NNPC to exit cash call arrangement January 1
Beginning from January 1, 2017, the NNPC will be exploring alternative funding mechanisms that will allow the joint venture business finance itself by retaining its operating costs and capital allowances.
Maikanti Baru, NNPC group managing director made this known , adding that in a year where fiscal costs are not sufficient to fund the budgetary requirements of the Joint venture, part of the margin part of the profit margin could be retained to fund the budget.
“Also where necessary external financing could also be sought to finance commercially viable and bankable Capital projects without recourse to Government treasury” said Baru.
He said these in his keynote address at the 34th edition of the Nigerian Association of Petroleum Explorationists (NAPE) 2016 conference on the theme ‘Nigerian Oil and Gas Industry: Tackling our realities,’ Tuesday, at Eko Hotels and Suites, Victoria Island, Lagos.
The implication of this move is that the Joint Ventures will relieve Government of the cash call burden by sourcing funds for its operations. Cash call underfunding in 2016 alone amounted to $2.5billion bringing total cash call areas to $8.5billion.
Cash calls is the counterpart funding 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.
“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 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 Oil Producers Trade Section (OPTS) at a recent gas conference in Abuja said that NNPC and its JV partners are working together to implement sustainable solutions which 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 can’t progress,” he said.
Ibe Kachukwu 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.