In a Game Changer, Buhari Gives NNPC Approval to Corporatise JV Assets

President Muhammadu Buhari has taken his first major step towards overhauling the Nigerian National Petroleum Corporation (NNPC) by giving its exploration joint ventures control over their own budgets as a way of overcoming chronic cash shortages.

General Buhari

The approval is no different from one of the crucial reforms proposed in the Petroleum Industry Bill (PIB) which has been pending before the National Assembly for eight years.

The PIB provides for the incorporation of the joint venture assets into companies, enabling them to raise funds independently from financial markets and control their budgets.

The initiative will save the federal government cash calls running into several billions of dollars for funding the joint venture oil blocks.

To speed up an often glacial decision making process at NNPC, Buhari has given the green light to revamp several joint ventures involving its poorly managed production and exploration arm – the Nigerian Petroleum Development Company (NPDC) – according to a letter by NNPC’s Group Managing Director, Dr. Ibe Kachikwu signed by Buhari, a copy of which was reviewed by Reuters.

NNPC did not respond to a request for comment but several oil sources confirmed the authenticity of the letter.

Nigeria produces about 2.2 million barrels per day of oil with foreign and local companies through production sharing contracts and joint ventures (JVs).

But projects have been held up because NNPC needs parliamentary and regulatory approval to spend anything. Officials and lawmakers are often six months late in giving their nod, making proposals irrelevant as costs exceed the original budgets. As a result, unpaid bills have been piling up.

According to the letter, the JVs will be turned into firms that control their own budgets. This will be similar to gas firm Nigeria LNG (NLNG), which “sources for its own funding, pays taxes and royalties and also pays dividends,” the letter said.

NLNG, in which Shell, Eni and Total have stakes along with NNPC, is one of the few efficient oil operations in Africa’s top crude producer.

There won’t be any immediate impact on oil exploration and production from the new model, so-called incorporated joint ventures, as it will be tested on a few blocks first. If successful, it could be expanded to other arms of NNPC, an industry source said.

But analysts see the new joint venture structure as a sign that reforms are finally underway.

“This could be an important early indicator for a key aspect of reformed oil sector policy – how to incentivise and maintain upstream investment by local private companies, and resolve operational issues between them and NNPC,” said Roderick Bruce, West Africa energy analyst at IHS.

To bypass time-consuming parliamentary approval, NNPC is expected to reduce its stake in joint ventures to below 50 per cent from 55 per cent by selling assets to local firms.

“Now the incorporated JV can raise funding more easily as it’s a model international investors will understand and there will be a balance sheet behind the IJV,” said Kola Karim, chairman of energy company Shoreline.

The letter states that this plan will apply to five oil blocks sold by Shell in 2011-2012 to local companies Shoreline Natural Resources Nigeria Ltd (OML 30), First Hydrocarbon Nigeria Ltd (OML 26), ND-Western Ltd (OML 34), Elcrest E&P Nigeria Ltd (OML 40) and Neconde Energy Ltd (OML 42).

It also covers West African Exploration and Production Co, which bought two oil assets in 2015 from Shell.

Oil traders and executives said dealing with NNPC has become more efficient under Kachikwu, who took over in August and is expected to be appointed oil minister following his confirmation by the Senate on Wednesday.

The exploration overhaul is seen as a start to further changes at NNPC after years of relative standstill under Diezani Alison-Madueke, the former oil minister under Buhari’s predecessor, Goodluck Jonathan.

She is being investigated by Britain for money laundering but has denied any wrongdoing.

Apart from dealing with stagnating oil production, Buhari needs to shake up the ailing refinery business, which forces the government to rely on expensive imported fuel for 80 per cent of its energy needs.

Since his arrival, Kachikwu has been wading through piles of receipts in the four towers of NNPC’s Abuja headquarters to get an idea of what the state giant owes foreign firms, part of an audit ordered by Buhari to tackle corruption.

With oil exploration firms working more efficiently under the new model, NNPC hopes to make a small step towards reducing its pile of unpaid bills.

But uncomfortable talks loom as oil firms say they are owed as much as $7.5 billion from the past few years, while NNPC puts the amount at $6 billion.

“During Diezani, the board hardly met, so expenses were not approved. Now NNPC is saying they won’t honour those that weren’t approved … the paper trail did not keep up. There has been a disconnect between expenditure and approval,” a source close to the matter said.

For example, for one joint venture project worth about $3 billion, NNPC still disagrees that over $300 million was spent on it ages ago, an industry source said.

“It will take three months to reconcile and another six months at least to figure out how to cover it. The obligations date back three years to 2012,” a banking source said, speaking of the overall debt.

In a Game Changer, Buhari Gives NNPC Approval to Corporatise JV Assets