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Alternative Funding Panacea To Joint Venture Operations

Posted: Sep 29, 2015 at 12:05 am   /   by   /   comments (0)

By Phillip Oladunjoye,


In what seems to be an answer to the prayers of local players in the oil and gas industry for the federal government to explore other means of funding its joint venture operations with the International Oil Companies (IOC), the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Dr. Emmanuel Ibe Kachikwu, has said that the corporation had started to explore alternative funding models to finance its operations with the IOC.

Kachikwu, told journalists in Lagos at the weekend that the corporation would seek alternative funding to pay the outstanding arrears of its obligations to the joint venture companies with the IOCs, which currently stands at about $6 billion, saying that he targets to pay all the arrears by the end of December this year.

He explained that the arrears of JV cash calls accumulated to about $6 billion because the National Assembly over the years did not allocate enough money for the cash calls in the country’s budget.

“If you ask for $4 billion; they (National Assembly) will give you $1.5 billion,” he said, adding that the corporation had started to explore alternative funding models to pay the arrears within this year, noting that he has the blessings of President Muhammadu Buhari to operate.

“I am grateful to be working with the President, who has done everything that you would expect in terms of giving you the latitude to bring the issues on the table; discuss with him; and reach decisions that will be fruitful to this industry. So, if you see the speed with which we are moving, it is because he has given me the free hand and is willing to work with me to sanitise the company. The President is very emotional about the poor people,” Kachikwu explained.

Kachikwu said the $1.2 billion multi-year drilling financing package secured recently by the corporation for 36 offshore/onshore oil wells under the NNPC/Chevron Nigeria Limited Joint Venture was one of the funding models being explored.

He also said that other IOCs are being encouraged to come up with funding models that would be favourable to the joint venture partners.

“Cash call arrears is over $5 billion and between now and December I will deal with the arrears of cash calls,” he said.

This, however, must be good news for the local players in the industry who have been lamenting over the delay of government in settling JV cash calls.

Many local contractors have complained that they could not collect their contract money due to the delay by government in paying cash calls promptly.

For instance, the Managing Director and Chief Executive Officer, Seplat Petroleum Development Plc, Mr. Austin Avuru, had at an industry event early this year, raised concerns about the NNPC’s value to the industry. He said, “The cost of operation in the upstream sector has soared. Two critical factors account for this – security issues in the Niger Delta and bottlenecks in NNPC; project delays and $5bn of cash calls in arrears that have not been paid to the point where you ask the question: Is NNPC really adding value to the industry today?”

Managing Director/CEO, Total E&P Nigeria, Elizabeth Proust, further buttressed Mr. Austin Avuru’s comment, saying, “Resolving JV funding could increase production by 2.8 billion cubic feet per day by 2020. Government and industry need to implement a sustainable solution to deliver vital funding.”

This particular challenge has adversely affected production output by 200,000 barrels per day. Production from JVs, which in the past accounted for about 95 percent of Nigeria’s crude oil output, has continued to decline yearly as international oil companies increasingly shift offshore due to onshore risks including funding, oil theft and sabotage.

According to the Public Relations Officer of PENGASSAN, Emmanuel Ojugbana, “Oil companies are owed billions of dollars in cash call arrears putting the jobs of our members and other workers in the industry in jeopardy as companies easily rationalize disengagement of staff and reduction in welfare packages due to lack of funds.”

Meanwhile, industry experts have suggested more appealing alternatives for all concerned parties such as a Modified Carry Arrangement (MCA). The MCA is a financing agreement whereby the IOC will advance a loan to NNPC for the purpose of investing in upstream projects with an understanding that the IOC will be reimbursed through a combination of tax relief and incremental oil production derived from the JV operations.

Another option is reducing the percentage of government equity (usually 60%) in the operations and letting the IOCs and indigenous companies cover exploration and development costs.

Head of Energy, Ecobank Capital, Mr. Dolapo Oni, said, “The best option will be to incorporate these Joint Ventures and list them on the Nigerian Stock Exchange (NSE), so that they can raise their funds through equity or debt directly, and also pay dividends to investors.”

To date, alternative funding models adopted by some IOCs has witnessed some success. ExxonMobil has successfully generated about $15billion of alternative capacity through external financing and Modified Carry Agreement. This has accounted for about 70 percent of current JV production. ExxonMobil’s model of external financing entails that commercial banks provide funding for approved JV work program at cost-effective, market driven borrowing rates; the lenders have no recourse to JV assets and the loan is secured by revenues from forward sale of incremental production volumes.

“We should accept that it is time to look inwards and accept the truth. Government and its agencies must withdraw from the industry and restrict itself to proper revenue collection and management of the revenue for the interest of this and future generations,” Avuru said.