• Thursday, February 29, 2024
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Understanding NNPC’s new payment model, IJV agreement

NNPC

Top on the lists of most discussion in the industry space is the news about plans of Nigeria National Petroleum Corporation (NNPC) to introduce a new model tagged Incorporated Joint Venture (IJV).

A new payment model set up to ease the funding of joint venture projects that have suffered delays due to financial hitches.

During a panel session at the Nigeria Oil and Gas (NOG) Conference in Abuja, NNPC Group Managing Director, Maikanti Baru said the IJV model was conceptualised out of the need to encourage healthy business culture and growth in the energy sector.

Baru, who was represented at the panel session by the Corporation’s Chief Operating Officer (CEO), Bello Rabiu, said the IJV model, when implemented, would make oil and gas business more productive and beneficial to investors.

 

Understanding the proposed structure of IJV

An IJV requires the creation of a new legal entity in a specific country which allows two or more companies to collaborate and carry out a common activity requiring legal instrument such as incorporation and shareholders agreement.

Under the proposed framework, the IJV’s will serve as incorporated commercial entities that can go to the financial market, raise capital for business and pay dividends to their shareholders. What this entails for the government is that the government owned partner in the joint venture needs to be a commercial, capitalized company.

The IJV would serve as the operator in its own fields and would be empowered to independently source for funds for executing its projects. It would also be allowed to sell and keep the funds derived from cost oil and cost gas while transferring all other hydrocarbon produced to its shareholders.

The IJV removes the need for cash call and annual funding strategy which will create transparency across all JV partners, reduce level of government bureaucracy.

 

Implication of the new IJV model

Charles Akinbobola, energy analyst at Lagos based energy firm Sofidam Capital  said arguably, exploring the IJV model is a smart move for the Corporation as the model will provide significantly better asset protection to the Joint Venture parties compared to the unincorporated ones.

“This is because the liabilities of the venture will usually be contained in, and limited to, the JV Company, rather than being borne by the Joint Venturers directly,” Akinbobola said.

Other stakeholders believes it will improve accountability within the governing structure, offer greater opportunities for technology acquisitions, reduce political interference and minimize rent seeking activities related to crude lifting.

Current Structure

NNPC currently holds the Federal Government equity interest under the concessionary fiscal system through joint venture or Production sharing Contract (PSC).

While the JV remained the principal contract model introduced in 1986, which typically govern onshore/shallow water projects for the purpose of exploration and production of resources, the inability of the NNPC to fund its equity participation in the JV led the arrangement to be increasingly unmanageable.

This however gave birth to the PSCs introduced in 1993, to address some of the issues faced by the Joint Operating Agreement (JOA) and also to provide a suitable agreement structure for encouraging foreign investment in offshore domain.

The Nigeria Federal Government of recent declared its move to reduce stakes in JV oil assets to 40 percent agreements with IOCs, which it thought wise to be the best hope to shore up revenue.

Recall, Nigeria has been on a perpetual voyage with Petroleum Industry Bill (PIB), a bill which holistic address most of challenges facing the Nigeria’s oil and gas sector. The bill is one its most important bills ever to be contemplated in its history in a journey that begin over  16 years ago with lots of anticipation and promises.