JV Cash Call: Made in Ikoyi
July 11, 1991. Light rain showers and an unusual bustle of traffic in that tree lined part of Ikoyi, Lagos. Even by Ikoyi’s high standards, the congregation of Pajero Jeeps, Mercedes Bend 200 ‘V-Boots’ and Peugeot 505s signaled something very special was in the offing. Frenchmen, Americans, English, Dutch, Italians huddled around office lobbies and nearby hotels. Very easy for the conspiracy theorist to have assumed it was another Berlin Conference. No it wasn’t that exactly. It was the day the Nigerian government alongside multiple Western Oil companies signed a landmark Joint Venture agreement to develop the vast oil fields in the Niger Delta. It was meant to be a win-win deal.
25 years later, the marriage has become quite inconvenient. The Nigerian government has failed largely in fulfilling its financial responsibilities while the IOCs have also developed a reputation for stakeholders’ mismanagement. Something had to give. Enter Ibe Kachikwu. He has led government to exit cash calls and begin a process towards Incorporated Joint Ventures. Yesterday, the 17th November, 2016 the cabinet quietly approved exits from cash call payments as from January 1, 2017, starting a new journey which should provide a fillip for the oil industry but very serious near term challenges for the country’s near term budget.
From publicly available information so far, Nigeria’s entitlement in the JVs would be pledged against the outstanding cash calls while future obligations would also be met from same cashflow. On the surface that seems quite optimistic but we have received assurances that the numbers are ok. The new approach also allows the Unincorporated JVs to borrow to fund growth. We already have project finance models like the Chevron deal of 2015. The real concerns here are these; how would the nation’s budget be funded if future cashflow is pledged for JV debts defrayment and what are the guarantees that NNPC in its present form can adequately and transparently manage the process? At least under the old JV funding mechanism the National Assembly, Revenue Mobilization Agency and FIRS still had oversight and insight.
For the new framework to succeed, very stringent conditions that guarantee transparency and accountability must be established alongside. It may be necessary for agencies like NEITI, the National Assembly, Civil Society groups demand for a payment plan that can be tracked and measured for compliance and performance. Plans to incorporate the JVs may also have to be accelerated to address legal and financial constraints the new funding mechanism may face.
As this new cash call model unfolds, it’s worthy to note that its success or failure, its fate, will still be determined in Ikoyi. NAPIMS, over to you.
Trump for Joy, Oh ye Drillers?
Republicans have always been good for oil but Trump’s win takes it to another level. If he sticks to his promises, that man would tear up all the ridiculous, snowflakey laws that democrats have employed in traumatizing the industry in the past eight years. Drill! Baby!! Drill!!! A little caution though as no matter how much oil the US is allowed to pump, they are still largely limited by global prices. Nigeria’s crude still has its competitive space available if we work only a little bit harder but prices may now stay lower for longer.
Obama despite being a democrat has not been overtly adversarial to the industry — allowed crude oil and LNG exports so probably little much Trump can do to drastically alter the shape of the industry. But there is one pain of the US downstream that I am positive Trump will help address. RINS — Renewable Identification Numbers, used to track the amount of biodiesel in fuels across the US. Its detestable. Merchant refineries across the US are forced to buy RINS if they are short, increasing costs and prices customers pay. The customers including petroleum product importing Nigeria pays unnecessarily for some of these elegantly designed but barely beneficial schemes. Get rid of it Mr. President.
Oil and Gas Policy
During the week, the Ministry of Petroleum hosted public consultation sessions on the proposed oil and gas policy. We could not make the session but have read through the policies. It contains the essence of reforms the industry has been dying (literally too) for. We suspect the Minister seeks to engage a shorter route with some of the reforms by seeking cabinet approvals instead of the parliament’s. He won’t be able complete the reforms without the drudgery of passing bills through them but we are convinced he will attempt much without them. Will Saraki look away?
The thrust of the oil policy is to harmonise industry upstream/midstream/downstream regulation, shift focus to domestic value addition, address funding and PSC issues and also dismantle NNPC. Infact, the developers of the oil policy could not hide their disdain for NNPC. Here is an excerpt, “If there are not significant changes in its operations such that it becomes profitable within a reasonable period, NPDC will be divested or closed down”. Yaa kuri, Maigida.
The gas policy is more consequential.
The Associated Gas Framework Agreement (AGFA), the primary incentive for gas investment in Nigeria is set to be abolished supposedly because it encourages overcapacity and discourages direct gas investment.
We think this idea could be a serious drawback for the spurt of growth recently witnessed in the gas industry especially if the replacement framework does not provide commensurate incentives as AGFA/NAGFA. The incentives offered with AGFA may only be reviewed if the domestic gas industry has matured — supply is robust, infrastructure is adequate and flexible and payment discipline is established.
Future LNG plants would also focused on tolling rather than upstream sales of gas to plant owners.
We are convinced no private interest would invest in LNG in Nigeria if the benefits would be limited to tolling fees. In the US where the model is gaining traction, the constraints and risks in Nigeria are absent.
Domestic Gas Sales Obligations would remain while compliance would be considered a precondition for future license renewals.
The concept of the DSO if rigorously implemented could be very helpful alongside other fiscal and legal policies in stimulating gas investments. Making compliance with DSO a precondition for license renewal is not out of place.
The new policy wants to scrap the aggregator, GACN and transfer responsibilities to the regulator.
It’s important for the growth of the sector that the aggregator is independent and commercially oriented. The current model where ownership is broad based and across government and industry is better than the proposal to move role to the regulator. The aggregator’s role as originally envisaged and practiced in other climes is not limited to regulation but also involves commercial interventions. Would the regulator be determining aggregated prices, finding home for stranded gas, matching suppliers and producers, administering negotiations? This responsibilities are best handled by an aggregator in the mould of the current GACN.
Franchising would be the sole responsibility of the regulator and not a corporate entity as it is right now.
Because of the regulatory vacuum in gas over the years, NGC has taken the responsibility of issuing gas distribution franchises across the country. The new policy’s plan to transfer that role to the regulator is welcome and appropriate.
Gas from Production Sharing Contracts is also set to get terms that would incentivise investments.
We agree it’s never too late to be sensible by establishing a framework for the development of PSC gas. The country has suffered enough from the myopic policy of restraining PSC investment in gas.
Avengers External Connection
Avengers have claimed multiple attacks across the Niger Delta this week despite the consultations with government. Beyond the usual brute tactics we have employed, it may be time to start investigating possible international connections in these military grade, well-coordinated attacks. Who are the people benefiting from sustained outage of Nigeria’s production?
Gas Land Concession: Lekki Gas Master
Talking about gas distribution concessions, we understand that Kola Karim is involved with the owners of the Lekki Franchise and probably one big man that likes to tweet a lot. Imagine the potentials in that Lekki axis — estates, churches, factories. The challenge here is that the nearest gas pipeline is distant and has to cross the lagoon. Let’s see how far and fast they go.
Forte Oil Bond
Forte Oil has floated and closed a N9 Billion bond primarily to refinance and expand on its outlets. Anyone investing in Forte oil these days may need to understand they are also betting on the prospects of Nigerian power sector. Geregu’s operational performance and cashflow may have a material impact Forte Oil’s fortune in the near term.
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