Oil: Incentives for investments in joint venture



Recently, the Central Bank Governor, Mr. Godwin Emefiele, called on the incoming administration of General Muhammadu Buhari (rtd), to consider selling off 30 per cent of the Federal Government’s majority stakes in Joint Ventures (JV) with multinational oil companies to shore up government finances and raise fund for infrastructural development. Emeifiele hinged his advice on the fact that over $75 billion is a realistic target for the deal, and that private equity groups could be encouraged to compete with the oil companies for acquisitions to ensure the price is competitive.  He was of the opinion that if the Nigerian National Petroleum Corporation (NNPC) could substantially reduce its 55 per cent equity in the joint ventures with oil giants, including the Royal Dutch Shell, Chevron, ExxonMobil, Total and ENI, which pump about half of Nigeria’s 2 million barrels a day of oil production, the country would be better for it. In this special report, Sylvester Enoghase, Phillip Oladunjoye, Emma Okwuke, Bamidele Ogunwusi, Abel Orukpe and Saheed Bakare, examine if the President-elect, Buhari should go ahead with the deal of raising more fund to rebuild the macroeconomic buffers damaged by collapse in global oil prices.

Daily Independent learnt that the Nigerian Government has put in place a number of investment incentives for the stimulation of private sector investment from within and outside the country. While some of these incentives cover all sectors, others are limited to some specific sectors. The nature and application of these incentives have been considerably simplified.

crude oilFor instance, the incentives in the petroleum sector are granted to companies that are into joint ventures with the Nigerian National Petroleum Corporation and have signed Memorandum of Understanding. The incentives are: Guaranteed minimum margin of USS2.50 bl; accelerated capital allowances which provides that the capital allowances can be carried forward indefinitely.

Other form of incentive is the graduate royalty rates, which are approved for oil companies carrying out onshore production in territorial waters and continental shelf areas beyond 100 meters.

This includes investment tax allowances (ITA), which is granted to a company in respect of any asset for the accounting period. The ITA is graduated as follows: On shore – five percent; Off-shore in depth of up to 10m – 10 percent; Off-shore in depth of between 100-200m – 15 percent; and Off shore in depth of over 200m – 20 percent. Apart from these, there are other tax incentives applicable to the gas industry.

Daily Independent learnt that in view of the enormous potentials in this sector, government approved some fiscal incentives including for companies in gas production phase, which enjoy applicable tax rate as the same as the company income tax of 30 percent; capital allowance at the rate of 20 percent per annum in the first four years, 19 percent in the fifth year and the remaining one percent in the books; investment tax credit of five percent and royalty of seven percent on shore and five percent off shore.


Reasons for Joint Ventures  

Joint ventures may involve companies in one or more countries. International joint ventures, in particular, are becoming more popular, especially in capital-intensive industries such as oil and gas exploration, mineral extraction, and metals processing. The basic reason is simple: to save money. Joint ventures became more attractive as a way to share risks and costs and create scale economies.

Daily Independent also learnt that another factor that contributed to the expansion in joint ventures in the past few decades was the cost involved for capital-intensive industries to continue their operations. Companies in these industries depend heavily on advances in technology to reduce costs. By pooling their money and personnel, companies enhanced their chances of developing advanced technological methods that would reduce exploration and production costs and increase profit margins. Joint ventures became a favored method of doing business for such industries.

Daily Independent also learnt that international joint ventures have also been fostered by international financial institutions such as the International Monetary Fund, the World Bank, and the World Trade Organization, who have instituted policies to eliminate trade barriers and deregulate foreign ownership restrictions and the international flow of capital. These policies, it learnt, have helped to create a business climate in which international investment and partnerships are an increasingly attractive, and often necessary, means by which companies seek to expand profit margins and market share.

According to experts, Joint ventures are extraordinarily helpful to some companies in gaining access to foreign markets, noting that neither party may really be interested in the primary project, but they participate simply to gain access to the new market. They noted that such projects generally represent a direct investment, which is sometimes limited by laws in the country in which the operation takes place. They argued that one of the aims of a partner in a joint venture is to have a majority interest in it; that way, it maintains control over a project, which they noted, explains why some countries do not permit foreign companies to hold majority interests in their domestic business ventures.

Industry experts also said companies seeking to cut the costs of doing business see joint ventures as a way to save money, explaining that such companies would be sharing the risks should a particular project fail. “For example, if two oil companies wish to produce a new drilling platform to search for oil in swamps or ocean areas, and neither one can finance the project on its own, they might join forces. That way, they are sharing the costs of the projects and reducing their individual risk should they find no oil. That is a decided advantage to many business people,” they said.


