Nigeria’s Economic Council approves alternative funding for joint venture oil operations

Crude oil extraction [Photo credit: Bloomberg]
Crude oil extraction [Photo credit: Bloomberg]

The National Economic Council, NEC, on Thursday approved a new funding regime for joint venture oil and gas operations in the country.

The new funding mechanism already approved on Wednesday during the meeting of the Executive Council of the Federation, was confirmed at a meeting of the NEC chaired by the Vice President, Yemi Osinbajo.

The meeting was attended by governors of all 36 states and the Central Bank governor.

NEC, which is the constitutional body set up to advise the president on economic matters, said the new funding arrangement would eliminate the often difficult cash call regime, which plagued the industry for over a decade, significantly stalling growth.

Presenting the memorandum on sustainable funding for joint venture cash calls in the oil and gas industry, Minister of State for Petroleum Resources, Ibe Kachikwu, described the new upstream JV arrangement as unincorporated Joint Venture (UJV).

Under the previous arrangement, partners in the six JV operations were expected to contribute to the approved annual budget for all programmes in accordance to their equity holding, while profits and losses were similarly shared.

The NNPC accounts for 60 per cent equity in all the JVs with ExxonMobil, Chevron, Total, Agip and Elf, and 55 per cent in the JV operated by Shell.

Over the years, the NNPC found it difficult to meet its cash call obligations to the various JVs, resulting in development programmes in the industry often being scaled down or suspended for inadequate funding.

Despite the government adopting various mechanisms to close the funding gap, it was difficult to meet such challenges on schedule, with significant impact on production and growth.

However, under the new arrangement, Mr, Kachikwu said the NNPC and the International Oil Companies (IOCs) partners in each JV were unique and separate legal entities.

While the NNPC would be expected to pay the entire oil and gas revenues realized from the JV operations into the Federation Account, the minister said the production costs would be appropriated and paid monthly as Cash Calls to the JV operations from the NNPC and IOCs.

Highlighting the challenges of cash calls, he said between January and November, under-funding of NNPC’s cash call obligations to the JVs was estimated at over $2.3 billion.

This excluded the $6.8 billion inherited as estimated arrears for 2015.

Based on negotiations, he said the $6.8 billion past cash calls burden on the Federation was reduced to $5.1 billion, with the balance to be paid as oil production output improved.

Under the new funding stream, Mr. Kachikwu said the JVs would become incorporated and source their own financing, freeing-up the government from the annual budgetary cash call obligations.

Under the alternative funding regime, he explained that the technical cost of oil production in Nigeria would also come down from about $27 to $18 per barrel.

The new arrangement is assured to scale up investments in the oil and gas sector, while also boosting production output and revenue significantly.

“For instance, net payment from oil production to the Federation Account is expected to peak under the new arrangement to about $18 billion by year 2020, while raising output to 3 million barrels per day,” Mr. Kachikwu explained.


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