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BusinessDay 14 Feb 2018

Wednesday

Wednesday 14 February 2018 C002D5556 BUSINESS DAY 05 government&policies NNPC’s $5bn oil-backed loan portends huge fiscal risks for Nigeria - NRGI WEST AFRICA ENERGY intelligence ISAAC ANYAOGU The plan by the Nigerian National Petroleum Corporation (NNPC) to secure oilbacked loan of $3.5-5 billion in exchange for 70,000 barrels of oil per day (bpd) over 5 to 7 years from oil trading companies to finance projects portends grave fiscal risks for the country, a transparency watch dog has warned. The Natural Resource Governance Institute (NRGI), a global extractive sector transparency group, cautions that if this loan is not carefully structured and managed, it could mortgage the country’s resource wealth without much productive return. It also poses major fiscal risks, especially to how much money the government collects from NNPC. “NNPC receives only about 700,000 bpd (out of about 1.8 million bpd production) and the company unilaterally keeps much of this revenue because an increasing amount of its oil is channelled to offset debts owed to upstream partners; subsidise fuel costs; and cover infrastructure-sabotage related expenses. “For this reason, it is likely that proposed loans would be repaid at the government’s expense—making it likely in turn that the amount of oil going toward repaying debts rather than funding budget priorities will increase even further,” said a note by Zira John Quaghe, NRGI, Nigeria officer and Alexandra Gillies, an advisor to NRGI. The risk is worsened by the fact that oil-backed loans tend to be very opaque, preventing citizens and accountability actors from properly scrutinizing the costs, repayment terms and utilisation of the loans. “In NNPC’s case, there is little documented evidence to justify all the loans provided by oil companies, so why would a loan from commodity traders be any different? “Political cycles also add incentives for reckless borrowing, since borrowing governments would not need to deal with long-term economic implications and re-negotiations. With the 2019 elections around the corner, there are additional risks connected to NNPC’s history of politicized spending, as seen in the run-up to the 2015 general elections,” said the analysts. Another concern by NRGI is NNPC’s record of poor financial mismanagement which has made it difficult for Nigeria to maximise returns from its oil sector. NNPC recorded losses of N276 billion and N198 billion in 2015 and 2016 Snapshot 70,000bpd The amount of Nigerian share of oil output the NNPC would trade in exchange for loan over a seven year period respectively, and still remains unprofitable. Recall that Ibe Kachikwu, minister of Petroleum Resources, and Maikanti Baru, NNPC’s group managing director, were engaged in a public brickbat over governance of the national oil company indicating the weak public oversight of NNPC’s contracts and procurements system. “This prompts two important questions: First, why pour more money into a company that has not proven itself a capable steward of national wealth? Second, are NNPC’s proposed capital projects really more important than other public priorities? Neither questions has been satisfactorily answered, and it is likely that NNPC will not translate the loan into positive outcomes for the corporation or the wider Nigerian economy,” said NRGI. The experiences of Venezuela and Congo-Brazzaville are teaching examples for the consequences of pissing away an oil-backed loan. During the boom years prior to 2014, Venezuela borrowed nearly US$50 billion from state-owned Chinese companies in exchange for oil, and borrowed about US$5 billion from Russia’s Rosneft under similar terms. The music stopped in 2015 and the ensuing oil price slump saw the Ven- ezuelan National Oil Company (PDVSA) falling months behind in its oil deliveries to China and Russia. The economy is in a tailspin and its creditors can seize its oil assets within and outside the country at will as they currently breathe down their neck. Meanwhile, oil-backed loans have led to corruption in Congo-Brazzaville says NRGI. Gunvor (a major Swiss commodity trading company with a specialty in trading Russian oil) secured untendered contracts for lifting 22 cargos of crude oil worth USD 2.2 billion from Congo- Brazzaville in exchange for six $125 million pre-financing deals (USD 750 million in total). Swiss law enforcement and NGOs have raised concerns that Gunvor made inappropriate payments to politically connected middlemen in order to secure these lucrative deals. According to sources cited by Reuters, NNPC plans a $3.5-$5 billion cash-for-crude prepayment with major trading firms including Glencore, Vitol and Trafigura. Standard Chartered is believed to be hired to advise on the deal. To ensure transparency in the deal, NRGI called for public debate on the proposed oil-backed loan calling on the Federal Government to disclose the parties to the agreement, details of the agreement, tender process and loan usage.

