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JV CASH CALLS & ALTERNATIVE FUNDING

by STANLEY LAWSON Group Executive Director Finance & Accounts Nigerian National Petroleum Corporation NEITI WORKSHOP PH- 28th July, 2005

AND WHAT IS CASH CALL? FUNDING UN-INCORPORATED JVs UN SHARE IMPUT COSTS, SHARE OUTPUT GAINS  CASH CALLS IN NIGERIAN OIL JVsJVsTHE JOINT OPERATING AGREEMENT


DEFINES PARTICIPANTS INTERESTS AND RESPONSIBILITIES

J O A
SETS OUT OPERATING PROCEDURES

PARTIES FUNDING OBLIGATION AS DEFINED BY JOA


ARTICLE 6 OF JOA PROVIDES THAT: EACH PARTY SHALL PAY ITS PARTICIPATING INTEREST SHARE OF ALL COSTS & EXPENDITURE FOR THE JOINT ACCOUNT PARTIES MUST PAY THEIR RELEVANT CASHCALLS INTO JOINT BANK ACCOUNT NOT LATER THAN 1ST DAY OF CASHCALL MONTH OPERATOR MAY, WITH OPCOMS APPROVAL, BORROW ON BEHALF OF DEFAULTING PARTY & INTEREST SHALL BE FOR THE DEFAULTING PARTYS ACCOUNT

JOINT VENTURE CASHCALL PROCESS


JVC
CC & WP FOR CASH CALL MONTH AND RETURNS OF 2 MONTHS PRECEEDING CC MONTH

CASHCALL COMMITTEE

RECOMMENDS CASHCALL TO BE PAID

NAPIMS

GGM-NAPIMS GED (E&P) GMD


GMDs APPROVAL FOR NAPIMS TO PAY GMD S APPROVAL FOR GFAD TO FUND

INSTRUCTS CBN TO PAY JVCCs

CBN
GFAD INSTRUCTS CBN TO FUND NAPIMS JVCC ACCOUNT

GED F&A

HICCUPS: THE CASH CALL ARREARS


RECONCILED JVC ARREARS AS AT END OF 1999:
-

ACCUMULATED BUDGET FUNDING SHORTFALLS FROM NNPC/GOVERNMENT COST OF FUNDING GAP TO THE OPERATORS TOTAL REFUNDED IN 2001 APPROVED BUDGET

=N=m 60,514,601

US $m 266,338

NATIONAL WISH LIST

36 billion bbls Reserves and 4 million b/d production by 2007 Maximising sector value and fair share for Nigeria Improving Nigerian capacity and Content 40 billion bbls reserves and 4.5 million b/d production by 2010 Develop domestic market and end flaring by 2008 Capture economic value and generate as much revenue from gas as from oil by 2010

JV CASHCALL AND REVENUE (1999 TO 2003)


YEAR
AVG CRUDE OIL PRICE, US $

1999 17.62 6,761 103 6,864 2,000 29.14 800

2000 27.60 10,649 280 10,929 2,600 23.79 1,318

2001 24.34 9,393 249.6 9,643 3,500 33.18 1,758

2002 25.18 8,127 264 8,391 3,200 38.14 1,396

2003 29.02 7,242 187 7,430 3,500 47.11 1,535

Oil Receipts ($MM) GAS ($MM) Total (Oil & Gas) ($MM) CashCash-Call ($MM) CC TO TOTAL REVENUE % RESERVE ADDITION (MMBLS)

MENU OF SOME JV OIL AND GAS CAPITAL PROJECTS


       

PLATFROM UPGRADE EAST AREA INTEGRATED PROJECT OKRIKA JETTY ESCRAVOS GAS PROJECT FORCADOS YORKI INTEGRATED PROJECT ETIM/INIM/UTUE PIPELINE & PRODUCTION GTL PROJECT EA/EJA

MENU OF SOME JV OIL AND GAS CAPITAL PROJECTS


      

