The Upstream petroleum sector in Nigeria that has recorded low investment in recent years would soon be upbeat in a flurry of activities. This is the prevalent views of captains of the Oil and Gas Industry led by the Hon. Minister of Petroleum, Dr. Ibe Kachikwu, the Group Managing Director of NNPC, Dr. Maikanti Baru and chief executives of International Oil Companies (IOCs) at a signing ceremony of cash-call exit agreement between NNPC and its Joint Venture partners in Abuja on Thursday,December 15,2016.
Speaking at the event, Dr. Ibe Kachikwu stated that the consensus in the industry is that with the signing of agreements to exit cash calls, investments would soon flow into the Nigerian Oil and Gas Industry. “This event is significant because it has taken us to a point where we can compete with our colleagues all over world. We have dealt with the downstream, and this is probably the most important item in the upstream and that is obvious we will begin to go into the policy measures and infrastructural development and the rest after the signing ceremony” Dr. Kachikwu said.
These strategies that are fully supported by the National Economic Council (NEC) will lead to an increase in national production from the current 2.2mbpd to 2.5mbpd by 2019, as well as reduction in Unit Technical Costs from $27.96/Barrel Oil Equivalent (iboe) to $18/iboe. The net payments to the Federation Account is expected to double from about $7Billion to over $14Billion by 2020 and the immediate effect of the new cash call policy will increase net FGN Revenue per annum by about $2billion.
Dr. Kachikwu outlined other innovations and initiatives championed by the ministry over the past year which have revamped the sector, restored investors’ confidence which was at an all-time low and positioned Nigeria’s Oil and Gas value chain for profitability. It would be recalled that based on historical records, the current Cash Call system has been structurally defective and has failed to address the perennial Joint Venture funding challenges being experienced in the industry where the Federal Government underfunding of the industry through JV Cash Calls stood at $9.125 billion as at September 2016. This arrangement will guarantee payments of statutory Oil and Gas Royalties and taxes by NNPC and its JV partners as well as profit from its investments in the Joint Ventures.
At US$42.5 per barrel Oil price which the 2017 budget is predicated on and US$24 per barrel fiscal cost recovery proposed for 2017 in FGN Medium Term Expenditure Framework (MTEF) recently submitted to NASS, over US$13 per barrel will accrue to Government as Royalties & Taxes from Joint Venture Oil and Gas Production apart from US$2.8 per barrel estimated as Government share of profit, at 57% equity.
In his remark at the event, NNPC GMD, Dr. Maikanti Baru recounted that a lot of work went to the signing ceremony of the cash call exit agreement noting that the Buhari Administration should be commended for mustering the desired political will to resolve the challenge. He explained that the signing of the exit cash call agreements comprises three components that are: the process of settling the pre-2016 cashall areas; the process of sustaining the cash call payment from 2017; and agreement and settlement over performance in 2016.
Also speaking during the signing ceremony, Chairman of Oil Producers Trade Section of the Lagos Chamber of Commerce and Industry, who is also the Chairman and Managing Director of Chevron Nigeria Limited, Mr. Clay Neff, said that the signing ceremony represents a milestone in the Oil and Gas Industry in Nigeria.
Neff expressed optimism that the agreement would stabilize and also increase upstream production over time, stressing that the repayment of the arrears in a sustainable manner is a key enabler to additional investment in the upstream sector in Nigeria. Under the new arrangement which came into effect following the signing of the agreement between the NNPC and the IOCs Joint Venture Partners, the entire NNPC equity Oil and gas revenues are now to be paid directly into the Federation Account.
Hitherto, competition from other appropriated items of expenditure in the federal government’s budget has always limited the deduction of technical cost required to fund the cash calls on monthly basis. With this arrangement, the federal government will continue to receive royalties, taxies and profit from its equity share of JV oil and gas production while the cost of operation is deducted upfront.
The agreement provides that the outstanding cash call arrears will be repaid within a period of five years through incremental production revenues without impacting the established based production revenue.