Oil majors delay investment on $23.5b offshore projects

International Oil Companies (IOCs) operating in Nigeria may have devised means to compel the Federal Government into changing its fiscal policy on the Petroleum Industry Governance Bill (PIGB).
Bonga oil field. PHOTO: SHELL
Bonga oil field. PHOTO: SHELL

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International Oil Companies (IOCs) operating in Nigeria may have devised means to compel the Federal Government into changing its fiscal policy on the Petroleum Industry Governance Bill (PIGB).

The Guardian learnt the IOCs have deliberately put on hold the Final Investment Decision (FID) on five offshore oil and gas projects to make government alter fiscal terms in the new bill deemed unfavourable to deepwater projects.

Already, the FID on the 225,000bpd Bonga Southwest-Aparo project; 120,000bpd Zabazaba-Etan project; 140,000bpd Bosi project; 110,000bpd Uge project and 100,000bpd Nsiko deepwater project has been delayed.

Estimated at over $23.5 billion, the projects were expected to assist the Federal Government achieve a 40 billion-barrel target and daily production of four million barrels per day (bpd).

FID on these projects ought to be taken before the end of 2018.

Some draft versions of the PIGB have prompted questions about the commercial viability of deepwater projects under the proposed changes to the fiscal terms.

Deepwater projects have typically included more favourable fiscal terms than onshore/shallow water projects. But the PIGB, if passed into law, is expected to increase the government’s share of production revenue coming from deepwater projects.

Experts believe that until the fiscal aspect of the bill is considered and is satisfactory to the Federal Government and IOCs, the uncertainty regarding FID on offshore projects would continue.

FID is the “final decision of the Capital Investment Decision (CID) as a part of the long-term corporate finance decisions based on key criteria to manage company’s assets and capital structure. It is the point at which contracts for all major equipment can be placed, allowing procurement and construction to proceed and engineering to be completed.”

An example of an affected project is Offshore Processing Licence (OPL) 245 on the southern edge of the Niger Delta, which is being jointly developed by the Nigerian Agip Exploration Limited and Shell Nigeria Exploration and Production Company (SNEPCo) at a cost of $13.5 billion.

Agip had planned to achieve first oil production by 2020 and was determined to start the execution of the project in the fourth quarter of 2017. But the acquisition of the asset with proven reserves of 560 million barrels of oil has been the subject of a corruption probe and prosecution in Italy and Nigeria. The owners maintain innocence.

Another example is the 225,000bpd Bonga South West-Aparo deepwater project, estimated at $10 billion. It is located in Oil Mining Licence (OML) 118 but also extends to OMLs 132 and 140.

FID was targeted for 2018, with first oil flowing in 2022. But Shell gave another reason for the stay back. It said it was still exploring more efficient and cost-effective ways of implementing the project.

On the status of Bonga South West-Aparo asset, Shell’s Media Relations Manager, Bamidele Odugbesan, said FID was delayed to allow SNEPCo and its co-venture and government partners explore more efficient and cost-effective ways of implementing the project.

He disclosed that in June 2017, SNEPCo organised multi-stakeholder content workshops on potential opportunities for Nigerian service providers. This, he said, was in fulfillment of mandatory requirements by the Nigeria Content Development and Monitoring Board.

He assured that a new timeframe for FID would be announced as soon as the necessary commercial framework for the investment, among other things, is agreed upon with Shell partners.

Business organisations will always want to safeguard their investments, stressed Registrar, Institute of Credit Administration (ICA), Prof. Chris Onalo.

He expressed optimism the projects would come up when the investment climate is clear and the issues surrounding the PIGB are resolved.

“If the passage of the PIGB is the motivating factor for them to take the FID, and suddenly it is delayed for whatever reason, it will play a critical role in their decision concerning any proposed investment. Investors always take notice of the trend of things that may affect their decision. Government policies will make them to play the ‘let’s wait and see’ game,” said Onalo.

