Why FG must fund its Joint Venture equity stakes

The fact that the Nigerian government is not properly funding its Joint Venture (JV) equity stakes with international oil partners means it is losing an opportunity to broaden prosperity in the country and pull more citizens out of poverty. It also means that the government is failing Nigerian citizens as proper JV funding could have increased government’s revenues which could be channelled into infrastructure investments to help diversify the economy and create value-added industries.

The Federal Government owns an average of 58.5 percent equity stake in various JVs with international oil companies (IOCs) that include Shell, Chevron, Mobil, Agip and Elf. These companies were responsible for over 90 percent of Nigeria’s oil production with revenues in excess of $70 billion in 2014.

However, the lack of adequate funding by the FG of its own share of exploration, production and development costs means production volumes from JV fields are down 53 percent in the last 10 years. JV output from the fields has fallen from about 2.3 million barrels a day (mbd) in 2004 to 1.09 mbd in 2013, oil industry data show.

Over the years, JV cash calls have not increased significantly, in spite of higher oil prices and high cost of project development. This underfunding has led to the NNPC negotiating other less-profitable business arrangements in order to fund projects.

In 1991, the government, recognising the high upfront cost of funding the JV, proposed a Production Sharing Contract (PSC) – where IOCs provide funding and recover costs from production if successful – for the deep offshore. This resulted in the 1993 PSCs, the terms of which were codified into law (Deep Offshore and Inland Basin Act of 1999).

Compared to the JV over the same timeframe (2004-2013), production from the PSC has grown 1,200 percent to 860,000 barrels per day.

Stakeholders say the key contributor to PSC growth has been unconstrained funding while JV funding is challenged on two fronts: cash call arrears and annual budget shortfalls.

Nigeria is losing cash from two sources by not funding its JVs. The JVs are more profitable than the PSC, so lower production from the JVs means less take for the government.

Nigerian oil production from the PSCs (875,000 bpd) surpassed JV production (837,000 bpd) in 2014, according to data from the Finance Ministry and NNPC.

The government’s take on JVs is an average of $77 per barrel when oil prices average $100/b, which comprises $19 in royalties, $2 NDDC levy/education tax, $51 Petroleum Profit Tax, and $5 NNPC profits, according to industry documents seen by BusinessDay.

When the $20/b average industry exploration, development and production costs are stripped out, the government’s take is equivalent to 96 percent of gross margins.

We believe it is immoral and short-sighted for the government to accept the benefits of the JVs without fulfilling its part of the obligations as regards the costs of operations. This lack of funding by government is one of the major reasons for Nigeria’s stagnant oil industry.

We therefore implore the incoming Muhammadu Buhari administration to make JV funding a priority as part of reforms of the NNPC.