AMENAM KPONO BONNY NAG SOUTH FORCADOS AGG CAWTHORNE CHANNEL YOHO FIELD DEVELOPMENT MOBIL POWER & GAS FLARE OUT PROJECTS SHELL AFAM / ABUJA POWER & LNG PROJECTS AGIP POWER & LNG PROJECTS

FUNDING REQUIREMENT (2004-2008)


9,000 8,000 7,000 6,000 5,000

GAS CAPEX

OIL CAPEX
4,000 3,000 2,000 1,000 0

OPEX

2004

2005

2006

2007

2008

AND WHAT IS ALTERNATIVE FUNDING ?


PROCESS OF FUNDING THE EQUITY

CONTRIBUTION OF ONE OR MORE OF THE JV PARTNERS OTHER THAN THE CASH CALL METHOD PROVIDED IN THE JOA-JOA---TO AUGMENT FUNDING SHORTFALL --TO

FUNDING OPTIONS
CASHCALL  ALTERNATIVE FUNDING CAPITALISATION/EQUITY 3RD PARTY LOAN CARRY ARRANGEMENT OTHERS/COMBINATION OF THESE


CASHCALL FUNDING
GOVT FUNDS ITS OWN SHARE OF JV OPERATIONS DIRECTLY THROUGH ANNUAL BUDGETING AND REVENUE OFFSET  NNPC MARKETS ALL GOVT EQUITY CRUDE OIL PRODUCTION AND REMITS PROCEEDS (100%) INTO FEDERATION ACCOUNT NET OF COST OF PRODUCTION (JVCC).


CASHCALL FUNDING


FOR CLARITY, PROCEEDS REMITTED IS MADE UP OF PPT ROYALTY PROFIT

CASHCALL FUNDING
FUNDING IS READILY AVAILABLE IF EXPENDITURES STAY WITHIN APPROVED BUDGET, AND ALSO REVENUES  NO FINANCIAL OR ENCUMBERANCE ON GOVERNMENT ASSETS


LOAN FUNDING


 

GOVT SOURCES FOR FUNDS TO PAY FOR ITS OWN SHARE OF JV OPERATIONS FROM THIRD PARTY OR EXTERNAL SOURCES NIGERIAN EQUITY CRUDE OIL PRODUCTION WILL BE ENCUMBERED BY DEMANDS OF LENDERS PRICING AND OFFTAKER CHOICE WILL BE AN ISSUE IN ADDITION TO THE FOREGOING, LENDER MAY REQUIRE ADDITIONAL COLATERAL AND/OR GOVT GUARANTEE

LOAN FUNDING


LOANS ARE RESTRICTIVE AND INFLEXIBLE AND INVOLVE VARIOUS FINANCIAL CHARGES VIZ:
 UPFRONT

FEES  COMMITMENT FEES  LEGAL FEES  INTEREST CHARGES ON PRINCIPAL AND OUTSTANDING INTEREST


THE FOREGOING CHARGES ARE ADDITIONAL TO THE REPAYMENT OF PRINCIPAL (SAME SIZE AS CASHCALL)

LOAN FUNDING


LENDING TO NNPC MAY ATTRACT HIGHER THAN MARKET INTEREST RATES DUE TO LOW OR NO CREDIT RATING AND LACK OF LENDING TRACK RECORD FUNDING THRU LOAN MAY REDUCE NET GOVT REVENUE AS EXCESSIVE FINANCIAL CHARGES ADDL TO FUNDING REQUIREMENT.

