Bond Market as Alternative Funding for Oil and Gas Projects

-By Ejiofor Alike

The greatest challenge facing the joint venture arrangement between the Nigerian National Petroleum Corporation (NNPC) and the International Oil Companies (IOCs) is the inability of the NNPC to provide its own share of funding for the joint venture projects.
A joint venture is an arrangement between two or more owners of oil and gas blocks, which are called joint venture partners. The joint venture arrangement is all about sharing cost in proportion to the interest or stake held by each of the partners, with one of the partners acting as the operator of the oil block.

The relationship between these partners is governed by a written article called the Joint Operating Agreement (JOA). Under the joint venture arrangement, all the partners share the cost of the projects according to their participating interests and the money they contribute is called cash calls.

When production begins in the blocks, each partner separately lifts oil and gas from the producing field in proportion to its stake and pay Petroleum Profit Tax (PPT) and royalty to the Federal Government.

The NNPC has joint venture arrangement with the Royal Dutch Shell Plc in Shell Petroleum Development Company (SPDC), where the corporation has 55 per cent interest, while Shell, Total and Agip have 45 per cent.
In the NNPC/Chevron joint venture, the NNPC has 60 per cent, while the IOCs have 40 per cent. The NNPC also has 60 per cent in the joint venture – Elf Petroleum Nigeria Limited, with the other partners having 40 per cent.
Under the joint venture arrangement in Mobil Producing Nigeria Unlimited, the NNPC has 60 per cent, while the other partners led by ExxonMobil have 40 per cent. Similarly, the NNPC has 60 per cent in the Nigerian Agip Oil Company (NAOC), while Italy’s Agip and other partners have 40 per cent.
Pan Ocean Corporation also has a joint venture arrangement with the NNPC, with the latter controlling 60 per cent and the former, 40 per cent. Finally, Texaco Overseas Nigeria Petroleum Company is a joint venture where the NNPC has 60 per cent, while the other partners control 40 per cent.

Counterpart Funding
However, the NNPC has over the years failed to provide its own share of the investment outlay for oil and gas projects being executed under these joint ventures.
Having the majority stake in these projects, the failure of the corporation to provide its cash calls has not only stalled ongoing projects but also many investment decisions in the industry, especially with gas-related projects.
For instance, the Final Investment Decisions (FIDs) of the Brass Liquefied Natural Gas project in Brass Island of Bayelsa State is being delayed because of concerns by the IOCs that the NNPC would not be able to fund gas supply projects.
The IOCs are insisting that for them to engage in projects that will supply gas to the proposed plant, the NNPC must provide its share of the funding.
The NNPC holds 49 per cent equity in the Brass LNG project, while ConocoPhillips; French oil giant, Total and Italian company ENI hold 17 per cent stake apiece. However, ConocoPhillips has commenced the process of divesting its stake to Oando Plc.
The NNPC also plans to divest 17 per cent of its stake in the project after the FID, and of the 17 per cent to be divested, Bayelsa and Rivers State Governments are proposed to take five per cent each, while the remainder will go to NNPC’s strategic investors.

The three potential strategic investors, it was learnt, include Japan LNG, Itochu Corporation and a joint venture between Sahara Energy and Sempra Energy.
Discussions are ongoing for gas supply between Brass LNG and the gas suppliers – Total Joint Venture (JV); Nigerian Agip Oil Company (NAOC) Joint Venture, and Chevron Joint venture But the suppliers are said to be insisting that they have to invest heavily in gas development if they are to commit to a Gas Supply Agreement (GSA) for 25 years with Brass LNG.
Their concerns, industry sources say, are the ability of NNPC to fund its own share of Joint Venture cash call for this development.
Several projects have suffered the same fate because the NNPC cannot meet its own financial obligations to the joint venture it established with the IOCs.

Other Operating Arrangements
The failure of the Federal Government, through the NNPC, to provide its cash calls for the JV projects led to the establishment of Production Sharing Contracts (PSC) and Sole Risk arrangements with local and international oil companies.
The PSC is an arrangement between an IOC, referred to as the contractor and the NNPC. Unlike the JV arrangement where all the partners contribute the development cost in proportion to their participating interest, the contractor bears all the cost of operations in a PSC arrangement.
Under the PSC, the government collects royalty as a first call on production, followed by the recovery of the development cost by the contractor. After the recovery of the development cost by the contractor, the contractor pays PPT to the government.
Finally, the remaining oil is share between the contractor and the NNPC according to percentages agreed originally in the PSC.

