ANALYSIS-Funding crisis is trouble for Nigeria oil sector

Nigeria’s inability to fund its share of joint venture oil projects means it could struggle to keep output at current levels in coming years, let alone meet an ambitious target of doubling it, industry executives say.

Violent attacks by militants in the Niger Delta, the heartland of Nigeria’s 2 million barrels per day (bpd) oil industry, are usually blamed for preventing it from being able to pump anywhere near its current capacity of 3 million bpd.

But the state-run Nigerian National Petroleum Corporation’s (NNPC) persistent inability to guarantee timely funding for joint ventures with oil giants such as Royal Dutch Shell and Exxon Mobil is taking an equally heavy toll.

With just two months left in the year, Africa’s largest oil producer is still in discussions with several of its foreign oil partners to finalise billions of dollars in financing meant to cover its costs for the 2008 joint venture budget.

“(The funding issue) creates uncertainties. There is proposed coverage for 2008, but beyond that we need to work with the government,” said John Chaplin, managing director of Exxon’s subsidiary, Mobil Producing Nigeria.

“It is key that the government comes up with a longer term solution,” he told Reuters on the sidelines of an industry conference in the capital Abuja.

NNPC announced a string of deals in May, worth around $6 billion, meant to plug immediate funding shortfalls in its joint ventures with Shell, Exxon Mobil and Total <TOTF.PA>. Under the so-called “carry agreements”, the foreign oil partners loan money to NNPC to fund its portion of joint venture projects.

But the deals are only a short-term solution and negotiations over the details have dragged on for six months, leaving NNPC funds tight and barely enough to finance much beyond the joint ventures’ basic operating costs.

A deteriorating global economic crisis could also exacerbate NNPC’s funding woes, although the problem predates the U.S. credit crunch.

An NNPC spokesman said the Total deal had been formally signed only two weeks ago. Shell and Exxon said they had still not finalised their contracts, though they were close to doing so.

OUTPUT THREATENED President Umaru Yar’Adua has been keen to bridge the funding gap in the oil industry through private sector financing since he took power 18 months ago. He proposed legislation in August to restructure NNPC so that it can raise money through capital markets, instead of relying on the government.

“This will enable NNPC to pay on time and reliably without any cash calls,” said NNPC spokesman Levi Ajuonoma.

But sceptics say it could be months before the legislation is passed and longer before it is implemented, meaning today’s funding woes will hit output in a few years’ time.

One industry group says output at Nigeria’s joint venture fields could fall to 700,000 barrels per day by 2015, from the current 1.7 million bpd, if NNPC fails to fix the funding crisis.

That could be devastating for sub-Saharan Africa’s second biggest economy as the oil sector provides about 80 percent of federal revenue. The industry group estimates revenue could fall by a third if output is allowed to drop to such a low level.

But it says that if NNPC boosts its funding, output from the joint venture fields could grow to 2.3 million bpd in seven years with government revenue increasing by 30 to 40 percent.

One senior oil industry executive said there was rare unanimity among rival oil firms that Nigeria risked sleep-walking into a crisis with a hangover that would be felt for years if it did not wake up quickly to the funding issues.

Smaller oil industry supply companies complain that with capital expenditure all but dried up at the major joint ventures, they too are losing business.

SCAREMONGERING?

Some analysts dismiss the rhetoric as scaremongering. They say foreign firms have sung the same tune for years and are trying to pressure the government into stumping up funds rather than investing more of their own record profits in new capacity.

Much of Nigeria’s new oil production will in any case come from offshore fields, operated under production sharing contracts that are less dependent on government funding.

Two new deepwater fields — Agbami, operated by Chevron <CVX.N>, and Akpo, operated by Total — are expected to add nearly 500,000 bpd of production by the end of next year.

The industry group said the joint ventures needed a total of between $15 billion and $20 billion per year to ensure that production continues to increase at their oil fields.

Since NNPC is a 55 percent shareholder, its share of 2008 joint venture funding is estimated at $8.8 billion. The company has provided $4.9 billion from the government budget, with the remaining $3.8 billion to be raised from the private sector.