EVALUATION OF GOVT NET REVENUE (CASHCALL Vs LOAN)




CASHCALL:


 

PROD BASED ON PROJECTED NIGERIAN SHARE OF OPEC CAP (2004-2008) (2004ANNUAL CASHCALL REQUIREMENT OF $3.2 BILLION IN 2004 IS ASSUMED. THIS IS EXPECTED TO INCREASE TO $3.86 BILLION BY 2008 DUE TO PROD INCREASE FROM 2.07 MMPD IN 2004 TO 2.57 MMPD IN 2008 AN AVERAGE OIL PRICE OF $24/BBL IS ASSUMED CASHCALL AND SALES REVENUE ARE BASED ON GOVT EQUITY OIL PRODUCTION ONLY

BASED ON THE FOREGOING, THE FOLLOWING RESULTS WERE OBTAINED:


  

GROSS REVENUE CASHCALL PAID . NET REVENUE

$57,585 MLN (2004-2008) (2004$17,950 MLN $39,635 MLN

EVALUATION OF GOVT NET REVENUE (CASHCALL Vs LOAN)




LOAN:
 

 

PROD BASED ON PROJECTED NIGERIAN SHARE OF OPEC CAP (2004-2008) (2004ANNUAL CASHCALL REQUIREMENT OF $3.2 BILLION IN 2004 IS ASSUMED. THIS IS EXPECTED TO INCREASE TO $3.86 BILLION BY 2008 DUE TO PROD INCREASE FROM 2.07 MMPD IN 2004 TO 2.57 MMPD IN 2008 AN AVERAGE OIL PRICE OF $24/BBL IS ASSUMED LOAN AND SALES REVENUE ARE BASED ON GOVT EQUITY OIL PRODUCTION ONLY UPFRONT FEES COMMITMENT FEES INTEREST RATE GRACE PERIOD PAYMENT PERIOD 2% 0.5% PP LIBOR+5% 1 QUARTER 4 QTRS/ANNUAL DISBURSEMENT

THE FOLLOWING LOAN TERMS WERE ASSUMED:


    

EVALUATION OF GOVT NET REVENUE (CASHCALL Vs LOAN)




BASED ON THE FOREGOING TERMS, THE FOLLOWING RESULTS WERE OBTAINED:


   

GROSS REVENUE PRINCIPAL REPAYMENT FINANCIAL CHARGES NET REVENUE

$57,585 MLN (2004-2008) (2004$17,950 MLN $ 1,025 MLN $38,610 MLN

 

ABOVE SHOWS CLEARLY THAT GOVERNMENT WILL LOSE OVER ONE BILLION DOLLARS AS FINANCIAL CHARGES IF SHE ACCESSES THE FINANCIAL MARKET TO FUND HER JV OPERATIONS ABOVE FINANCIAL CHARGES DO NOT INCLUDE LEGAL FEES ALSO THE INTEREST RATE OF LIBOR+5 ASSUMED FOR EVALUATION IS CONSIDERED VERY CONSERVATIVE IN VIEW OF NNPCS LACK OF TRACK RECORD IN THE FINANCIAL MARKET

CASHCALL Vs LOAN FUNDING


14000
14000

12000

12000

10000

10000
Net Incom e=$38,610 m illion

8000

Net Rev on Equity Sales=$39,635 miilion

8000

6000

6000

Finance Charg=$1,025 million

4000 Cashcall=$17,950 million 2005 2006 2007 2008

4000
Princ Rep=$17,950 m illion

2000 2004

2000 2004

2005

2006

2007

2008

CARRY ARRANGEMENT
FUNDING THE EQUITY PORTION OF AT LEAST ONE OF THE JV PARTIES BY ONE OR MORE OF THE REMAINING PARTIES OFFSETS PARTNERS WHILE THE FUNDING TAX

RECOVER AND A

THEIR SHARE

COST OF

THRU THE

EQUITY

PRODUCTION OF THE PARTIES BEING FUNDED

CARRY-TECHNICAL CRITERIA

GREENFIELD LOCAL CONTENT EARLY IST OIL LOW COST OIL

CARRY-COMMERCIAL CRITERIA
# # #

CAPEX FUNDING ONLY COST RECOVERY FROM PROJECT CRUDE ONLY COST RECOVERY HINGED ON TAX OFFSETS PLUS SHARE OF EQUITY CRUDE OF THE PARTY BEING CARRIED

