NNPC cash-for-oil deal mortgages 30% of output

The recent decision of the Nigerian National Petroleum Company Limited’s (NNPC) to pledge a total of 440,000 barrels of crude oil per day (bpd) to secure cash deals has raised questions about the future of Nigeria’s oil wealth and the well-being of its citizens.

Africa’s biggest oil-producing country currently pumps around an average of 1.4 million bpd.

To achieve this, NNPC Ltd uses Joint Venture Agreements with local and international oil companies to produce in onshore and shallow-water oil wells. It owns 60 percent of benefits in these agreements but often fails to contribute its share of costs
, leading to what is known as cash call arrears in the industry.

Experts are at a loss on why NNPC is mortgaging over 30 percent of Nigeria’s current oil production of 1.4 million bpd at a time the country is not extracting enough value from its oil reserves of 37 billion barrels and revenues are badly needed to shore up declining external reserves and prop up a bruised currency.

Kelvin Emmanuel, an energy economist and board member at Obsidian Archenar Nigeria, said it beggars belief that the Nigerian government in 2024 is embarking on the financialisation of future revenues from oil and gas assets by securitising crude oil and gas output in pursuit of immediate cash.

“At a time when the Nigerian government should be laying out a detailed plan to conduct house cleaning for NNPC Ltd or books, start book building for an IPO, the Nigerian government is amortising precious future crude oil earnings in a deal structure that robs the federating units of millions of barrels of crude oil in oil for swap transaction that sums up the point Jeffrey Frankel made in his working paper about the ‘Resource Curse Theory’ at Harvard University,” Emmanuel said.

Data from NNPC Ltd.’s newly released audited financial report showed the national oil company acquired a 20 per cent stake in Dangote refinery for $2.76 billion through a $1.036 funding from Lekki Refinery Funding Limited, of which $1 billion was paid to Dangote Oil Refining Company and $36 million accounting for transaction costs.

NNPC Ltd said: “The balance of the cost of equity investments made in Dangote refinery, which is $1.76 billion will be paid upon completion of the refinery project starting April 1, 2023 or any other date agreed between the parties (NNPC and Dangote Oil Refining Company Limited) via a combination of a $2.5 discount (on the official selling price) per barrel on 3oo,ooo bpd to DPRP FZE, and 100% of NNPC’s portion of any dividend declared by Dangote Refinery throughout the repayment period.”

To acquire the $1.036 billion funding from Lekki Refinery Funding Limited, the NNPC said it entered a forward sale agreement (FSA) with Lekki Refinery Funding Limited for the sales of 35,000bpd of NNPC’s future crude oil for the settlement of $1.036 billion (N426.2 billion).

“So, a corporation borrowed at the London interbank offered rate of plus 600 to buy equity in an offshore refinery that it intends to utilise whilst having onshore refineries that it intends to rehabilitate?” a senior oil executive who pleaded anonymity said. “Where is the money coming from for Port Harcourt and others?”

The delivery of crude oil to Lekki Refinery Funding Limited was scheduled to commence in August 2023, the NNPC said.

“We have staked our crude oil so much on loans, though I understand it is for immediate need, but the FX opportunity cost is worrisome,” Nuhu Abubakar, a financial analyst with an international consulting firm, said.

Chukwuka Chukwuemelie, a project manager, said borrowing just to own a stake in a private refinery is not a good investment of public funds.

“NNPC Ltd doesn’t need to own a stake there no matter what they put on paper. NNPC is still the government, whether we accept it or not,” Chukwuemelie said.

The NNPC reserved up to 90,000 barrels of crude for the $3.3 billion financing deal it got from the African Export-Import Bank last year.

Its audited report also showed NNPC Exploration & Production Limited (NEPL) recorded capital commitments of $352.88 million (N158.3 billion) as of December 31, 2022.

According to the NNPC, this relates to the forward sale agreement with Eagle Export Financing Limited for the delivery of crude oil.

Based on the agreement, the NNPC report said at least 1,800,000 barrels of crude oil must be nominated and scheduled by NEPL and delivered at the relevant delivery terminal to Eagle Export Limited in every delivery period which commenced on August 28, 2020.

To acquire 40 percent of Chevron Nigeria’s interest in OML 86 and 88, the NNPC said finances were raised through a forward sale agreement with Middleton Export Funding Limited to fund the acquisition through Project Brogue and as of December 31, 2022, $33-36 million has been paid back.

“Hence, NEPL has a capital commitment to Middleton Funding Limited as of 31 December 2022 amounting to $266.64 million,” the NNPC said.

“What is sad is that Nigeria is still at 1.3 million bpd when ideally the country should be meeting 1.8 million bpd. The delta and other implications might not be so bad if only we can produce what we need,” Jide Pratt, country manager at Trade Grid, said.

Nigeria’s oil and gas industry, the source of much of the country’s foreign receipts and more than half of government revenues, finds itself on shaky ground in 2023 as chronic underinvestment and rampant crude oil theft threatened to erase gains from subsidy removal or refinery renaissance.

The pain of this large-scale theft and vandalism, as well as decades of under-investment in infrastructure, was so severe that last April, the country produced less than one million barrels of oil daily, far below its 1.8 million bpd quota from the Organization of Petroleum Exporting Countries.