Poor JV funding shows FG failing the people

The Nigerian Government is so badly underfunding its Joint Venture (JV) equity stakes with international oil partners which include Shell, Chevron, Mobil, Agip and Elf that production volumes from JV fields are down 53 percent in the last ten years.

It also means that the government is failing Nigerian citizens as proper JV funding could have increased governments revenues which could be channelled into infrastructure investments to help diversify the economy and create value added industries.

“Funding issues and other challenges must be resolved in order to unlock Nigeria’s full production potential,” an oil industry source said, on condition of anonymity because he was not allowed to speak publicly.

“FGN reduction in JV funding will exacerbate production decline.”

JV output from the fields where the Nigerian National Petroleum Corporation  (NNPC) owns an average of 58.5 percent equity stake has fallen from about 2.3 million barrels a day (mbd) in 2004 to 1.09 mbd in 2013 oil industry data show.

Over the years, JV cash calls have not increased significantly, inspite of higher oil prices and high cost of project development and this underfunding has led to the NNPC negotiating other less profitable business arrangements in order to fund projects.

In 1991, the government, recognising the high upfront cost of funding the JV, proposed a Production Sharing Contract (PSC) – where IOCs provide funding and recover costs from production if successful – for the deep offshore.

This resulted in the 1993 PSCs, the terms of which were codified into law (Deep Offshore and Inland Basin Act of 1999).

Compared to the JV over the same time period (2004 – 2013) production from the PSC has grown 1,200 percent to 860,000 barrels per day.

Stakeholders say the key contributor to PSC growth has been unconstrained funding, while JV funding is challenged on two fronts, cash call arrears and annual budget shortfalls.

“It is interesting to note that the Deep Offshore PSCs generally offer lower government take, compared to the JV cash call system,” Nigeria’s finance minister, Ngozi Okonjo- Iweala said last year, amid questions from lawmakers about dwindling oil revenues.

Nigeria is losing cash from two sources by not funding its JVs.

The JVs are more profitable than the PSC, so lower production from the JVs means less take for the government.

Nigerian oil production from the PSCs (875,000 bpd) surpassed JV production (837,000 bpd) in 2014, according to data from the Finance Ministry and NNPC.

The government’s take on JVs is an average of $77 per barrel (Pb) when oil prices average $100 Pb which comprises of $19 in royalties, $2 NDDC levy/ Education tax, $51 Petroleum Profit Tax, and $5 NNPC profits, according to industry documents seen by BusinessDay.

When the $20 per barrel average industry exploration development and production costs are stripped out, the governments take is equivalent to 96 percent of gross margins.

The underfunding of its JV equity stakes also means Nigeria cannot increase production volumes to boost revenues to compensate for lower oil prices like other OPEC members.

Abu Dhabi, capital of the United Arab Emirates and its biggest sheikhdom, which holds about six percent of world oil reserves, plans to boost capacity for producing crude oil to 3.5 million barrels a day in 2017 from about 3 million barrels a day currently, even as prices have dropped more than 40 percent in the past year, amid a global supply glut.

Nigeria’s oil production has been stuck at the 2.0 million bpd mark since the 2008 oil price peak, as an estimated $350 billion of proposed investments into the sector were deferred or cancelled.

Estimates of losses include annual JV cash call gaps, the difference between capital expenditure proposals versus actual, planned but undone final investment decisions (FIDs), and cost of capital on project delays.

“JV funding challenges are constraining Nigeria’s overall oil production growth,” said another oil industry source.

“Funding JVs at required level will unleash capacity for broader economic growth and prosperity.”

PATRICK ATUANYA