President Muhammadu Buhari has taken his first steps towards overhauling Nigeria’s exploration and production Joint Ventures (JVs) by granting them control over their budgets.
The model adopted by the president for the oil industry, called Incorporated Joint-Ventures (IJV), is aimed at overcoming chronic cash shortages facing the Nigerian National Petroleum Corporation (NNPC) financing of JVs.
It will be used in revamping several joint ventures, particularly five oil blocks sold by Shell in 2011-2012 to local companies; Shoreline Natural Resources Nigeria Ltd, First Hydrocarbon Nigeria Ltd, ND-Western Ltd, Elcrest E&P Nigeria Ltd and Neconde Energy Ltd.
It also covers West African Exploration and Production Company, which bought two licences in 2015 from Shell. A report yesterday by Reuters said the president approved revamping several joint ventures involving production and exploration arm of the NNPC in a letter to NNPC Group Managing Director, Dr. Emmanuel Kachikwu.
Nigeria produces about 2.2 million barrels per day of oil with foreign and local companies through production sharing contracts and joint ventures (JVs). But projects have been held up because NNPC needs parliamentary and regulatory approvals to spend fund.
Officials and lawmakers are often six months late in giving their nod, making proposals irrelevant as costs exceed the original budgets. As a result, unpaid bills have been piling up. According to the letter, sighted by Reuters, the JVs will be turned into firms that control their own budgets.
This will be similar to the operations of the Nigeria Liquefied Natural Gas (NLNG), which finds “sources for its own funding, pays taxes and royalties and also pays dividends,” the letter said. NLNG, in which Shell, Eni and Total have stakes along with NNPC, is one of the few efficient oil operations in Nigeria.
There will not be any immediate impact on oil exploration and production from the new model, as it will be tested on a few blocks first. If successful, it could be expanded to other arms of the NNPC, an industry source said. But analysts see the new joint-venture structure as a sign that reforms are finally underway.
“This could be an important early indicator for a key aspect of reformed oil sector policy – how to incentivise and maintain upstream investment by local private companies, and resolve operational issues between them and NNPC,” said Roderick Bruce, West Africa energy analyst at IHS.
The letter stated that the plan would apply to five oil blocks sold by Shell in 2011-2012 to local companies; Shoreline Natural Resources Nigeria Ltd, First Hydrocarbon Nigeria Ltd, ND-Western Ltd, Elcrest E&P Nigeria Ltd and Neconde Energy Ltd.
It also covers West African Exploration and Production Co, which bought two licenses in 2015 from Shell. Oil traders and executives said dealing with NNPC had become more efficient under Kachikwu, who took over in August. He is expected to become Minister of State for Petroleum Resources under Buhari, who has retained the oil portfolio for himself, to oversee the industry’s daily operations.
The exploration overhaul is seen as a start to further changes at NNPC after years of relative standstill under the immediate past Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, who is being investigated by Britain for money laundering. She has denied any wrongdoing.
Apart from dealing with stagnating oil production, Buhari needs to shake up the ailing refinery business, which forces the government to rely on expensive imported fuel for 80 per cent of its energy needs. Since his arrival, Kachikwu has been wading through piles of receipts to get an idea what the oil corporation owes foreign firms, part of an audit ordered by Buhari to tackle corruption.
With oil exploration firms working more efficiently under the new model, NNPC hopes to make a small step towards reducing its pile of unpaid bills. But uncomfortable talks loom as oil firms say they are owed as much as $7.5 billion from the past few years, while NNPC puts the amount at $6 billion.
“During Diezani, the board hardly met, so expenses were not approved. Now NNPC is saying they won’t honour those that weren’t approved … the paper trail did not keep up. There has been a disconnect between expenditure and approval,” a source close to the matter said. For example, for one joint-venture project worth about $3 billion, NNPC still disagrees over $300 million spent ages ago, an industry source said.
“It’ll take three months to reconcile and another six months at least to figure out how to cover it. The obligations date back three years to 2012,” a banking source said, speaking of the overall debt.
Corruption and mismanagement at the NNPC have hampered an industry that provides over 70 per cent of state income. NNPC has been accused of failing to account for tens of billions of dollars, while no new exploration blocks have been sold since 2007. Buhari, who took office on May 29, wants to make reform of the sprawling NNPC a priority at a time when a slump in oil prices is hammering the economy.
