NIGERIA - The 01 Cash-Call.

The federal government in late 2000 increased cash-call funding for NNPC by $ 1 bn to $3.5 bn for the whole of 2001, with payments to compensate foreign partners in its six JVs made on monthly basis. The 40% increase was welcomed by the foreign companies involved.

However, the foreign companies are still owed money from the previous years. In late 2000 Shell said it was owed $735m in cash-call arrears. It was said that together the six JVs were then owed about $1.9 bn.

Production costs up to loading at terminals in Nigeria are low by non-OPEC standards, though high by Middle East standards. Under normal circumstances, oil production costs average $4/barrel. Under normal conditions, costs for oil produced in Shell's larger onshore fields are around $2/b. But on an annual basis, the average can go up to $3/b because of violence, sabotage and labour strikes. Costs for offshore oil exceed $4/b, while ExxonMobil says the cost of its offshore production is less than that. In some fields the cost is over $5/b. In deep-water areas now being explored, production costs could be about $8-10/b. But for companies to keep producing oil, they have to explore and make discoveries as the size of most fields is small.

Problems: The biggest problem onshore is violence worsened by a state of lawlessness in the oil producing areas onshore. When the civilian government of President Obasanjo took over from the military in early June 1999, arrears to be paid by NNPC for the six main JVs to maintain their capacity and expand exceeded $2 bn. By then, violence in the south had forced the foreign operators to cut production temporarily. At times even before the death of military dictator Gen. Sani Abacha in June 1998 total Nigerian oil production had fallen by a third. Output disruptions in 2000 by local communities was the worst ever.

The causes of violence are complicated. Ethnic rivalry has plagued Nigeria since 1914 when the British official in charge, Lord Lugard, decided to forge a single nation out of the largely Muslim protectorate in the north and the mostly Christian south. Sometimes a bad incident can escalate and threaten the whole nation. In 1966 the massacre of Christian Igbos in Kano by Muslims was one of the sparks which ignited the civil war and led to the Biafran secession movement in the south-east. There is chronic tension between the Hausa Muslims of the north and the Yorubas of the south, among the many ethnic conflicts raging in the country. There is violence in and around the oil refining areas of Kaduna and Warri. Communities in the oil-rich south never gained much from their oil wealth, while most governments in Nigeria have been dominated by the Muslim north.

What complicates issues in Nigeria is the state of lawlessness of which many gangs often take advantage by looting or trading in stolen fuels. For example the Yandaba (sons of evil) street thugs have long monopolised the distribution of stolen fuels in the black market and have flourished during chronic fuel shortages under former military governments.

Under President Obasanjo the situation has not improved. Shell, the worst affected by the violence and lack of payment by NNPC, has cut its staff considerably. ExxonMobil has done the same. The others have scaled down their operations as well.

Background Of JV Terms: The JV partners had their agreements improved in July 1991, when they signed a new Memorandum of Understanding (MoU) replacing the MoU of 1986. This restored the real value of their profit margins. It guaranteed a minimum after-tax profit of $2.3/b provided that technical operating costs did not exceed $2.5/b. But the minimum guaranteed margin rises to $2.5/b if capital investment exceeds $1.5/b with total operating costs of less than $3.5/b. (The 1986 MoU guaranteed a minimum margin of $2/b in exchange for stipulated exploration commitments. That margin was subject to NNPC's operating partners keeping to minimum standards of cost efficiency; when costs rose above a notional level of $2/b, the guaranteed margin was reduced. It also obliged the foreign partners to buy NNPC's crude oil share at 45 days' notice if it was unable or unwilling to sell it because of adverse market conditions).

In addition, the 1991 MoU provided bonuses for companies which increased their reserves by more than the amount they produced in any given year, thereby adding to net reserves. It reduced the required notice period for purchasing unsold government crude oil to 15 days. It also put in place a series of further fiscal incentives for new investment and mapped out a five-year plan for exploration and capital investment designed to increase the companies' production capacities and oil reserves as well as invest in new gas utilisation projects. This MoU did not affect the then new PSAs.

The MoU made relations between NNPC and its foreign partners clearer. The partners were each required to sign a Joint Operating Agreement (JOA). For the first time in most cases, the JOA documented in precise detail the rights and obligations of each party. It spelled out procedures for funding decisions, their obligations to train Nigerians, and NNPC's right to become the operator of certain fields if and when it chose to do so.

It was understood that, to maintain a capacity of 2m b/d, NNPC and its partners must spend $4 bn/year. It was estimated that another $5 bn/year would be required to expand the capacity to 2.5m b/d. The Shell-led group then pledged to raise capital spending from $500m/year to $1.5 bn/year - with NNPC to provide 55% of this - in order to expand its capacity. Relatively big outlays were pledged by the foreign partners in the other JVs. But NNPC failed to pay its majority share of the capital on time, causing the foreign companies to delay work on their fields.

In October 1994 Shell - often acting as leader on behalf of the other companies - declared NNPC in default. This was partly to cover itself against legal action by sub-contractors for money owed by the JV and partly to add pressure on the government. Shell lifted the default notice in the following month. A few months later NNPC began paying parts of its share of the funding to the main JV partners. But in the subsequent years there was confusion about NNPC's naira denominated arrears to its partners because of disagreement over the exchange rate. Confusion has continued since then over both dollar and naira denominated arrears.

In September 2000, after years of stalling, the six JVs agreed to renew the MoU. The new accord revamped the formula that guarantees a minimal margin of return for the foreign companies and included additional E&P incentives.

The following are profiles of the six main joint ventures in Nigeria. Profiles of the other operators are in Gas Market Trends of this week.