FG sets out bold move to resolve oil industry crisis

The Federal Government has set out a set of fresh initiatives to resolve Nigeria’s oil industry crisis which has constrained growth and even led to considerable divestment by the mainly western joint venture partners, BusinessDay has learnt.

In a four page letter dated March 31 and titled “guidelines for resolution of industry financial challenges” and addressed to the CEOs of Chevron, Shell, Total and Agip, the minister of state for petroleum, Ibe Kachikwu said, “the Nigerian oil and gas industry now stands at a cross-roads as the financial challenges that we collectively face are threatening the viability of our business and, if left unresolved, could cripple our industry and erode the substantial progress that we have made on various fronts.”

Saying he was writing on behalf of the government of Nigeria and the NNPC, the minister identified the unresolved challenges as – the joint venture cash call arrears of approximately $3-5bn, the current year to year cash call funding issues and government’s plan to exit cash call payment going forward, and finally the production sharing contract, PSC lifting dispute of approximately $5bn and the unclear status of the PSC arbitration awards.

On the cash call crisis, the government acknowledged that there had been a dispute not just about delayed payment but also about the actual amount owed, with the IOCs still maintaining that the debt is in the region of $5bn, with the government talking of a reconciled position in the region of $3bn.

According to the minister, “to avoid unnecessary lengthy negotiation process, and given the fact that some of those expenditures were carried out without following the JOA provisions, the HMPR (who in this case is President Muhammadu Buhari) has indicated his willingness to consider a full and final settlement amount not exceeding $4bn.”

The government proposed that the repayment of the proposed settlement amount be based on “incremental production to be financed through alternative financing arrangements over a five year period.”

On the year to year JV cash call, the minister said the “NNPC is securing government mandate to lift and retain a portion of its JV equity production for the recovery of Opex and qualifying capital allowance… Any additional capital funding requirement can be met by 3rdparty financing, where an IPC may co-lend subject to appropriation by the National Assembly. A $5bn third party loan has already been provided for in the 2016 appropriation.”

Finally, the government said as at the end of last year, the PSC contractor parties claim that NNPC over-lifted crude oil valued at $5bn, based on their interpretation of the 1993 PSC terms, while the NNPC insists that its liftings are well within the provision of the PSC agreement.

According to the letter, “although the PSC contractor parties have obtained various arbitration awards which are currently being challenged in court, this process can take up ward of 5-6 years with no certainty of conclusion. Consequently, without prejudice to any rights under the on going arbitration proceedings, the following as a way forward need to be considered for discussions; HMPR (Buhari) is willing to use its executive fiat to consider 40% settlement of the alleged over lifted IOC contractor parties claim and utilise the repayment mechanism – the amount to be paid over a period of 7-10 years and that a review of the PSC terms will be carried out to address all the disputed issues and government will be expecting production increase within one year, whereby the resultant incremental production volumes will be used as a primary source for the repayment of these claims.”

The government said its offer for settlement is based on its expectation that JV partners must commit to raising production levels and must ensure that there is no decline in production, that control of cost is a mandatory requirement, as there are a number of budgetary items that need to be drastically reduced, in light of the fall in oil price, that there will be joint working teams for each of the the JVs for the process of establishing the incorporated joint venture, IJV within the next three years, that join naira and dollar accounts will be opened in Nigeria for the operation of each JV and that going forward, all parties will be required to reach a final written resolution of all the issues disputed on the PSCs, in order to forestall any further future disputes.

The government has set a deadline of May 15, 2016 for the completion of the negotiation process to enable the Minister to present the agreed positions to the Federal Executive Council by the last week of next month.

Oil industry chiefs said they would prefer if they were receiving a cheque from the government but they however, acknowledged that this was the first time in more than five years that government had shown the readiness to dialogue.

According to one industry official, “this is certainly a good step in the right direction, even if we will still have to wait for our cash. However, for years we could not even hope of a dialogue with the government.”

One retired senior government oil chief said it was good for government to demonstrate that they are willing to negotiate but it cannot be on government’s terms.

According to him, “:it will be hard just to ask someone you are owing to forget $1bn. Is it that the debt was not incurred or what?”

He also wondered if the officers named to be in the join negotiating teams have the requisite knowledge to do the job.