Addax Petroleum Exploration Nigeria Limited, Addax Production Development Nigeria Limited, Esso Exploration and Production Company Limited (subsidiary of ExxonMobil), Shell Nigeria Exploration and Production Company Limited (SNEPCo), Nigeria Agip Energy Limited and Star Deepwater Petroleum Limited (subsidiary of Chevron) operate PSC arrangement with the Federal Government.

While the NNPC has JV and PSC arrangements with the IOCs, the indigenous producers operate Sole Risks in the development of marginal fields. Under the sole risk, the operator bears all the risks and rewards and pays only royalties and tax to the Federal Government.
Platform Petroleum; Sheba Exploration and Production Company Limited; Niger Delta Petroleum Resources; Waltersmith Petroman; Newcross Petroleum; Midwestern Oil and Gas; Amni International; Atlas Petroleum; Moni Pulo; Dubri Oil and Conoil Producing/Continental Oil and Gas are some of the indigenous companies that currently operate sole risk arrangement.
There is also another arrangement called service contract, with Agip Energy and Natural Resources Limited operating as a service contractor to the federal government.

Latest Measures
To address these funding challenges, the Petroleum Industry Bill (PIB) has proposed the incorporation of the joint ventures.
But concern that the IOCs, which currently operate the joint ventures, might be forced by the proposed legislation to cede the operatorship to the NNPC, which has majority stake, has made the IOCs to kick against this provision.
Recently, the NNPC and Mobil Producing Nigeria (MPN), a subsidiary of ExxonMobil are said to be planning to access the bond market by 2016, as part of the renewed efforts to address the funding challenges associated with the current relationships between the NNPC and the company.

Under the NNPC/Mobil Joint venture, the National Oil Company owns about 60 per cent equity but its inability to provide its own share of the joint venture cash calls has made it increasingly difficult for the other partner to execute oil projects.

Reuters quoted the oil majors as saying that the NNPC’s lack of financing is one of the biggest impediments to the progress of Nigeria’s oil industry. Nigeria currently produces over 2 million barrels of crude oil per day and also holds the world’s ninth-biggest gas reserves.
“NNPC is meeting with her joint venture partner (Exxon) to brainstorm on alternative sources of funding such as bond markets to enhance revenue,” Reuters quoted NNPC’s Finance Director, Bennard Otti, as saying in a notice on the company’s website.
MPN’s Chief Financial Officer (CFO), Mr. Segun Banwo, was quoted as saying that “the joint venture will use external financing options from 2013-2015 but will access the bond market by 2016.”

ExxonMobil’s subsidiary, Mobil Producing Nigeria (MPN) and the NNPC operate a joint venture with a capacity of over 550,000 barrels per day of crude oil, condensate and gas liquids.
The plan by the NNPC/Mobil joint venture partners to access the bond market by 2016 has the potential to address the lingering challenges facing the oil and gas industry in financing projects.

All about Bonds
A bond in the finance parlance is a debt instrument used to raise fund to finance long term projects.
According to Wikipedia, the bond market, popularly known as the credit, or fixed income market “is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds”.
Bonds with fixed interest rates are issued to potential creditors, who are paid the lump sum and the accrued interest after a fixed number of years.
The essential ingredient of the bond market is that it provides a mechanism for long term funding of public and private expenditures.
Also according to Wikipedia, traditionally, the bond market was largely dominated by the United States, but today the United States is about 44per cent of the market.
Citing Wikipedia, “the size of the worldwide bond market – total debt outstanding is an estimated $82.2 trillion, of which the size of the outstanding United States bond market debt was $31.2 trillion as of 2009, according to Bank for International Settlements (BIS), or alternatively $35.2 trillion as of second quarter of 2011, according to Securities Industry and Financial Markets Association (SIFMA)”.
With the large volume of fund accessible in the bond market, the decision of the NNPC/Mobil joint venture to explore the bond market by 2016 will no doubt bring to an end the current challenges arising from the inability of the partners to raise funds to finance oil and gas projects.



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