Inside Nigeria’s plan to attract oil investment

Nigeria is improving its commitment to repaying cash call arrears and in reforming fiscal terms in the Petroleum Industry Bill (PIB), moves that signal the country is ripening for fresh investments.

The Nigerian National Petroleum Corporation (NNPC) has so far paid about 66 percent of its cash-call debts worth about $3.1 billion to five major international oil companies (IOCs). This leaves $1.570 billion outstanding, according to the latest statistics released by the corporation.

Cash calls are requests sent by joint venture operators to non-operating partners for payment in the light of anticipated future capital, operating expenditures or need of additional capital contributions. In other words, before expending funds on a project already contracted for or pay invoices due, the operating partner will issue a cash call to the non-operating partner to advance the costs.

It is not practical for all the participants in a joint venture to manage the operations, the partners designate an operator.

Nevertheless, the NNPC has a history of not providing its part of the cost of exploring and producing oilfields that it owns with IOCs. To forestall future relapses, the NNPC has secured several alternative funding options and financing deals for the state-owned oil corporation and its partners.

Nigeria owed the foreign partner companies $6.8 billion in counterpart funding, known locally as cash calls, as of 2016, forcing the government to renegotiate the debts and adopt a new funding mechanism for upstream ventures by late 2016.

The NNPC has also secured about $3.15 billion funding for Nigerian Petroleum Development Company Limited’s (NPDC) OML 13, $876 million for OML 65, and $3.4 billion for OML 11, a development expected to keep investment flowing into a sector crucial for Nigeria’s economy at a time spending is being slashed.

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It also concluded the necessary processes for a $1.8 billion financing for the Ajaokuta-Kaduna-Kano (AKK) pipeline project as well as executed a term sheet with the Bank of China to raise escrowed $519 million from internal cash flows to support equity funding of oil and gas industry projects in the country.

In a bid to attract more investment, Nigeria is also renegotiating commercial contract terms in its proposed oil reform bill in a move it hopes will keep investment flowing into the sector.

Some of the changes to Nigeria’s PIB include the reduction of royalties for new production from deepwater oil fields to 5 percent from 7.5 percent. The threshold for higher royalties has been moved from 15,000 barrels per day (bpd) to 50,000bpd.

The new package comes with a 30 percent reduction in hydrocarbon tax for converted leases down from 42.5 percent in the original copy of the PIB that was presented to the national assembly. Managers of Nigeria’s economy believe this will attract new investments into the oil and gas sector.

Industry officials and analysts say Nigeria’s commitment to settling its cash-call debts in the last two years and reduction of royalties and hydrocarbon tax for new production for oil fields will make the country’s exploration terms more attractive as they compete for a limited pool of capital.

“Certainly, because oil companies are more confident in a system that guarantees a return for investments,” Nigeria-focused energy analyst Abiodun Adesanya said.

The Ministry of Petroleum declined to comment, and the NNPC did not respond to a request for comment.

The OPEC member is also very keen to grow its gas resources as its oil export revenues continue to taper.

Policymakers are increasingly recognising that gas must be the future of Nigeria’s energy resource economy. The country’s large reserves are almost completely untapped. If Nigeria can unlock its gas potential, it may be able to solve some of its greatest wider crises: the lack of reliable power that drives up manufacturing cost and leaves most Nigerians either without any power at all or relying on costly diesel generators.

“The story of oil and gas in Nigeria is a story of missed opportunities if we look at the resource base of the country, our ability to convert that resource base into production and subsequently money for the economy,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, said.

Over the years, Nigeria captures just a tiny fraction of oil and gas investment in Africa, despite crude oil accounting for roughly half of government revenues and nearly all of its foreign exchange receipts, as well as a big part of its presence on the global stage.

Despite its huge oil reserves, Nigeria was able to attract only $3 billion, or 4 percent, out of the $70 billion committed on new projects in Africa between 2015 and 2019.

The sector has a reputation for corruption, inefficiency and problems ranging from high production cost to unrest sparked by environmental damage and lack of development for local communities where oil is extracted. However, things are changing.

As many as 100 oil and gas projects are set to start in Nigeria by 2025, accounting for 23 percent of all energy projects in Africa within the next five years, data and analytics company GlobalData notes in a new report.

Petrochemical projects will hold the highest share of new start-up projects in Nigeria through 2025, with 28 projects, followed by 25 expected upstream oil and gas projects, 24 refinery projects, and 23 midstream projects, according to GlobalData estimates.

To address other major challenges facing its energy sector and maximise oil revenues for an OPEC-member country that records among the world’s highest poverty rates, the Nigerian government has been working for 15 years on new regulations.

The bill is intended to modernise the sector by commercialising the national oil company and ironing out revenue sharing agreements in joint ventures with oil majors in Africa’s largest crude producer.