Nigeria’s joint venture companies to receive financial autonomy

According to industry information,  President Buhari has given approval for the conversion of the country’s joint ventures (JVs) with international oil companies (IOCs) – Shell, Total, Chevron, ENI and ExxonMobil to be converted into self-funding ventures, similar to the Nigerian LNG Plant in Bonny.

The new policy direction, conveyed by a letter sent to the companies, is expected to lead to the conversion of these unincorporated joint ventures into incorporated joint ventures, which will function like private companies, with boards of directors etc. This is likely to give financiers more confidence to lend directly to these joint ventures and improve financing for
oil and gas exploration in Nigeria.

The move is quite critical especially as the JVs, which once accounted for over 70 percent of Nigeria’s oil output now account for less than 35 percent of output. Their production volumes have fallen by over 50 percent from a high of 1.5million barrels per day (bpd) in 2008, on account of divestments, disturbance from aggressive host communities & militants and more importantly, lack of funding for exploration and development projects. The drop in production by the JVs is strongly reflected in the country’s annual oil output, which has fallen by over 100 million barrels since 2010.

Analysts say the inability of the NNPC to meet its share of the JV cash calls for funding field development has been one of the major challenges with developing new fields and conducting exploration programmes. Notably, the NPDC, NNPC’s upstream subsidiary, has struggled to keep up pace with the development programmes of the indigenous companies that took over assets from the IOCs since 2010 due to lack of funding.

‘The move is likely to boost funding support as financiers will find direct access to the proceeds from the fields directly very attractive. More importantly, this will resolve the NNPC’s difficulty in raising its share of cash calls as financiers will be looking more at the operators, the IOCs, and not having exposure to the NNPC directly. The reduction in the NNPC’s stake will reduce the political influence of the government on these companies also,’ said an Ecobank analyst.

However, the move is only the first step towards resetting the industry on the path to accessing more funds for its projects. But it is likely to face some challenges as the NNPC has significant debts to the IOCs, which it will have to clear for this new initiative to move ahead. Furthermore, incorporating the JVs and creating a degree of transparency around payments for projects, to contractors, to the regulators etc will require time and establishment of some processes not yet in place.

In addition, as this represents a significant modification of the joint operating agreement, it
could still be contested as a matter requiring legislative approvals. However, couched purely as financial autonomy for the JVs, allowing them greater control over their budgets, with the NNPC owning a lesser stake in the JVs, it could easily be accepted as something within the purview of the oil minister, a role being played currently by the President.

The plan is for this to be tested on the fields divested by Shell in 2010 and some recently in 2015. The NNPC is expected to reduce its stakes on these fields below 50 percent. ‘Although the Petroleum Industry Bill (PIB) expectation is for the NNPC to reduce its stakes to about 30 percent, we do not expect that to be the case now. Thus, we could see between 10 and 15% farmdown in NNPC stakes. Although the low oil prices are likely to reduce the valuation of these fields significantly, a 15 percent stake sale could still yield $350 – 420m for the NNPC,’ the analyst said.

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