The Federal Government has released a new policy in the oil and gas sector tagged ‘Draft Petroleum Policy 2016’ with the intention to sanitise the sector, which is being regulated by laws many stakeholders believe are out-dated and far from addressing current challenges in the oil and gas sector. OLATUNDE DODONDAWA writes.
The Federal Government has revealed it will exit all cash call arrangement it has with oil and gas companies including International Oil Companies (IOCs), Indigenous Oil Companies all other stakeholders in the sector.
Cash call arrangement is an investment policy where all parties contribute to funding oil exploration and production operations in the proportion of their Joint Ventures (JV) equity holdings and receive
crude oil produced earnings in the same ratio.
The Federal Government, through the Nigerian National Petroleum Corporation (NNPC), owes over $5billion in cash call arrears.
According to the Draft Petroleum Policy 2016, released by the Petroleum Ministry, the government has resolved to exit such arrangement and come up with how it intends to fund such projects in future.
The government hopes to exit cash call arrangement by end of 2017. The target is to move then to Petroleum Sharing Contracts (PSCs) and Challenges of JV financing model Joint Ventures model have many problems, but the problems often associated with JVs are not insurmountable. The most important of which include:
Cash calls deficit
The problem for the NNPC to fund the constant call for cash payments (the cash calls) has been due to inefficiency, lack of transparency, corruption and politics. These problems will be addressed with the proper capitalisation of the NNPC or the proposed National Oil Company with a structure that allows for project and balance sheet financing.
The difficulty of monitoring and checking the costs that the operator (the IOC or international partner) presents is also another challenge but this issue is not unique to only the JVs but it’s even more prevalent in the PSCs. The solution is incorporating the JVs and using fiscal tools to incentivise cost reduction.
It must also be said that contracting cycles, government mandates and bureaucracy are also important factors in cost escalation in the Nigerian petroleum industry.
Despite the challenges facing JV model, the document stated that the government stuck to JV model because the government has higher barrel from crude oil produced than from PSC arrangement.
Therefore, conversion of a JV to a PSC might result in reduction of government take rather than increased government take if not properly negotiated.
PSCs vs Cash calls
Using PSC as a financing mechanism, instead of Cash Calls model, results in a higher cost of financing than using bank debt since in PSCs compensation for the financing is in barrels of oil and not cash; and when prices are low as they are currently, large quantum of barrel will be needed for financing production.
PSC contractors by virtue of the fiscal provisions of the law (PPT Section 10) in addition to project returns also receive interest deductibility (financial returns) against tax liability which further enhances their Return on Equity (RoE).
Therefore, the draft argued that “any consideration for conversion of JVs to PSCs must take into account these factors and there must be provisions for recognising historical equity investments by government and managing government take such that there are no losses to the sovereign.”
For the Federal Government, through the Ministry of Petroleum Resources, to effectively implement the draft petroleum policy, there is need for it to ensure the passage of Petroleum Industry Bill (PIB)
by the National Assembly. Without the passage of the bill, the policy may be faced with resistance from the International Oil Companies (IOCs).