Finding lasting solutions to JV cash calls challenges

The challenges of cash calls deficit have been affecting oil and gas operation, especially Joint Venture (JV) agreements. In this report, OLATUNDE DODONDAWA examines these challenges and how to find lasting solutions.

Cash calls is the counterpart funding the Federal Government, usually represented by the Nigerian National Petroleum Corporation (NNPC), pays yearly for its equity shareholding in various oil and gas fields operated by International Oil Companies (IOCs) and indigenous oil firms. This equity holding ranges between 55 and 60 per cent.

Presently, the cash calls deficit is now put at over $7 billion which has accumulated over the years and it may continue to rise considering claims by the Federal Government that it will fund 2016 budget deficit with money meant for Joint Venture funding.

Speaking recently, the Minister of Finance, Mrs Kemi Adeosun, was reported to have stated that “If the revenue doesn’t come in, we have got N1 trillion in the budget for cash calls. We will not fund those cash calls from the budget. “We will force those cash calls out into the modified carrier arrangement and we will release that money back into the federation account. That’s where the fiscal buffer sits.”

It was assumed that the prevailing low oil price regime, which has reduced the nation’s revenue from oil, may prevent the government from accomplishing its desire to settle the $7 billion debt.

As at January 2016, NNPC was owing the IOCs cash call arrears of $5.5 billion, while their  indigenous counterparts are being owed $1.1 billion, and an estimated $500 million may have be been owed for this year alone.

 

Closing the funding gap

The Federal Government announced that it is considering the adoption of zero funding model for the JV operations from 2017 to halt the growth of the cash call arrears. This proposal was however criticised by some stakeholders.

The zero JV funding seeks to empower the operators not to wait for the NNPC counterpart funding before going on with operations and projects implementation. Therefore, the operators will source funds and go ahead with projects’ implementations, while the NNPC’s bureaucratic processes of approval including endorsement by the National Assembly continue. The operators of the JVs will deduct costs at the end and remit what is due to NNPC at the end of the deal.

Stakeholders, who spoke at the recently concluded annual conference by Society of Petroleum Engineers, stated that the zero funding model being contemplated by the state-run oil firm will cost it more as the operators will source funding from banks, and interests paid on such loans secured by the oil firms will be factored into the cost of production.

They argued that if the government lacks capacity to pay its cash calls, let it choose from some alternative options including divesting some of its equity holdings to indigenous firms, adopt crude for cash calls or privatise the NNPC.

According to them, NNPC has only been able to meet only 30 per cent of the 60 per cent cash call it is supposed to pay. “As long as the funding issues exist, production will adversely be impacted,” warning that JV oil production has since dropped to one million barrels per day (bpd) as against about 2.5 million bpd in the past due to JV budget delay.

However, Group Managing Director, NNPC, Dr Maikanti Baru assured the stakeholders that the government is doing everything possible to reduce contract processing cycle and address the challenges of cash call deficit.

Speaking at the SPE conference, Maikanti, who was represented by the Managung Director of NETCO, a subsidiary of NNPC, Mr Siky Aliyu, stated that NNPC’s current reform process is predicated upon granting autonomy to its Strategic Business Units (SBUs) while the Autonomous Business Units (ABUs) formally referred to as Directorates; provide relevant directions to the SBUs.

“This will remain as part of my agenda for incubating and growing the new business models. One of the agitations of the oil and gas unions during its recent strike was as a result of non-remittance of JV cash calls on NNPC’s part. We are working round the clock to ensure that all outstanding cash call arrears are settled.

“As part of our resolve to settle this pertinent issue, we are also working towards creating a sustainable and long term funding plan to sustain our portion of the JV funding. National aspiration for oil production and reserve growth to a target of four million barrels per day (4mbopd) and 40 billion barrels respectively, have been elusive over the years due to a combination of factors ranging from funding constraints, infrastructure vandalisation, security concerns e.t.c

“We are committed to ensuring production and reserves growth by restoring oil and gas production to peak levels, growing the production mix and portfolio of oil and gas reserves through very transparent processes,” he said.

Stakeholders’ reactions to the cash calls deficit challenges

Mr Bank Anthony Okoroafor, the Chairman of Petroleum Technology Association of Nigeria (PETAN) argued that the government should clear all the outstanding cash call arrears and start on a clean slate and change the structure.

“The companies will become self funding and the government will be making more money from petroleum profit tax, and other taxes. If we do that, government won’t be saddled with paying cash calls. Government will only worry itself on collecting all taxes which is more than 85 per cent. Allow people who understand the business to run the business. When you have that, you won’t be worried about transparency again,” he said.

He stated that due to poor funding, some projects have been differed while some have been cancelled. Some companies have reduced their staff strength. “If we can handle our above the ground risks properly, we can still be profitable. The main issues in Nigeria are above the ground risks. In many places, the lands are shut in, a company like WalterSmith drilled nine wells with 95 per cent Nigerian content. Now, the lines are shut in, they cannot produce. They must have borrowed this money and how do you pay back. You must have made all your calculations based on your production. Some lines that are supposed to have brought gas have also been shut in,” he said.

The Chief Executive Officer, Oilserv Limited, Emeka Okwuosa said everybody is affected definitely. “We have an industry wide downturn, you have low activity, you have low price regime, so it is affecting everybody. It also creates a challenge for the government to be able to cope with these issues of funding. Knowing fully well that oil in particular is the major ingredient of our economy in terms of being able to feed our economy.

“Oil still constitutes more than 60 per cent of our foreign exchange earnings as a country. You can realise that lots of things we use in Nigeria are purchased from overseas. So to fund these, you need to ensure you get enough money from the sale of crude to meet them. If you put that aside, you will know we have a gap there, it makes it more difficult for the government to fund their Joint Venture commitments. And do not forget that some of these commitments are dated more than five to eight years ago. It is actually a problem.

“But I believe really strongly that, like the honorable minister of state for petroleum resources, Dr Ibe Kachikwu, has stated severally, they are working on it. They are looking at alternative means of funding. They are also looking at being able to draw some funds from Middle East, China and from other sources. The government is in a better position to decide that, but I believe they know what the problem is and that they are dealing with it.

“But as far as it affects PETAN members and Oilserv, it is a serious problem. We all know that it is not going to be there forever because if you look at the price regime of crude oil, it appears like it has bottomed, you have upside going forward. It requires planning and decisions to get it to the $100 per barrels cap.

What is important is that the oil producers that need our services are still in business. So far as they are in business, they will need our services. It is just a matter of time,” he said.

 

Conclusion

Mr Samson Iheadioha stated that the government must ensure speedy passage of the Petroleum Industry Bill (PIB) and understands that oil and gas projects are capital intensive and that the government must make funding its priority or allow those that are ready to finance the projects while it focuses on tax.