The sale of several oil and gas asset would benefit the Nigerian economy in the mid to long term. All commercial asset in which the state has a controlling and operating interest should be scaled-down. These include asset held by the Nigerian Petroleum Development Company (NPDC), the exploration and production subsidiary of the Nigerian National Petroleum Corporation (NNPC), writes Samuel Diminas.
Nigeria’s economy is in decline following the downward trend in crude oil prices beginning in July 2014. By the end of Q2 2016, the country slipped into recession, following consecutive negative GDP growth in the first and second quarters of the year. Low oil prices, exacerbated by militant attacks on oil and gas facilities in Nigeria’s oil-producing Niger Delta, a lack of competent fiscal measures and adverse macroeconomic policies, amongst other factors, have combined to make a bad case worse. Nigerians unanimously agree that the country is faced with the urgent task to mitigate a growing recession, and ultimately guide the economy back to growth; the strategy to achieve this is the subject of diverse opinion.
The National Economic Council (NEC) recently recommended the sale of state-owned assets to raise much-needed revenues. The Senate President and Nigeria’s businessman, Aliko Dangote, have both supported this view. However, most wholly state-owned asset have almost been run aground, making the literal interpretation of the proposal a reasonable one. But wholly state-owned asset, like the only three refineries in the country, a steel plant, amongst others, which the country would benefit from privatising or even outright sale are not the asset in focus.
The state-owned asset proposed for sale are government-owned interests in joint ventures with oil and gas companies and the Nigeria Liquefied Natural Gas (NLNG), which are the primary non-tax revenue generating asset for the country.
The begging question is: Should Nigerian shares in oil and gas asset be sold? We answer ‘Yes and No.’
‘Yes, Sell’: The sale of several oil and gas asset would benefit the Nigerian economy in the mid to long term. All commercial asset in which the state has a controlling and operating interest should be scaled-down. These include asset held by the Nigerian Petroleum Development Company (NPDC), the exploration and production subsidiary of the Nigerian National Petroleum Corporation (NNPC). Competent and efficient operations of several of those asset would lead to an increase in production from the respective fields, which in turn would translate to more national revenues. Many of these fields are currently capped or under-producing.
National asset under the NNPC joint venture (JV) arrangements with the IOCs should also be scaled down. The NNPC owns 55 percent of each JV with oil and gas companies holding the remaining 45 percent (there are slight variations). With these asset, the NNPC reserves the right to become an operator, but a Joint Operating Agreement (JOA) is signed which sets the guidelines for running the operations of the field, with one of the partners designated the operator. All parties are required to share in the cost of operation. Unfortunately, the NNPC is rarely able to meet its funding obligations, and one wonders why in the first place anyone expected the NNPC to be able to do so. This arrangement has also created a loophole for massive graft and an inexplicable waste of government funds at the NNPC through cash calls.
The economics of the JV assets would be greatly enhanced if the state ownership were reduced well below the statutory 55 percent, to between 10 to 20 percent depending on the specific economic conditions of individual fields. The optimal operation of these fields would provide requisite revenue through other means, including Petroleum Profit Tax, Equity Oil (without cash calls based on 10 to 20 percent carry and cost recovery models), Royalty, etc. Any strategy that optimises production from Nigerian fields would generate more revenues for the Federal Government, better so if the NNPC is removed from the equation.
Amongst Nigeria’s deep-water blocks, there are a few with oil and gas discoveries but are considered non-commercial for development under current economic terms. In a couple of these fields, a reduction in the state’s statutory interest of 50 percent held by the NNPC, has the potential to tip the economics of scale towards commercial viability even under current oil prices. Developing just two (2) of these fields would add approximately one hundred and fifty thousand barrels per day (150K bpd) of secure crude oil production within the next four to five years.
The capital and operating expenditure required for the development of two of these fields exceed $10 billion. While the NNPC owns 50 percent of these undeveloped blocks, it is unable to contribute its share of 50 percent of the required investment for development. Developing these fields require the investors or operators to fund 100 percent of the investment up to first oil strike, and depend on long-term production cost recovery fiscal-terms, invariably condemning these fields to non-commercial status.
