Issue 126 • 16 November 2007

Cash call phase-out opens Nigerian borrowing conundrum

As the federal government works to push ahead with the restructuring of Nigerian National Petroleum Corporation (NNPC), President Umaru Yar’Adua made headlines in early November by confirming that Abuja planned to review its contracts with the five multinationals who produce the bulk of Nigerian oil – Royal Dutch Shell, ExxonMobil, Chevron, Total and Agip – and to stop the current system of cash call payments (AE 125/4). But hopes that commercial bank loans might supplant the cash call system for Nigeria’s oil industry are probably premature, according to bankers canvassed by African Energy.

Under the annual cash call system, the majors and government are obliged to put in roughly equal funding to maintain and develop their facilities. Instead, suggested Yar’Adua, the money could be raised from international markets, to free resources for other critical areas such as power, education and health. The cash call system has long been rife with problems, and bankers confirmed that NNPC had been missing its monthly payments for some time, leaving it to the majors to plug the gap. The ‘new NNPC’ wants to play a more assertive role, Department of Petroleum Resources head Tony Chukwueke told the recent Africa Upstream conference, and “will no longer be an onlooker to Shell and Exxon” (see Upstream oil).

Chukwueke suggested Nigeria’s resurgent local banks could take on some of the burden. But many bankers are sceptical. “Now they want financial markets to carry them as well, but it will take a while for markets to like country risk, transparency, balance sheet and all other aspects of the new NNPC that is not yet defined. This story has only just begun,” a Paris-based oil financier told African Energy. Another banker, based in Lagos, was even less sympathetic to the government’s change of tack, arguing: “It takes a lot of gall to join a joint venture, then complain about one’s obligations. Very simply, if the government does not want to meet cash calls, it should not insert itself, via NNPC, into the joint venture in the first place.” He added: “The government is being rather silly, but I guess this a great example of the Nigerian government playing by the golden rule that he who has the gold, makes the rules. Yar’Adua appears to be taking lessons from Russia on how to deal with oil majors.”

Even so, with bulge bracket banks looking for opportunities in Nigeria, Abuja is unlikely to find itself short of financing solutions. As much as $4.3bn could be sought from banks, according to one report. “It’s certainly not fair on the oil companies, but they’ll just have to stomach it – and with oil at $100 a barrel, it is not so bad for them,” the Lagos-based banker said.

Meanwhile federal funding is not yet at an end, Yar’Adua said on 8 November as he presented details of the 2008 budget to the National Assembly. The government would make available $4.97bn in the 2008 budget as cash call payments. Although this represents a 10.4% increase from the $4.5bn allocated under this year’s budget, the federal government’s JV funding shortfall is still reportedly around $3.5bn.

Analysts linked NNPC’s inability to finance its cash call obligations to the fall in oil revenues resulting from the continuing violence, and disruption of production, in the Niger Delta region. This has forced the government to dip into its oil windfall account to help make up for the revenue shortfall, which Abuja expects to come in at over $6.5bn this year. But relations with the JVs have never been easy, and the government has regularly failed to meet commitments even when the Delta was reasonably peaceful.

The Lagos-based banker believed the big five majors were “likely to huff and puff, and then bluff, but it’s far too risky for any of them to walk away.” Already, they have complained that funding issues have affected their growth projections, and have made them unable to meet the government’s 2008 deadline for zero gas flaring. Abuja has leverage, the Lagos-based banker observed: “There are enough Chinese companies waiting in the wings, prepared to step into the frame, should anyone choose to abandon their current positions. Furthermore, anyone who does, would need to think hard about their future ability to acquire oil blocks in Nigeria.”

The Paris-based banker said oil explorers in Nigeria had been tapping reserve-based lending facilities for some five or more years. Given the levels of liquidity in emerging markets, “there is no difficulty in finding the cash to plug the gap.” The key dilemma for potential commercial lenders “will be the mechanics of taking on, and pricing, what is essentially federal government risk that is being unfairly transferred to IOCs.” He concluded: “Ultimately, the obligation will fall on the government, even if it comes down to paying down the debt, from receivables. They’re simply taking less upfront risk, which is rather cynical, but clever.”

A third banker, based in London, speculated that “for the oil acreage where there is a bit of certainty, IOCs will probably dig into their pockets and take the hit, then slam the government with the bill, plus a hefty slug of interest, if they are successful.” In the case of a dry well, “there would be lots of pain for the IOC, and none for the government.” The London-based banker signed off by observing that “in a just world, the government would privatise NNPC, make oil prospecting a free for all, and derive its revenues from taxation.” Now there’s a thought.

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