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Gas flare: Shell urges proper structure for IJVs

By Yemie Adeoye
IN order to end gas flare in the country and meet up with the domestic gas requirement Shell Petroleum Development Company (SPDC) has urged the federal government to consider proper structuring of the Independent Joint Ventures (IJVs) and ensure that the it is not bedeviled by the problem of underfunding, a situation which crippled the JV structure with the NNPC.

This came as part of the multinationals recommendation to the Joint committee of the National Assembly on the Petroleum Industry Bill (PIB).

Managing Director of SPDC Mr.Mutiu Sumonu speaking on behalf of the company stated that over the last eight years, the SPDC JV has been structurally underfunded, resulting in SPDC’s inability to achieve planned growth in oil and gas development, including flares out.

During this period, SPDC and its IOC  partners have provide numerous short term funding solutions to alternatively fund the JV (eg bank loans, bridges loans, MCA, Arrears).

Shell considers the I-JV as a structural to a long standing funding challenge. Funding need to improve to meet national target of 4 bb/d oil production, 40 billion barrels reserves, to supply domestic gas and to end flaring.

“IJV must be structured to enable self-funding, including the raising of huge qualities of debt across the industry.
To fail to do so would invalidate a key pillar of the PIB. Yet this structure will necessitate hard decisions, often entailing compromises from ideas, that requires proper conditions due to their gravity.

Significant start-up capital and interim cash call will be required during initials phase of the I-JVs. Provisions are required in the 2010 and perhaps 2011 appropriations for the joint venture companies.”

He stated further that I-JVs should not be seen as a government controlled entity, as that will complicate securing debts and constrain funding. “I-JV governance structures should be such as to make the I-JVs independence business entities that will be viable enough to attract funding.

Transitions activities including broad definitions, Technical Services Agreement, resolving exiting funding solutions already in place, transfer of all staff an assets to I-JV, establishing a necessary management and operating track-record required by lenders , etc. are complicated and would require adequate implementation time.

Safeguarding exiting operation and revenue generation in a safe and responsible manner is essential during the transition to I-JVs.”
“The first deepwater PSC were awarded in 1993, enabling SNEPCo to unlock this new frontier with significant investment, taking on very high risks in a process stretching well over a decades. Today’s deepwater production constitutes about twenty eight percent of Nigeria’s production, with significant potentials for further developments in turn having scope for material local content development(eg new fabrication yards)

The PIB proposes multiple, increased royalties and taxes that, frankly, make new investment n the deepwater unviable. Further, certain legitimates cost are excluded from cost recovery, notwithstanding Nigerian content requirements have been met. Finally, the PIB seeks to resolve exiting disputes via legislation rather than negotiation or contractual mechanisms, running the risk of calling into question Nigeria’s whole investment environment.

Distinguish senators, Nigerians need to define PIB fiscal for the deepwater regime on a realistic cost based that would stimulates further investments and growth while deferring to contractual mechanisms that already exist to resolve current disputes that cannot be settled via negotiations.”

He also urged the Senators to commit more time to the issue and reconsider the submission of the Inter-agency group, which he siad did not consider a lot of factors which currently affects the oil industry.

“The submission of the inter-Agency group of this public hearing yesterday called for a substantially different bill to that read in the senate and the house of representatives. We recognize the right of the senate to develop legislation and embrace this consultation process.

We believe that, as an interested stakeholder with many billions invested in the industry in Nigeria, we have unique insights into the practicalities of implementing the PIB which leads to a number of fundamentally different conclusions to those presented yesterday.

In particular, we believe statements about costs, were “aspirational” made without reference to current industry realities, security requirements in Nigeria, inefficiencies in contract and procurement processes, limited contractors capacity reducing competitions and over-looking the benefits seen elsewhere in the economy when utilizing local content providers. We have as yet


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