I spoke to a very good old friend of mine tonight and she asked me how work had been. By the time I finished explaining to her I had not been at work for over a week now (first due to the Eid public holiday, then the extended holiday) because of the current PENGASSAN strike, it struck a nerve deep inside that I had to write a simple article on what this strike was all about.
There are quite a number of things PENGASSAN is trying to draw attention to with this strike; the key ones I would like to touch on are cash calls, NNPC’s historical arrears & the PIB. But how do you understand these issues, without having a sneak peek into the mechanics of the oil & gas business? I will help you break all the elements down in simple ABC...
1. THE ABC OF JOINT VENTURE ARRANGEMENTS
*The oil & gas business is a very risky & uncertain one. A company may blow over $30mln in months to explore an area & drill a single well only to discover it contains just water! Ooops! No oil. No gas. Yikes!
*Just imagine a single company having over 10 such exploration campaigns in a period. Over time, the company will be dead & buried!
*So, if the risks & uncertainty are so high, then why are there very many successful oil & gas companies all over the world swimming in billions of dollars? Well, the returns from one successful find can more than pay for the losses from over four dead-end campaign! Pure & simple.
*So, it’s a “high risk – high return” business. And it’s too risky to go it alone. If you go alone & hit a huge iceberg, you are gone like the Titanic. So, to survive, companies form joint ventures in order to share the risks & returns...
Before I forget, there is one key thing you need to keep in mind always...
*In every JV, the partners are divided into the operator & the non-operating partners. The operator manages (or simply “operates”) the JV on behalf of all the JV partners.
2. JV ARRANGEMENTS IN NIGERIA
*In a simple JV arrangement like many of the ones we have in the upstream industry in Nigeria, there are usually 3-4 different JV partners.
* The JV partners were in the past mainly international oil companies (IOCs) like EXXONMOBIL, AGIP, SHELL, & TOTAL; working closely with the NNPC (it represents the Federal Government’s interests). These days, however, there are loads of indigenous oil companies like SEPLAT, Shoreline Resources & ENERGIA participating actively in this highly lucrative play/game.
*The NNPC is a constant feature in many, if not ALL, of the JVs in Nigeria. The NNPC is represented in these JVs by one of its subsidiaries, the National Petroleum Investment Management Services (NAPIMS).
*The NNPC usually has the lion share (50% - 60%) stake in each JV.
*As a general rule for oil (NOT gas), each partner comes to scoop its own share of the total oil production from the JV & goes to sell it directly in the international market. Thus, the JV doesn’t actually sell oil directly, so, it doesn’t generate revenue of its own per se. This is, however, very simplified; & let’s keep it so. The story changes with gas (especially domestic gas) & the new adjustments to the primary JV arrangements (e.g. the use of alternative funding).
*So, if all the partners just take their share of the oil & go sell directly in the international market, how then does the JV get the funds the operator needs to fund its operations? That’s where the miracle of cash calls comes in...
3. CASH CALLS DEMYSTIFIED
*Cash calls are the monthly monetary contributions made by all partners in a joint venture (JV) to ensure the smooth, day-to-day running of the JV.
*The operator “calls” on all the partners (including itself) to make cash available to it to run the JV in order to continue to produce the hydrocarbons they all share from.
*Remember: all partners get their share of physical oil. They go sell the oil individually. In return, they share all the costs of operating the JV. Thus, they pay for the costs through contributing cash calls.
*The operator usually asks for the cash 2 months in advance of when the cash will be needed to pay the JV’s bills.
4. THE HISTORICAL CASH CALLS GAP & THE HUGE NNPC ARREARS
*Having understood the basics, now imagine that your company is the operator of a JV where the NNPC has a 50% stake. Let’s assume that the monthly cash needed to fund this JV is $60mln. Thus, your company expects $30mln (50% x $60mln) monthly from the NNPC.
