How to revive Nigeria’s troubled oil sector

Settling the backlog of over $6bn Joint Venture (JV) cash call arrears, addressing governance constraints, resolving contractual disputes and ensuring global competitive risk reflective fiscal returns are urgent actions required to address Nigeria’s beleaguered oil sector, experts say.

The Federal Government needs to protect and grow JV production volumes which BusinessDay analysis already shows delivers greater value. Whereas government’s gross take from Production Sharing Contract (PSC) operations under a $50 a barrel price regime is as low as $17 a barrel, Nigeria gets as high as $27 per barrel of crude oil at a $50 price in a JV setting, in the form of profit share, taxes, royalties as well as Niger Delta Development Commission (NDDC) levy.
Experts spoken by BusinessDay say a key step in improving economic opportunity and harnessing better value from JVs & PSCs is ensuring globally competitive, risk-reflective fiscal terms. They further observe that there is no better time than now to critically examine why Nigeria maintains an ownership stake in Joint Ventures when Cash Call arrears continue to pile pressure on public finances and breed mistrust with partners.
A high ranking International Oil Company (IOC) official told BusinessDay that, “The NNPC has consistently failed to meet its obligations in the joint ventures and other partnerships and if you as a partner is scared and you are forced to ask the questions, ‘should I continue to bring in my cash to run the joint business?’ at some point, you will slow down.”
Industry operators say transparency in policy formulation and doing business should lead to more collaboration and increase investor confidence, even in a low oil price environment.
“Transparency in the oil and gas industry remains the panacea to improve the investment climate based on the similar rate of returns in all other regions,” said George Kalu, chairman Society of Petroleum Engineers.
A recent Natural Resources Governance Institute (NRGI) report which called for reforms in the corporation suggests that this can be achieved with a quarterly state of business review of NNPC activities chaired by the Nigerian National Petroleum Corporation (NNPC) Group Managing Director, with key participants such as the National Petroleum Investment Management Services (NAPIMS) Group General Manager, IOC Managing Directors, Ministry of Finance, Department of Petroleum Resources (DPR), Federal Inland Revenue Service (FIRS), and Ministry of Trade & Investment, facilitated by an independent international consulting firm.
The report further states that the NNPC’s path to profitability lies in operating as a business entity, capable of funding its operations. It suggests the NNPC should settle its cash call arrears by selling off its equity, either by divesting physical assets or listing corporate shares on a stock exchange to raise capital for priority investments.
Another option, it says, is to convert the existing JVs to independent joint ventures, so they can raise their own funds. Previous versions of the Petroleum Industry Bill contained this provision and the move, the report identified, may be constrained by unwillingness of banks to lend to IJVs until the NNPC establishes a track record of better governance.
Tentative actions towards resolving lack of trust with its JV partners would involve changing the NNPC’s imperial attitude towards its creditors and holding meetings with them to determine the true value, repayment period, structure and terms of these debts, as these actions will restore investor confidence, investments, foreign exchange revenue and employment, the reports states.
Specific JV funding options geared towards finalising and securing the Federal Executive Council’s approval for NNPC self-funding scheme, include short, medium and long term options at the right level.
The short term options include Pay-As- You-Go, cash call crude, project external financing, carry arrangement, JV equity budget and sole funding.
Medium term funding options include the NNPC selling down equity, selling JV bonds – public, private, convertible, asset by asset PSC arrangement, bridge funding, using government funds and privatising the NNPC through initial public offering and private placement.
Long-term options include commercialising NNPC, PSC conversion, NNPC Corporate Debt finance, converting NNPC stake to indigenous champions and incorporating the JVs.
The real issues for policy makers to determine is whether they want Nigeria to just be known as a country with oil resources or one that manages them efficiently, a nation locked in, or one that plays globally. Experts say a market driven economy along with pragmatic fiscal and regulatory framework would end the dearth of upstream investments for the past ten years.
“We need to rely on markets not on government intervention. It is important to realise that the role of the state is not to bring commerce but to regulate it. We fail woefully in Nigeria because there is no allocative efficiency mechanism. That is why markets will deliver the best value,” said Tim Okon, chief executive officer, International Institute of Petroleum Energy and Policy.
Jude Amaefule, vice chairman/CEO, Emerald Energy Resources Limited, said, “Government should focus on being competitive in the global market by improving fiscal and regulatory framework to encourage investments and capital flow.”
Resolving PSC lifting disputes by adjusting lifting schedules to the middle ground between arbitral award and NNPC position will be the first sign of good faith. Entering into discussions with IOCs to settle disputes, prospective interpretation and terms will further straighten ruffled feathers.
The US Energy Information Administration, in a report on how shale gas production is driving world natural gas production growth, recommends that governments should begin revising investments laws that stipulate preferential treatment for national oil companies in favour of collaboration with IOCs to develop their resources.