Starved of dollars, Nigeria struggles to meet cash-call obligations

The uncertainties surrounding access to foreign currency are currently making it difficult for Nigeria to meet cash-call arrears owed to multinational oil companies, which are joint-venture partners of the state-owned Nigerian National Petroleum Corporation (NNPC).

The development is a huge stain on NNPC, whose previous default rate of meeting cash-call obligations in various joint venture contracts with the oil majors has often led to arbitral disputes and cancellation of major projects.

Although the NNPC has paid about 66 percent of its cash-call debts worth about $3.1 billion to five major international oil companies (IOCs) as of November 2020. However, the corporation’s inability to sustain the momentum and settle a $1.5 billion outstanding within the agreed time may send a wrong message about Nigeria’s readiness for fresh investments.

For most experts, NNPC’s present difficulties are the latest signs of strain in Nigeria’s foreign-exchange regime, as the Central Bank of Nigeria (CBN) keeps hanging on to its dollars to support the local naira – leaving a dwindling supply of hard currency to do business that are the bedrock of Africa’s largest economy.

“NNPC is facing an unprecedented level of FX scarcity that is affecting all of its current operations, including payment of cash-call arrears,” a senior oil executive familiar with the matter, told BusinessDay.

He said, “There was a meeting recently where the NNPC offered to pay the IOCs in naira but they turned it down, insisting on following the contractual cash-call repayment agreement signed in 2016.”

In Nigeria, cash calls are requests sent by joint venture operators to NNPC for payment of its 55 – 60 percent share 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 paying invoices due, the operating partner will issue a cash call to the non-operating partner to advance the costs.

Nevertheless, the NNPC has a history of not providing its part of the cost of exploring and producing oil fields that it owns with IOCs.

For instance, Shell Petroleum Development Company (SPDC) is still owed an outstanding balance of $917 million while Total E&P Nigeria Limited and Nigerian Agip Oil Company are owed $252 million and $370 million, respectively.

Shell and Total declined to comment, and NNPC did not respond to a request for comment.

“NNPC’s current struggles are due to systemic problems such as lack of fiscal reforms, high production cost and addiction to cheap petrol,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, said.

Other experts say the delay in cash-call repayments will serve as further discouragement to IOCs who are cutting billions in spending after taking hits to their profits, shifting money to renewable fuels and focusing only on the most cost-effective markets.

For the global oil industry, the financial misery of NNPC is surprising, especially at a time when national oil companies around the world are reporting better financial performance, even declaring dividends despite lower oil prices and the coronavirus pandemic.

For instance, NNPC has the same oil production capacity as Norway’s Equinor, but that is where the similarity ends. Equinor raised its dividend and posted a bigger-than-expected rise in 2021 first-quarter operating profit, boosted by higher oil and gas prices and massive one-off gains from its renewable energy business.

Equinor, a state-owned oil corporation like the NNPC, paid a dividend of 15 cents per share for the quarter, up from 12 cents paid for the final three months of 2020.

Equinor is also the first major oil firm to report its renewables segment separately in Q1 2021, while European peers such as BP, Shell and Total combine their renewables business results with natural gas, marketing or other segments.