NNPC Offers to Pay $10bn Disputed Arrears to IOCs

Ibe Kachikwu

As Nigeria seeks to ramp up oil production, the Nigerian National Petroleum Corporation (NNPC) has approached its joint venture partners and proposed to pay disputed arrears of between $8 billion and $10 billion, saying that oil production shortfalls “could cripple” the industry if left unaddressed.

A letter from the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, to the Managing Directors of Chevron, Shell and the Nigerian subsidiaries of Exxon and Eni named three “unresolved challenges”: arrears from the joint ventures; the payment structure of the joint ventures; and a dispute related to production-sharing contracts.

The letter, dated March 31 and seen by the London-based Financial Times (FT) newspaper, also laid out “guidelines” for NNPC and the oil majors to resolve these issues by mid-May.
However, according to FT, insiders say this deadline is unrealistic, particularly because of a lack of guarantees about NNPC reforms.

Even if these issues were resolved, the oil sector’s fiscal regime would not be clear until Nigeria’s long-awaited Petroleum Industries Bill is passed, said Ronke Onadeko, a Lagos-based Nigerian energy sector expert.

Various drafts of the bill have remained stuck in Nigeria’s congress, known as the national assembly, for the past eight years.

“Who in their right mind will make investments without rules, terms and conditions?” Ms. Onadeko said. “Money is scarce with low oil prices and people would rather put their money in a place where they know what their risks are and can mitigate them.”

Concerns that Nigeria’s oil output is set to decline sharply over the next decade, because of uncertainty over promised reforms to the cash-strapped and debt-laden NNPC have become widespread.

President Muhammadu Buhari came to power a year ago partly on a vow to shake up Nigeria’s oil industry, where corruption and mismanagement have long held back production. With 37 billion barrels of crude, Nigeria is Africa’s top oil producer and has the 11th-largest oil reserves in the world.

However, details of a promised overhaul of NNPC remain unclear, putting investment on hold and stoking frustration in the sector.

Wood Mackenzie, the energy consultancy, has cut its output forecast for Nigeria by more than a fifth, to 1.5 million barrels a day (mbpd) on average over the next decade. Its previous forecast for the period was 2.1mbpd, roughly in line with present output levels.

“The government is not doing a good job of signalling and this could hurt (Nigeria’s oil production) in the medium term even if oil prices recover,” said Gail Anderson, lead Nigeria analyst at Wood Mackenzie.

The oil price collapse that began in mid-2014 has forced companies to cut investment worldwide, but there has been even less incentive to back Nigerian projects because of the country’s policy uncertainties.

A drop in production would be another blow to government finances, as low crude prices have sparked the country’s worst economic slowdown in 15 years.

“This is unfortunate because, if you think about what is happening in the Middle East, the Saudis are drilling like hell and the Kuwaitis and Emiratis are doing the same,” a former executive at one of the international oil companies operating in Nigeria said.

“The way the cycle works, the oil price will recover and those countries that have the capacity then will have the market.”

Global oil companies are concerned that NNPC will continue to fail to fund its share of joint ventures — a problem that has stymied Nigeria’s ambitions to double production to 4mbpd.
Oil executives argue that the target would be achievable if NNPC were freed from direct government control and run as a commercial enterprise. About $15 billion of investment is needed just to maintain current production levels and compensate for a natural decline in production of about 250,000bpd each year as some oilfields mature, according to insiders.

“This funding issue is more important to Nigeria’s future oil production than other issues such as militancy, sabotage and theft,” said Aurelien Mali, a senior Africa adviser at the rating agency Moody’s.

The Niger Delta, the country’s oil-producing region, has had long-running problems with militants and a February attack on the Shell-operated Forcados terminal knocked national production down to 1.7m-1.8m bpd.