# #

NONNON-RECOURSE FINANCING NATIONAL DEBT STOCK UNAFFECTED

CARRY PROJECTS NOW ONSTREAM


 SPDCS  ELFS

EA FIELD DEVELOPMENT

AMENAM/KPONO FIELD

DEVELOPMENT
 YOHO/AWAWA

FIELD DEVELOPMENT

CARRY-GENERAL TERMS


AGREEMENT COMPLIMENTS EXISTING CONTRACTUAL, LEGAL & FISCAL ARRANGEMENTS.

 

OPERATIONS OF AF PROJECT GOVERNED BY JOA SEPARATE BANK ACCOUNT, BUDGETS, ASSET RECORDS & FINANCIAL STATEMENTS KEPT FOR AF PROJECTS

FOR THE PURPOSE OF COST RECOVERY, CARRYING PARTY WILL UNTIL FULL COST RECOVERY TREAT THE ENTIRE PROJECT ASSETS AS ITS OWN

AFTER FULL COST RECOVERY, 60% OF PROJECT ASSETS WILL BE TRANFERRED TO NNPC @ ZERO COST

CARRY-GENERAL TERMS


AGREEMENT SHALL REMAIN IN FORCE UNTIL ANY OF THE FOLLOWING OCCURS FIRST:


CUM PROD REACHES A PRE-DETERMINED LEVEL PREFULL RECOVERY OF CARRY CAPITAL COST ANY TIME THAT NNPC PAYS BACK OUTSTANDING CARRY CAPITAL COST AND OUTSTANDING SHARED OIL

THE BREACH OF MATERIAL OBLIGATION UNDER THIS AGREEMENT TOTAL SHARED OIL RECEIVED BY CARRYING PARTY REACHES THE AMOUNT AGREED BY BOTH PARTIES

CARRY-FUNDING PROCESS
`

PARTIES WILL JOINTLY OPEN SEPARATE BANK ACCOUNT FOR AF PROJECT AND WHICH WILL BE FUNDED BY THE CARRYING PARTY

ALL EXPENDITURES IN RESPECT OF PROJECT DEVELOPMENT WILL BE MADE FROM THE ACCOUNT

IF CARRYING PARTY DOES NOT FUND THE ACCOUNT AS AT WHEN DUE, CARRYING PARTY WILL PAY INTEREST TO NNPC AT PREVAILING BANK RATE.

NNPCS PORTION OF THE INTEREST EARNED IN THE ACCOUNT WILL BE USED TO OFFSET UNRECOVERED CARRY CAPITAL COST

CARRY-FUNDING PROCESS


EACH PARTY WILL FUND ITS OWN PORTION OF THE OPERATING COST IN ACCORDANCE WITH THE JOA

FOR THE PURPOSE OF THE 2ND SCHEDULE OF THE PPT, CARRYING PARTY WILL TREAT THE ENTIRE PROJECT ASSETS AS ITS OWN UNTIL FULL COST RECOVERY AFTER WHICH 60% WILL REVERT TO NNPC AT ZERO TRANSFER COST

NNPC MAY AT ANY TIME PRIOR TO FULL COST RECOVERY ELECT TO PAY CARRYING PARTY
 

THE BALANCE OF CARRY CAPITAL COST THE DISCOUNTED VALUE OF UNREALISED SHARED OIL DUE TO THE CARRYING PARTY

CARRY-FUNDING PROCESS
$1,200
SPDC 47.1% NNPC55% $660 Mln
FUNDED BY SPDC & NAOC IN THEIR PARTICIPATING EQUITY RATIO

JOINT BANK ACCOUNT NNPCS 55% ($660 Mln) FUNDED BY SPDC ($565 Mln) & NAOC ($95 Mln) NAOC 7.9%

SPDC30% $360 Mln

FUNDED BY SPDC

ELF10% $120 Mln NAOC5% $60 Mln

FUNDED BY ELF FUNDED BY NAOC

PARTNERS 45% ($540 Mln) FUNDED BY SPDC ($360Mln) ELF ($120 Mln) & NAOC ($60 Mln)

