The Federal Government’s plan to exit joint venture cash call, starting January 1, 2017 is enjoying support from stakeholders in the oil and gas sector, even as they caution that careful planning is required so it does not constrain cash flow when future oil incomes are used to pay cash call arrears.
Another source of concern is whether the Nigerian National Petroleum Corporation (NNPC) an organisation often accused of being opaque, would be able to adequately and transparently manage the new model and remit enough proceeds to maintain cashflow for sustainance of government.
“Any arrangement that will stop the cash call will be positive for Nigeria, the operators, for government and everybody, because the process has been poorly managed in the past,” said Taiwo Oyedele, PwC partner and West African Tax leader.
Oyedele further said, “What is required is to ensure that there is transparency on the agreed terms and government must honour what they agreed. They need to pay the accumulated debt but it must be carefully planned so it does not affect budget and spending plans.”
Wunmi Iledare, president Nigerian Association of Energy Economics,traced cash call arrears to the Federal Government’s decision to take all equity oil revenue as if they are automatic spending revenue but agreed the proposed model may pay off eventually.
“Certainly, in the short run, there may be some short fall in the revenue for the budget. However, the national economy will be better off in the long run. I want to believe the NNPC has not mortgaged JV assets without evaluating other options but the arrangement they have proposed is cheaper than equity funding,” he said.
The JV cash call exit model the NNPC is pursuing guarantees it most of the revenue that normally accrues to it from the JV operations by lifting the Royalty and Tax Oil upfront but much of this will be utilised to settle cash call arrears of about $8.5billion in a negotiated settlement.
“One way is to use future production to settle the cash call and if they are using this method, it is not bad. They just need to plan, so it does not have an impact on budget and other plans,” said Oyedele.
Henry Biose, petroleum economist and policy researcher, University of Port Harcourt, says the model is a good one, as it may allow the joint venture partners to source for loans to fund their activities if it progresses into an incorporated joint venture.
“With this ability to get loans, they can fund their operations from other sources but the NNPC will have to work hard to manage the process,” he said.
Though analyst feel good about the arrangement, they are calling for deep reforms in the NNPC so that it delivers the best value to the country.
“Given the litany of corruption and mismanagement allegations against the NNPC, it is only fair that observers would cast doubt over the success of such a plan, however good it sounds,” Luke Doogan, analyst at West Sands Advisory, told BusinessDay in an e-mail response.
According to plans announced by Maikanti Baru, NNPC’s group managing director on November 15 in Lagos, the organisation is exploring alternative funding mechanisms which allow the Joint Venture Business finance itself by retaining its Operating Costs and Capital Allowances (Fiscal Costs) in order to sustain and grow the business.
He said where the fiscal costs for any year are not sufficient to fund the budgetary requirements of the Joint Venture, part of the profit margin could be retained to fund the budget and where necessary, external financing could also be sought to finance commercially viable and bankable capital projects without recourse to government treasury.
ISAAC ANYAOGU