For Sunny Oputa, Chief Executive Officer, Energy and Corporate Africa, low oil prices and insecurity in the Niger Delta and other parts of the country have contributed greatly to many oil companies slowing down investments to mitigate risk and massive loss.

Oputa said: “The two major reasons are economics and security. Two years ago, the price of crude oil plunged below $50 per barrel, which was not attractive enough for investors and mega oil companies to continue to invest in exploration and production.

“Exploration and production investments were almost stalled globally as a result of the economic crisis the falling price of oil triggered in the market. At the price below $50, operators were struggling to maintain or balance their capital expenditure and operating expenditure to remain afloat and ensure profitability for business growth.

“What is needed is create an atmosphere of lasting peace, initiate strong corporate social responsibility acts, and community relations between producing companies and communities. Government should do its part by ensuring maximum economic security and encourage deployment of technology to safeguard assets.”

Oputa urged the Federal Government to fast-track the projects by creating an enabling environment, promoting a culture of peace and understanding between communities and operators, and ensuring a functional win-win petroleum law and local content initiatives.

“Government can also assist by attracting funds, backing up as guarantors, and reducing taxation or zeroing it out on some of the items to be imported for such projects. That would help to reduce capital expenditures,” he added.

The Chairman, Petroleum Technology Association, Mr. Bank Anthony Okoroafor, also urged the Federal Government to expedite action on the PIGB to boost activities in exploration and production profile. He noted that the Federal Government’s Cash Call exit would help to attract investment in offshore business and called for the harnessing of local long-term funds like pensions and sovereign funds into long-term productive and profitable infrastructure assets.

The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, had described the delay in signing the FID as a major concern to the Federal Government, saying: “You don’t make a $10 billion investment by just walking through it like a tiny door. You have to understand your policy; you have to get your investors lined up; you have to be sure of your renewals. The terms have to be right. It is important that those terms are looked at, to ensure the federation is getting what it is supposed to get. So, a lot of that is going on. It takes an average of two to three years really to run through these things before you then come to the crucibles of FID.”

Still on the oil and gas sector, the Department of Petroleum Resources (DPR) has concluded plans to clamp down on exploration and production companies over unpaid debt of more than N7 trillion to the Federal Government.

The Presidency has directed the agency to embark on the recovery of all debts owed by the companies, and the DPR has already warned the affected companies to offset all outstanding payments on or before today or face sanction.

An inquiry from the Nigeria Extractive Industries Transparency Initiative (NEITI) showed that Nigerian National Petroleum Corporation (NNPC) is yet to remit dividends from investment in Nigerian Liquefied Natural Gas Company (NLNG) worth $16.898 billion, $1.050 billion, and N68.552 billion, representing outstanding payments for oil wells divested by NNPC to Nigeria Petroleum Development Company (NPDC). Also, NNPC and its upstream arm, NPDC, have failed to remit $21.778 billion and N316.074 billion to the Federation Account.
NEITI said the amounts were from federation assets divested to NPDC and NPDC’s legacy liabilities; payments for domestic crude allocation to NNPC; and dividends from investment in NLNG paid but withheld by NNPC. It also revealed that the National Petroleum Investment Management Services (NAPIMS) erroneously paid cash calls amounting to $552 million on divested assets.

NEITI’s Director of Communications, Orji Ogbonnaya Orji, said: “NEITI welcomes the recent directive to DPR on the recovery of outstanding payments from companies. If DPR approaches NEITI for support in this important assignment, we will gladly provide information and data supported with crucial facts.

“For instance, from disclosures by NEITI’s independent reports, the outstanding recoverable debts include $16.898 billion NLNG dividends paid to NNPC. NNPC acknowledged receipt but failed to remit the funds to the Federation Account as required by law. The other recoverable is the sum of $1.050 billion and N68.552 billion representing the outstanding payments for the oil wells divested by the NNPC to NPDC. These are part of the remedial issues NEITI seeks to address, to improve government revenue generation and transparency in the sector.”
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