NNPC faces funding dilemma: the Nigerian National Petroleum Corporation, cannot fully fund its share of new development costs. Ford analyses its alternative strategies

African Business, Feb, 2004 by Neil Ford

The new head of the NNPC, Funso Kupolokun, has admitted that the company cannot finance its share of development costs on joint ventures (JVs) with the oil majors and so additional investors may be sought. Yet rather than highlighting a sign of weakness in one of Nigeria's most important parastatals, this could be a sign of a greater level of realism at the top of the industry.

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Exploration and development plans drawn up by Shell, ChevronTexaco, Exxon-Mobil, Eni-Agip and TotalFinaElf for the coming year require investment of $6.5bn, of which the NNPC is required to provide 57% under the terms of its JV contracts.

However, the government has allocated only $3bn to fund the NNPC's cash call for the year, leaving a shortfall of $700m. Higher government social spending in the run-up to the last election has prompted the federal government to tighten its belt in the face of falling reserves of foreign currencies.

The shortfall may result in the NNPC and foreign oil companies having to prioritise development plans but the government will undoubtedly be disappointed if any projects are postponed: the development of oil fields is required to maximise oil revenues in the years to come. Moreover, gas projects comprise a large proportion of this year's investment plans and Abuja is committed to eliminating flaring.

The NNPC has held talks with the majors on how to fund the corporation's share of development investment over the course of this year and beyond.

The NNPC's stakes in the JVs-and therefore also the government's interests-are held by NNPC subsidiary National Petroleum Investment Management Services (NAP-IMS), but it has been the NNPC itself that has led the negotiations.

One option is for the majors to make up the shortfall, probably through taking a larger share of the JV equity. The main alternative would be for the NNPC to seek loan funding, which could be guaranteed by the foreign oil partners. Future oil contracts will almost certainly take the form of production sharing contracts (PSCs), under which the foreign firms are required to fund development work in full.

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It will be interesting to see to what extent the financial solutions reached are actually made public. Under the new Extractive Industry Transparency Initiative, the NNPC is expected to publicise its financial dealings.

The government also hopes to make information on the country's oil and gas reserves more accessible and is investing $25m in the creation of a hydrocarbons data bank.

Landmark Graphics Corporation of the US has been awarded the contract to establish and manage the data bank by the Department of Petroleum Resources (DPR). Foreign oil companies will be expected to provide all the upstream information they hold on the country.

The government hopes to reduce management data costs for the investing companies and strengthen the role of the DPR, while allowing the country to make maximum use of its hydrocarbon resources. Landmark has set up oil industry data banks elsewhere in the world, including the UK, Norway and Kazakhstan.

DEBTS CALLED IN

The government's refusal to subsidise the NNPC itself means that the corporation must now seek to put its own financial affairs in order.

Oluremi Fayemi, the chairman of the Nigerian Gas Company (NGC), has admitted that the company collected just 65% of revenues due during the last complete financial year.

The NNPC's new realism may have prompted its hard line stance over the National Electric Power Authority's (NEPA) massive N4bn debt to the NGC. According to the corporation's group executive director of finance and accounts, Omby Harry, the NNPC has instructed its NGC subsidiary to cut gas supplies to the power company if it fails to pay off its debt.

Harry indicated that under the new regime, the NNPC would stop subsidising all customers, including other state owned organisations. This seems to be a key element of Kupolokun trying to run the company on commercial lines, but the public may not react well to power cuts if and when they occur. Rivers State was named as another major NGC debtor.

However, NGC managing director Smart Fadayomi remains upbeat about the company's prospects. He commented: "Even though operating problems militated against our achieving the planned volume of off takes, we are confident that the future of gas is bright, as the operating environment is encouraging industries to optimise resources by converting their process to run on natural gas-resource of cheaper energy."

JOB LOSSES THE MAIN FEAR

Opposition to change in the corporation has been fiercest over job losses. The corporation dismissed 1,388 employees in November, as part of its 'rationalisation' programme, provoking intense although expected union anger. The National Union of Petroleum and Natural Gas Workers (NUPENG) and the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) have both claimed that a total of 5,000 NNPC staff will eventually lose their jobs.

Speaking at a National Assembly dinner in December, Kupolokun said: "What we are doing really is cutting our coat according to our size. We must have an efficient organisation, because it's only when NNPC is efficient that we can talk about growth. So we are going to have the right people in the right places, we are going to encourage people to develop in a very meaningful manner and in the right areas. There is no way you can do all this without some pain."