NNPC sets January 1 deadline to exit $8.4bn oil venture funding – Businessday

NNPC

Starting from January 1, 2017, Nigeria will no longer fund its Joint Venture arrangement with International Oil Companies (IOCs).

Maikanti Baru, NNPC group managing director said this on November 16, while delivering a keynote address at the 34th edition of the Nigerian Association of Petroleum Explorationists (NAPE) 2016 conference.

Baru disclosed that the NNPC would be exploring alternative funding mechanisms, which allow the joint venture businesses to finance their obligations by retaining operating costs and capital allowances. “Where necessary, external financing could also be sought to finance commercially viable and bankable capital projects, without recourse to the government treasury,” said Baru.
The country will be saving a minimum of $700 million monthly or $8.4 billion from exiting the arrangement. This would also boost the NNPC’s contribution to the federation account, which is usually eaten up by the demand to fund joint venture cash calls.

The implication of this move is that the Joint Ventures will relieve government of the cash call burden by sourcing funds for their operations. Cash call underfunding in 2016 alone amounted to $2.5billion, bringing total cash call areas to $8.5billion.
Cash call is the counterpart funding which the NNPC pays yearly for the 60 per cent equity shareholding it owns in various oil and gas fields operated by International Oil Companies (IOCs) and indigenous oil firms and $712.46 million was earmarked for it in 2016 according to the NNPC’s September operations report. “The JV cash call exit model we are pursuing, guarantees government most of the revenue that normally accrues to it from the JV operations by lifting the Royalty and Tax Oil upfront.
“This contributes 75% to 85% of the accruable revenues to government. Consequently, the effect on government’s take would be minimised. We are working assiduously to kick-start this from 1st January, 2017” Baru said.

`Industry experts say the deal is a good move because it eases funds needed for critical sectors of the economy, which are buried in paying debts, and demonstrates good value to Nigeria. “I agree it is a very good move by the NNPC,” said Chuks Nwani, energy lawyer and vice president, Powerhouse International Limited, an energy consultancy.

The IOC’s now literally at the end of their tether, will jump at any arrangement that will resolve the protracted dispute, which has contributed to stalling final investment decisions on critical projects. Clay Neff, chairman of the Oil Producers Trade Section (OPTS) at a recent gas conference in Abuja, said the NNPC and its JV partners are working together to implement sustainable solutions that will fully fund JV budgets. “Since 2010, the funding level for NNPC’s share has not been sufficient to fully implement Joint Venture business plans. The persistent shortfall in funding constrains growth, as a significant number of viable projects cannot progress,” he said.

Ibe Kachikwu had earlier proposed funding mechanisms for the cash call debts, including alternative funding options such as external financing, Alternative Funding (AF), or Modify Carry Agreement (MCA). In external financing, commercial banks provide funding for approved joint venture work programmes at cost-effective and market-driven borrowing rates.

External financing is structured in such a way that the lenders have no recourse to the JV assets, as the loan is secured from forward sale of incremental volumes.

Under Alternative Funding or Modified Carry Arrangement, the IOC funds the NNPC share of the approved joint venture work programme. In exchange, the IOCs receive agreed after-tax Internal Rate of Return (IRR), while the loan is repaid via tax relief and crude oil liftings.