens. President Muhammadu Buhari last week travelled to China to borrow $6bn to fund the 2016 budget deficit.

However the problem is more nuanced as it has had a trickledown effect to the average Nigerian.

Major sectors of the economy that are buoyed by government spending, especially construction and these are contracting on revenue shortfalls.

Prices of goods have soared on the back of bourgeoning inflation and government’s macroeconomic policies including foreign exchange controls and refusal to liberalise the petroleum downstream sector continues to add to the potpourri of chaos.

State governments are so stuck in debt that after deducting their loan repayment from the Federation Account, a state like Osun had only N6million left to fund its operations in February.

Babatunde Fashola, minister of Power, Works, and Housing, in February, during his ministry’s 2016 budget proposal defence, said the Federal Government was owing contractors handling over 200 on-going road projects in the country about N1 trillion.

Analysts have said the dip in oil prices leading to almost 70 percent fall in oil prices from 2015 prices indicate that the Federal Government cannot afford to treat the NNPC’s processes with indifference.

ISAAC ANYAOGU