In the cases mentioned above in deep-water assets, the NNPC owns 50 percent of the blocks that do not generate income or economic activity. Thus the economic benefit to the state is zero. In these blocks, NNPC divestment, applied along with strategic incentives could lead to commercial viability. Development of these fields would generate billions of dollars in economic activity for local businesses, providing a multiplier effect and increase taxable income from service providers. As long as the assets are operational, there are several avenues for revenues to flow into government coffers from these fields; these include Petroleum Tax, Equity Oil, and Corporate Income Tax for all associated service providers to business activities deriving from the operations of the fields.
There is no justifiable long-term benefit in selling Nigeria’s shares in the LNG, a quick sale as proposed is not feasible. There is also no realistic path to raising funds for Nigeria’s 2016 budget through oil and gas asset sales at the end of 2016; it is also unlikely that this can be achieved even for the 2017 budget.
As for state interests in pipeline infrastructure, one wonders why the state retains these asset. Selling these asset would free the state of scarce resources expended in maintaining them. To optimise the benefit from relinquishing these asset through sales, legislation would be required to make oil and gas companies account for production at the wellhead rather than at export terminals.
If oil and gas companies were made accountable to pay Petroleum Tax, Equity Oil and Royalties on the volume of oil produced at the wellhead, companies would be more responsible towards eliminating pipeline breach and its accompanying oil theft. With the availability of modern pipeline technology, it is curious that Nigeria still grapples with crude oil theft from pipelines, a lot of which are intertwined and explained away as part of the actions of vandals and militant attacks.
‘No Sale’: The country’s 49 percent interest in the Nigerian Liquefied Natural Gas (NLNG) should not be contemplated for sale. It is Nigeria’s single highest revenue generating investment. A consortium of private oil and gas corporations own majority shares of the NLNG (51 percent). They operate and make management and investment decisions, making the NLNG a global model for successful State/Public–Private partnership.
The reasons put forward by the proponents for the sale of state-owned shares in the NLNG is the need to raise capital for fiscal stimulus towards achieving the implementation of the 2016 budget. In the first place, the proposed objective is not tenable. Nigeria’s 49 percent shares in the LNG cannot be sold and successfully closed on, with and funds received in the bank within the next 18 months.
In the case of the NLNG, due diligence, process formulation, board and corporate resolutions/approvals, etc., would take more than a year, and this is just the process preceding a formal approval of all shareholders for the commencement of divestment. The estimated timeline does not take into account public opposition led by unions and host communities against the sale of the asset.
The partners in the NLNG would also have the right of first refusal on any proposed sale, and negotiations between political interests and that of the Majority Private Shareholders would raise legal issues that would take some time to straighten out.
In the past five years, annual revenue from the LNG to Nigeria has been between $1.5 to $2.5 billion. Applying a simple valuation model, taking into account current market conditions and an estimated potential growth of 25 percent over the next ten years, the present value of Nigeria’s interest in the LNG is between $13.8 and $23 billion.
This amount cannot be banked in cash in a sale transaction within one year under current market conditions. In consideration of political risk, an astute investor would spread out payment at a highly discounted value for as long as possible, considering a sale could be rescinded by future governments, as was the case with the sale of Nigerian state-owned refineries in 2007.
The NLNG is a great investment for Nigeria; this benefit is not optimised because of the structure of the NNPC, which holds the shares of the asset on behalf of Nigeria. Revenues from Nigeria’s shares in the LNG have to pass through the NNPC, which is wholly owned by the state, and the mismanagement of the dividends occurs at this point. The NNPC has become more of a liability than an asset to the country. Dealing with this and other related issues, require legislation.
There is no justifiable long-term benefit in selling Nigeria’s shares in the LNG, a quick sale as proposed is not feasible. There is also no realistic path to raising funds for Nigeria’s 2016 budget through oil and gas asset sales at the end of 2016; it is also unlikely that this can be achieved even for the 2017 budget.
For Nigeria’s shares in the NLNG, it is ‘no sale.’
Samuel Diminas a petroleum geophysicist, is the Chair of the Board of Trustees of Spaces for Change, Nigeria. He can be reached on S_diminas@yahoo.com.