Wednesday 14 February 2018 06 BUSINESS DAY C002D5556 WEST AFRICA ENERGY intelligence Brief Tullow swings into profit as focus shifts to Kenya kichar basin contained 560 million barrels in so-called 2C proven and probable oil reserves. Tullow had previously estimated reserves of 750 million barrels there, according to a different Africa-focused oil and gas producer Tullow Oil swung back into profit in 2017 after three years in the red, and outlined plans to begin production in Kenya by as early as 2021. The London-listed company is targeting East Africa - Uganda but particularly Kenya - as its next major frontier after developing two large fields in Ghana earlier this decade. The recovery in oil prices to over $60 a barrel by the end of 2017, as well as higher production from its flagship West African fields, allowed Tullow to boost revenue and sharply reduce debt. That, in turn, helped it to turn its focus to new projects and exploration for new fields around the world. Tullow, which entered Kenya in 2010 and has more than 48,000 square kilometres of acreage in the country, said after appraisal drilling and well tests that it estimated the land-locked South Lometric including possible future upside potential. In terms of Kenya’s best-case future potential, Tullow increased the upper range from around 1 billion barrels to 1.23 billion. Tullow said it had proposed to the Kenyan government to start developing the basin’s Amosing and Ngamia fields and construct a processing facility with a capacity of 60,000 to 80,000 barrels per day, which would be exported via pipeline to the coastal town of Lamu. The company expects to reach a final investment decision (FID) on the project in 2019 and first oil production by 2021-22. Tullow, which holds 50 percent of the Kenyan development, will seek to reduce its stake once a FID decision is reached, he said. Toronto-listed Africa Oil has a 25 percent stake in the Lokichar development. The Kenyan project is expected to cost $1.8 billion, while the pipeline construction would require $1.1 billion, Tullow said. “Tullow is in a much better position now than a year ago. finance people Sasol completes $1bn wax plant expansion in South Africa Petrochemicals group Sasol completed a $1 billion expansion of a wax plant in South Africa that will boost its annual production, the firm said. Sasol, the world’s top maker of motor fuel from coal, has increasingly diversified into chemicals, gas and clean energy projects, in part to meet a global shift to low-carbon products. The project to produce wax, used in adhesives and printing, is one of the company’s largest investments in South Africa. It was funded through Sasol’s own cash and is part of a strategy expands its chemicals businesses. Sasol said it aimed to ramp up production to 137,000 tonnes per annum of wax within the next two years at the Sasolburg site, 100 km south of Johannesburg. Sasol produced 63,000 tonnes of wax in the six months to the end of December. The wax, which will be exported, is used in hot melt adhesives to seal cereal boxes or milk cartons Exxon Mobil Corp said its oil and gas reserves surged 19 percent last year, thanks to growth in US shale, the United Arab Emirates and Guyana, with a portfolio large enough to pump for the next 14 years at least. The reserve update, which is required annually by US regulators, comes as Exxon faces concerns about its growth potential and spending after reporting lower-thanexpected quarterly profit last week. Exxon said it added 2.7 billion barrels of oil equivalent (boe) to its proved reserves last year, bringing the total to 21.2 billion boe. Proved reserves are those that are considered economically and geologically feasible to produce in the near future. “Exxon Mobil’s portfolio of development opportunities positions us to grow shareholder value as we bring on new supplies of oil and natural gas to meet growing demand,” Chief Executive Darren Woods said in a statement. Exxon’s stock fell about 0.3 percent to $76.69 in morning trading as oil prices and the broader market dipped slightly. In Texas, where Exxon is headquartered, the company paid more than $6 billion last year to double its acreage in the Permian Basin, the largest US oilfield. That shale deal added more than 800 million boe to reserves, the company said. Exxon added another 800 million boe to its reserves from operations and in printing ink products such as 3D printing, adhesives, inks, paints, candles and emulsions. Bongani Nqwababa, Sasol Co-Chief Executive Officer said production was running ahead of appointments schedule. The company began construction of the plant in 2015. “With completion of this project, South Africa is now one of the leading countries of wax production globally,” he said. ExxonMobil’s reserves jump 19 percent on growth in US Shale, UAE in the United Arab Emirates’s Upper Zakum field. In Guyana, where Exxon, Hess Corp and other partners have yet to pump oil, the company said it and partners have found recoverable resources, including proved reserves and other resources, estimated to be 3.2 billion boe. In 2016, Exxon had cut its proved reserves by 3.3 billion boe, mostly due to writedowns in the value of its Canadian oil sands assets amid low oil prices. Oil prices rebounded in 2017, making some of those assets profitable again.

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