The National Economic Council (NEC), presided over by Nigeria’s Vice President, Professor Yemi Osinbajo, has endorsed a new funding regime for the oil and gas industry.
This will in turn, eliminate the often arduous and onerous cash call regime which has stalled growth in the industry. The alternative funding stream had been approved earlier this week at the Federal Executive Council meeting and then presented to NEC, as the body mandated to come up with “measures necessary for the coordination of the economic planning efforts of the various governments of the federation”.
Under the previous arrangement, partners in the six JV operations were expected to contribute to the approved annual budget for all programmes in accordance to their equity holding, while profits and losses were similarly shared. The NNPC accounts for 60 per cent equity in all the JVs with ExxonMobil, Chevron, Total, Agip and Elf, and 55 per cent in the JV operated by Shell. Over the years, the NNPC found it difficult to meet its cash call obligations to the various JVs, resulting in development programmes in the industry often being scaled down or suspended for inadequate funding. Despite the government adopting various mechanisms to close the funding gap, it was difficult to meet such challenges on schedule, with significant impact on production and growth.
Minister of state for Petroleum, Ibe Kachikwu, who briefed State House Correspondents after the meeting, said: “the current upstream joint venture arrangement in Nigeria’s oil and gas industry, is unincorporated, meaning that NNPC and the International Oil Companies (IOC’s) partner in each joint venture as unique and separate.”According to the minister, from January to November 2016, under-funding of the NNPC cash calls is estimated at USD $2.3 billion. This is in addition to the inherited arrears estimated at USD $6.8 billion for 2015 year ending. While the NNPC would be expected to pay the entire oil and gas revenues realized from the JV operations into the Federation Account, the minister said the production costs would be appropriated and paid monthly as Cash Calls to the JV operations from the NNPC and IOCs..
Based on negotiations, he said the $6.8 billion past cash calls burden on the Federation was reduced to $5.1 billion, with the balance to be paid as oil production output improved.
Under the new funding stream, Mr. Kachikwu said the JVs would become incorporated and source their own financing, freeing-up the government from the annual budgetary cash call obligations. Also the technical cost of oil production in Nigeria would also come down from about $27 to $18 per barrel. The new arrangement is assured to scale up investments in the oil and gas sector, while also boosting production output and revenue significantly.
“For instance, net payment from oil production to the Federation Account is expected to peak under the new arrangement to about $18 billion by year 2020, while raising output to 3 million barrels per day,” Mr. Kachikwu explained.
Cash calls are requests for payment for anticipated future capital and operating expenditures, sent by joint venture operators to non-operating partners. Most joint operating agreements (JOAs) include a provision that allows the operator to issue cash calls to non-operating partners. When the company running SAP Joint Venture Accounting (JVA) operates a venture, that company issues operated cash calls to its non-operating partners. When the company running SAP JVA is a non-operating partner in a venture, that company receives non-operated cash calls from the operator of the venture.
Operated Cash Calls
Operated cash calls are requests to the non-operating partners of joint ventures for payment of expenses before they are incurred. The transactions are posted as two equal and opposite open items to a partner account. The items are posted with two different
Special G/L Entry Indicators (
SEI ). Although the items update the same partner account, they update different general ledger accounts which are identified via the
SEI . The open item is cleared when cash is received from the partner.
An operator can also post a cash call to itself. The entries produced by this type of cash call are posted as memo entries (representing both cash requested and cash received) directly to the billing ledger. The cash received is posted on the assumption that an appropriate transfer will be made from the operator bank account to the joint venture bank.
Non-Operated Cash Calls
Non-operated cash calls are requests for payment of prospective expenses received from an operator of a venture in which the company running SAP JVA is a non-operating partner. The transactions are posted as two open items to an operator vendor account. Like operated cash calls, the items are posted with two different
SEIs , which update the same partner account, but different general ledger accounts. One open item is cleared with a cash payment to the operator. The other item is cleared manually in the non-operating company’s system with actual expenditures received in a non-operated bill from the operator.
Cash calls are often issued by the operator and paid by partners several months before expenditures are incurred. When this occurs, a reclassification process takes place.Reclassification is an SAP JVA process that has the following two major functions:
It creates an accounting record of cash call payments in the month when they are received
It applies cash call payments in the month when expenditures are incurred
The reclassification process accomplishes these two tasks by connecting the accounting entries related to the steps in the cash call process to two time values:
Billing month ( the month the expense appears on the bill to the customer)
Operations month (the month the payment is matched against the expenditure)
By using the billing and operations month, the SAP JVA reclassification process identifies the cash call payments that should be included in the partner’s current month bill. – Source, SAP manual – help.sap.com