*Now, imagine that every month, the NNPC only pays $20mln out of the $30mln. Clearly, there is a gap of $10mln monthly. In a year, the under-funding is $120mln.
*Worse still, the $20mln even comes in 1-2 months late. Your company either ends up paying vendors late or borrows. The costs here can be both financial & reputational.
*Now, imagine this has been happening in the past 5-10 years. Now, the funding gap (what NNPC is owing your company) is now in billions of dollars.
*Finally, imagine that in all those 5-10 years, the NNPC took exactly 50% of the total oil production! There is God ooo!
*Sadly, this is the exact reality for many of the operators (especially the IOCs) in today’s upstream business in Nigeria...
CASH CALLS ARREARS, UNDERFUNDING, PIB & PENGASSAN
I sincerely hope you are already getting the gist. It may all seem disjointed & scattered all over, but do not worry. I will quickly help you connect all the scattered pieces without further ado, so you can clearly see the epicentre of this ongoing PENGASSAN struggle:
*When the going was good & the oil price was still high, many of the operators were more than happy to continue to directly pay for or cover the under-funding from the NNPC. Business was booming; cashflows were heavy; they could even borrow from banks or their parent companies with ease. After all, as long as the hydrocarbons hadn’t dried up, there were better days ahead; the NNPC would come good over time. Or so they thought...
*...then came the tsunami of global over-supply of crude that resulted in prices hitting rock bottom. The cash reserves dried up quicker than they were built. The parent companies all of a sudden became risk averse & started asking for outstanding loans to be repaid; no more new loans. Banks globally are reeling in bad debts from past oil & gas loans. Suddenly, the bubble has burst!
*Now, with this persistent under-funding problem, the following have been the implications for the operators:
-reduced or zero exploration. This is dangerous for Nigeria. If you deplete oil & gas reserves faster than you are replacing them, you are already reducing your future production capacity in advance. It’s like when Jonathan’s government was blowing away our external reserves when the boom was on. We are seeing the direct consequences now!
-reduced or zero new projects. This is similar to the exploration one above. The main difference however is that, unlike in exploration where you are still gambling into the unknown world of searching for new reserves, here you are leaving known or already discovered reserves in the ground below. What is in the ground doesn’t generate cash until you bring it out. You can’t bring it out unless you drill & complete wells, construct flowlines & facilities to channel the hydrocarbons into vessels that will transport them to the market.
-reduced/zero exploration and reduced/zero new projects mean one thing: retrenchment! Now, this is where PENGASSAN is hurt terribly; it’s a serious haemorrhage in the industry right now, my friends. PENGASSAN is the Petroleum & Natural Gas Senior Staff Association of Nigeria (like you don’t already know!). PENGASSAN is bleeding as it has been losing & will continue to lose its members to incessant redundancy exercises that the oil & gas companies have been forced to implement in order to stay afloat. It’s bad already that the global oil price is low. It’s even worse when your majority partner is not paying their share of the cash needed to run the business, yet it shares in the benefits in FULL.
What about PIB? How can I forget the elephant in the room? A lot has been written on this. For the purpose of this current PENGASSAN struggle, the PIB has practically the same implications as the cash calls conundrum above. It is creating a huge cloud of uncertainty across the industry. IOCs are playing the “wait-and-see” game. Nobody wants to invest much in new exploration or in heavy capital investments. You just don’t know what a new PIB can throw up. No no, it is way too risky. New oil & gas investors are not eager to even put a toe in the water. Banks are scared to the nerve to advance new or additional loans to oil & gas companies. The direct result of all these? Again, a shrinking business; & that’s bad news for PENGASSAN as it will continue to bleed by losing more of its members to retrenchment.
Now, I really hope my very good friend (Ayibadeinyefa) will appreciate the different dimensions to this ongoing strike & why I am awake at 2am typing this article. In summary, PENGASSAN is fighting specifically for the future of its members, and generally for the future of our dear country, Nigeria...
By Isaac Audu-Usman