Types of Joint Ventures  

Daily Independent gathered that Joint Ventures fall into several categories, among them are equity based operations that benefit foreign and/or local private interests, groups of interests, or members of the general public. There are also non-equity joint ventures, also known as cooperative agreements, in which the parties seek technical service arrangements, franchise and brand use agreements, management contracts or rental agreements, or one-time contracts, e.g., for construction projects. Quite often, non-equity joint ventures are used simply to provide access for the participants into foreign markets.

According to our investigation, equity type arrangements involve two sides: one that provides the capital, and one that receives it. Since there is money involved, there are also inherent risks, particularly with equity ventures launched in less developed countries. The biggest risk is that the business will fail and the money invested will be lost. There is also the risk that some foreign governments will nationalize certain industries in order to protect their own domestic interests.


Benefits of Joint Ventures  

Daily Independent learnt that among the most significant benefits derived from joint ventures is that partners save money and reduce their risks through capital and resource sharing. Joint ventures give smaller companies the chance to work with larger ones to develop, manufacture, and market new products. They also give companies of all sizes the opportunity to increase sales, gain access to wider markets, and enhance technological capabilities through  research and development (R&D) underwritten by more than one party.

Daily Independent also learnt that government’s increased involvement in the private business environment has created more opportunities for companies to engage in domestic and international joint ventures, although they are still legally limited in what they can do and where they can operate.

Daily Independent also gathered that more and more companies are involving themselves in joint ventures, and that the trend is to increase their participation, since the advantages outweigh the disadvantages.


Disadvantages of Joint Ventures  

The disadvantages of joint ventures, according to our findings include potential financial losses if a project fails; expropriation or nationalization, disagreements among partners, and less-than-anticipated results.


Production Sharing Contract (PSC) 

Daily Independent gathered that in view of the burden of funding joint venture operations (cash calls) by the NNPC and the need to increase Nigeria’s oil reserves from the present 20 billion barrels and also to develop other sectors of the economy begging for government attention, the federal government decided to introduce the Production Sharing Contract (PSC). This policy, according to the report, is designed to transfer exploration risks and funding of exploration and development efforts on new acreage to the interested oil companies.

The report noted that the essence of PSC is that NNPC engages a competent contractor to carry out petroleum operations on NNPC’s wholly held acreage; the contractor undertakes the initial exploration risks and recovers his costs if and when oil is discovered and extracted.

Under the PSC, the contractor has a right to only that fraction of the crude oil allocated to him under the cost oil (oil to recoup production cost) and equity oil (oil to guarantee return on investment). He can also dispose of the tax oil (oil to defray tax and royalty obligations) subject to NNPC’s approval. The balance of the oil, if any (after cost, equity, and tax), is shared between the parties (profit oil).

The report said the current direction in the petroleum operations in the country is the production sharing contract.

Some of the companies operating PSC with NNPC include Statoil/BP operating three Blocks; Ashland, two Blocks; Abacan, one Block; Esso Exploration, one Block; Agip, one Block; Shell, five Blocks; Elf, two Blocks; Mobil, one Block; Chevron, seven Blocks; Conoco one Block; and Allied Energy, one Block, which is being operated by Statoil.

Daily Independent learnt that the term of the contract is for 30 years (inclusive of 10 years exploration and 20 years OML period).

It was also gathered that the contract may be terminated if at the end of the sixth year (from the effective date of the contract) the agreed work programme has not been substantially executed, or either party gives a notice of not less than 90 days for termination of the contract (on grounds permitted by the contract terms). Termination of the contract will also take place if no petroleum is found in the contact area after 10 years from the effective date of the contract.

Daily Independent also gathered that the minimum work programme and amount to be expended during the exploration period also form part of the contract.

For instance, contract year’s amount to be expended stipulates that between one to three years the company would spend $24 million; between fourth to sixth years, it would spend $30 million; while it would spend $60 million in the seventh to tenth year period.

Daily Independent also learnt that if during any period of the contract years, the contractor spends less than the required expenditure; an amount equal to such under-expenditure shall be carried forward and added to the amount to be expended in the following period of contract years.

Under the PSC agreement, Management Committee must be established within 30 days from the effective date of the contract, while the committee would be made up of 10 persons appointed by the parties on a 50/50 basis.

The NNPC appoints the Chairman of the Management Committee while the contractor appoints the Secretary who will be a non-member of the Committee.

Also, there is a provision for recovery of operating costs and crude oil allocation in the contract. This means that the available crude oil from the contract area shall be allocated in accordance with the Accounting Procedure, the Allocation Procedure and other applicable provisions of the contract.

Source : Independent

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