End Is Nigh For NNPC Joint Venture Model

Oil & Gas
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Tuesday, November 22, 2016 9:27/ AM /fdc

Joint Venture (JV) is one of several types of oil and gas arrangements in Nigeria’s upstream sector. A Joint Venture arrangement is a partnership between state oil firm, the Nigerian National Petroleum Corporation (NNPC) and an international oil company (IOC).

Under this arrangement, both NNPC and the IOC contribute to production costs in the ratio of their equity holdings in the JV. Likewise, the crude oil produced is apportioned using the same ratio. In most cases, the NNPC has 60%, while the IOC has 40%.

The NNPC’s inability to meet its funding obligations for its JV cash calls is a recurrent challenge in Nigeria’s upstream sector, with IOCs often having to stall investment decisions and thus inhibiting significant growth in oil & gas production.

This problem is even more magnified today, considering that the country in a recession for the first time in two decades and state finances are still undermined by low oil prices.

NNPC Group Managing Director, Maikanti Baaru recently disclosed that the state oil firm had amassed roughly $2.5bn in cash call arrears for 2016 alone. Baru further stated that the NNPC’s funding shortfalls have resulted in declin-ing JV oil production from approximately 1 million barrels per day (bpd) to 800,000 bpd.

To address this problem, the NNPC reached a $5.1bn settlement deal to pay IOCs for cash call arrears. The agreed amount is $1.7bn less than the total amount owed ($6.8bn), which covers arrears between 2010 and 2015.

The settlement entails payment in the form of crude oil sales over a five year period, however, payment will only be made if the country exceeds its 2.2 million bpd production target. |
In addition, the NNPC is seeking to gradually phase out the current JV model and introduce alternative funding mechanisms. As proposed by Baru, under the new ar-rangement, JVs will be able to meet their financing obligations by retaining operating costs and capital allowances.

Clearly, the NNPC is in dire need of a sustainable solution for its funding shortfalls and any alternative which can offer such will be wel-comed by industry stakeholders.

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