CARRY- FUNDING PROCESS


CARRYING PARTY HAS THE RIGHT TO RECOVER :
a) FULL CARRY CAPITAL COST FROM


TAX OFFSETS DUE TO NNPC ARISING FROM ITS PORTION OF THE PROJECT CAPITAL EXPENDITURE i.e. FROM i) ii) CAPITAL ALLOWANCE EXPENSED INTANGIBLE COSTS

A PORTION OF NNPCS EQUITY PRODUCTION

b)

SHARED OIL FROM THE REMAINING PORTION OF NNPCS EQUITY PRODUCTION AFTER RECOVERING CARRY CAPITAL COST OUTSTANDING

CARRY- COST RECOVERY


CARRY TAX RELIEF

NNPCS 55%

85% RECOVERED THRU TAX OFFSETS

($660 Mln)
FUNDED BY SPDC ($565 Mln) NAOC ($95 Mln)
OUTSTANDING CARRY OIL

85% ($561 Mln)


RECOVERED THRU TAX OFFSETS

15% RECOVERED FROM EQUITY PROD

15% ($99 Mln)


RECOVERED FROM NNPC EQUITY PRODUCTION

ALLOCATION OF JV PRODUCTION
PARTNERS EQUITY PROD (158 MMB) CARRY OIL (30 MMB) ALLOCATED AS PARTNERS NNPCS SHARED OIL EQUITY PROD (81 MMB)
(192 MMB)

TOTAL VOLUME LIFTED BY CARRYING PARTY

JV PROD 350 MMB

NNPCS SHARED OIL (81 MMB)

ALLOCATION OF NNPC EQUITY PRODUCTION


CARRY OIL (30 MMB) PARTNERS SHARED OIL (81 MMB)
AVAILABLE SHARED OIL (162 MMB) NNPCS
LIFTED BY CARRYING PARTY FROM NNPCS CRUDE

NNPCS EQUITY PROD 192 MMB

ALLOCATED AS

SHARED IN THE AGREED SHARED OIL RATIO

SHARED OIL (81 MMB)

OUTSTANDING CARRY OIL DUE TO CARRYING PARTNER


CARRY CARRY CAPITAL COST CCC (CCCA)
SPREAD OUT AS (FOR FISCAL PURPOSES)

CARRY CAPITAL COST AMORTISED (CTR)


RECOVERED AS

CARRY

TAX RELIEF

OIL RECIEVED (COR)

RESIDUAL CARRY EXPENDITURE

CARRY CAPITAL

CARRY

PREVIOUS

COST AMORTISED

TAX RELIEF

CARRY OIL RECEIVED

(RCE)

(CCCA)

(CTR)

(COR)

RCE = CCCA CTR COR

WHAT IS A BARREL WORTH TO CARRYING PARTY?

ROYALTY

TECH COST

ONE BARREL OF OIL


MADE UP OF

PPT

MARGIN

IT S WORTH JUST THIS

AND FINALLY


 

THE OPTIMAL FUNDING CHOICE MUST DEPEND ON METICULOUS COST ASSESSMENT OF ALTERNATIVES GOVERNMENT REVENUE EXPECTATIONS FOR TODAY, AND FOR TOMORROW BALANCE OF REVENUE AND RESERVES BUILDBUILDUP, OPEC QUOTA LIMITATIONS, FOCUS ON THE FUTUREFUTURE- GAS DIVERSIFICATION OF THE NATIONAL ECONOMY, LOCAL PARTICIPATION AND

TRANSPARENCY

.AND THANK YOU


VERY MUCH

FOR YOUR ATTENTION