- FG Postpones JV Cash Call Exit to December
The Federal Government has shifted the deadline for the exit of joint venture cash call arrangement with oil companies to the end of this year.
The government failed to exit the JV cash call arrangement in January in line with the agreement it reached with the international oil companies in December last year.
The nation’s oil and gas production structure is split between the JV (onshore and in shallow waters) with foreign and local companies, and Production Sharing Contracts in deep water offshore.
Under the JV arrangement, both the Nigerian National Petroleum Corporation and private operators contribute to the funding of operations in the proportion of their equity holdings and generally receive the produced crude oil in the same ratio.
But over the years, the NNPC has failed to meet its share of cash call obligations, and the chronic JV funding shortfalls have resulted in declining JV oil production.
The Ministry of Petroleum Resources, in the new National Petroleum Policy approved by the Federal Executive Council last week, said the government’s interest in the upstream sector of the oil and gas industry would consist of incorporated JVs, PSCs currently under the 20-year production phases and the PSCs at exploration phases.
Under the PSC arrangement, the concession is held by the NNPC (acting for the government) that engages the operator as a contractor to undertake petroleum operation on its behalf, with the operator bearing the financial risks.
If the operation is successful, the contractor is entitled to recover its cost upon commencement of commercial production, and if not, the contractor bears all the loss.
According to the new policy, Nigeria is one of the few countries, if not the only one, in the world which still retains the JVs as a petroleum development contractual arrangement.
It said most developing countries around the world had moved to the PSCs, adding, “While Nigeria has adopted the PSCs for most new petroleum exploration and production contracts, the JVs remain the norm for most contracts.”
The policy document said conversion of a JV to a PSC might result in reduction of government take rather than increased the government take if not properly negotiated because a JV barrel produced has a higher government take than a PSC barrel.
It said, “Under the petroleum policy, all cash call arrangements under the NNPC JVs will be exited, with a target of exiting all of them by the end of 2017. The target is to move them to a PSC or incorporated JV arrangement.
“It is the intention of the petroleum policy to evaluate existing PSCs at the end of their exploration and production phases in order to determine the appropriate financing structure and risk reward matrix needed for any proposed renewals.”
The government said it might consider conversion of some JVs to the PSCs, adding, “However, such potential conversion needs to meet the requirement that the historical equity capital contributions to the resource must be recognised and the risk reward profile must be significantly beneficial to the state.”
President Muhammadu Buhari, while presenting the 2017 budget estimates to a joint session of the National Assembly in December, disclosed that one major policy coming into effect from January this year would be to stop direct funding of the JV operations.He stated that from January, the Federal Government would no longer make provision for the JV cash calls, adding, “Going forward, all joint venture operations shall be subjected to a new funding mechanism, which will allow for cost recovery.
“This new funding arrangement is expected to boost exploration and production activities, with the resultant net positive impact on government revenues, which can be allocated to infrastructure, agriculture, solid minerals and the manufacturing sectors.”
The JV funding problem, which has lingered for over two decades, has been exacerbated by the steep fall in global oil prices, which have driven down the country’s earnings from the commodity, its major revenue earner.