Recent media reports that the Federal Government will sell some of its stakes in joint ventures with international oil companies have not come as a surprise. The move has been on the table for some years with no action on it, especially when oil price was far more favourable and the stakes could have fetched higher price for the country than now.
Although belated, we believe it is a step in the right direction, as the country cannot continue to rely on foreign loans for the prosecution of its budgets. The decision to sell some of the stakes is coming against the backdrop of public outcry against the Federal Government’s penchant for foreign loans to meet its yearly budget aspirations in the past four years.
Recall that the government had considered reducing its majority stakes in these joint ventures for more than a decade but higher oil prices boosted revenues from oil and the decision was put to rest.
Following financial constraints, the Federal Government could not meet its share of cash call obligations for many years, resulting in significant debts owed to oil companies. Owing to its financial constraints, the international oil companies agreed to give the Federal Government a discount of $1.7bn
The Buhari administration had also said, in its Economic Recovery and Growth Plan, released in 2017, that it would reduce its stakes in joint venture oil assets, refineries and other downstream subsidiaries such as pipelines and depots. If this promise is kept, there will be more money to meet Nigeria’s various infrastructural obligations.
The Minister of Budget and Planning, Udoma Udoma, said the Federal Government would reduce its stakes in joint ventures with Shell and Chevron to improve its finances.
The Nigerian National Petroleum Corporation currently operates six joint ventures with international oil companies. They are: Nigerian Agip Oil Company Limited, Mobil Producing Nigeria Unlimited, Texaco Overseas Petroleum Company of Nigeria Unlimited, Elf Petroleum Nigeria Limited and Chevron Nigeria Limited (CNL) where it holds 60 per cent stake in each. It also holds a 55 per cent stake in the joint venture with Shell Petroleum Development Company of Nigeria Limited.
The Debt Management Office had said that the Government would raise N710 billion from restructuring of its equity in the joint venture oil assets. If the restructuring is completed in the current financial year, it will reduce the Federal Government’s holding in the oil assets to 40 per cent. It will also reduce the burden on government for the payment of cash calls.
Following financial constraints, the Federal Government could not meet its share of cash call obligations for many years, resulting in significant debts owed to oil companies. Owing to its financial constraints, the international oil companies agreed to give the Federal Government a discount of $1.7bn from the $6.8bn cash call arrears owed by the NNPC.
Consequently, in 2018, when Government generated N3.11tn from the sale of crude oil and gas, it transferred N1.829tn into the joint venture cash call account while the balance of N1.28tn was paid into the Federation Account.
Under the joint venture arrangement, both the NNPC and private operators contribute to the funding of operations in the proportion of their equity holdings and generally receive the produced crude oil in the same ratio. Thus, Nigeria’s equity holding in the joint ventures will be reduced and the amount of cash call payable each time there is cash call will reduce in accordance with the percentage sold.
The Federal Government has been under heavy criticisms in recent years because of the sad implications of its borrowing spree on the country’s economy. Instead of borrowing money and piling up debt for generations of Nigerians to come, it is better to sell part of the country’s assets now to attract equity. However, with the sale of part of its stakes in the oil assets, the Government will be buoyant enough to prosecute its budget, particularly those that have to do with enduring infrastructure.
Analysts calculate that in spite of the not too rosy oil market, the Federal Government could generate as much as $9bn in revenue from the sale, which will go a long way to fund other enduring infrastructure programmes in the budget.
In the absence of any reserve information, we believe that selling down NNPC’s stake from 60 per cent to 40 per cent will reduce NNPC’s joint venture production by about 142,000bpd (eight per cent of Nigeria’s production). At today’s oil price, this translates into a $3.5bn loss in revenue.
Looking ahead, we believe that the Federal Government should also reduce its stake in the NLNG to 40 per cent and sell 60 per cent of its 100 per cent stakes in Pipelines and Product Marketing Company, the Nigerian Gas Company and the Transmission Company of Nigeria to raise money and to bring in competent foreign technical partners to run them and make the assets work efficiently.
However, we believe that the sale should be done with a lot of prudence and it must be open and competitive. The Federal Government must sell the stakes at an optimum price and to highly valued partners, who will respect the country’s
laws.
Far more important is that the Federal Government should not use the money realised from the sale to fund its recurrent expenditure. Rather, it will be more meaningful, fruitful, justifiable and acceptable to Nigerians if the revenue realised from the sale of the assets are used to fund enduring infrastructure.
