Assets Devt: Shell pulls out of IOCs’ accord with NCDMB, NNPC, demands more waivers


The recent efforts by the Nigerian Content Development and Monitoring Board (NCDMB) and the Nigerian National Petroleum Company Limited (NNPC) to reduce upstream projects’ contracting cycle and enable quick development of major oil and gas assets have hit a brick wall, as Shell has, reportedly, withdrawn from the Memorandum of Understanding (MoU) NNPC and NCDMB signed with the international oil companies (IOCs).

It was gathered that Shell might have pulled out of the deal to force the Nigerian government to suspend the country’s laws and grant it more waivers. Shell had demanded this after some waivers were granted it as an incentive to quicken development of some of its offshore projects that had been lying fallow for decades.

Executive Secretary of NCDMB, Mr. Simbi Wabote, hinted at Shell’s withdrawal from the September 2023 tripartite pact, during his intervention at the just-ended 41st Annual International Conference and Exhibition of the Nigerian Association of Petroleum Explorationists (NAPE), held in Lagos.

Wabote asserted that the IOCs, especially Shell, were no longer interested in investing in the country.

The assertion came as NNPC lamented the return of portfolio managers into the Nigerian oil and gas industry due to the advent of the Nigerian Local Content Act.

As part of the steps to address the waning investment in the upstream oil sector, continued production decline, and infrastructure deficit, NNPC and NCDMB had in September signed the landmark MoU with the IOCs to reduce the contracting cycle by 81.6 per cent.

The move was expected to cut down the current contracting cycle to an optimal level of not more than 180 working days from the current 327 days.

NNPC, in a statement at the time, said the deal was expected to improve the ease of doing business, reduce cost and drive efficiency, which would eventually translate to production growth, increased revenues, and, ultimately, improved profitability.

The statement said, “The MoU is also expected to contribute significantly to the double-digit economic growth rate agenda of the federal government and generate tremendous value for all the stakeholders, which include investors, companies, host communities and the nation at large.

“Key benefits of the framework in the MoU include a reduction of the contracting cycle for open competitive tender, selective tender, and single sourcing tender to 180, 178, and 128 working days, respectively, compared with the current best effort performance of 327, 333, and 185 working days, respectively.”

But contributing during a panel session at the NAPE conference, Wabote stated that the reliance on the IOCs would not help Nigeria make progress in the development of its assets, stressing that Shell no longer wants to invest in the country.

Referring to Shell’s attitude in the September MoU between the IOCs, and NNPC and NCDMB, Wabote argued that the company had continued to demand more waivers after some had been granted it. He said Shell wanted Nigeria to set aside every of its laws and allow it to develop the prolonged prolific Bonga Southwest project and some of its shallow offshore projects on its terms.

Wabote stated, “I don’t think Shell wants to invest in this country again. I’m sorry to say it, because I give you an example. Bonga Southwest started before I was even recruited in Shell and that is 26 years before I left Shell.

“Today, Shell wants Nigeria to set aside every law and do Bonga Southwest on their terms. Same thing with some of the shallow offshore projects. They want you to set all your laws aside and they want to create an emergency situation to tell you it is now very critical.

“But we started HI development almost 20 years ago, now it is very critical for Shell. HA development is now becoming critical for Shell. That’s how they leave their projects, such that it becomes critical, they write all the justifications, set aside your PIA, set aside your Local Content Act for them to do those projects. I personally don’t think they want to invest in those projects, they will prove me wrong, but time will tell.

“We in local content sat down with all the IOCs (myself and Mele Kyari) and we said, what are the issues to enable us increase production. They listed those issues. We agreed on waivers that we would give. Later, I wrote a letter and submitted back to Shell to say, three months ago, we agreed to all the waivers you requested, where is the progress? The next response was that they were looking for further waivers.”

The NCDMB boss encouraged the local exploration and production companies that are now taking over assets divested by the IOCs to apply strict corporate governance so that they could create a joint venture that would help the country to develop its assets. He said Nigeria needed to be deliberate and realise that some of the multinationals were not prepared to help the country move forward, adding, “Let’s take our destiny in our hands and progress accordingly.”

In her intervention at the panel, Executive Vice President (Upstream), NNPC, Oritsemeyiwa Eyesan, who listed the challenges confronting the country’s oil and gas industry, revealed that despite its gains, the Nigerian Content Act had encouraged the return of portfolio managers in the industry.

Eyesan said, “I must at this point just also introduce the challenges we have with local content. When the Local Content Act was passed, we were all excited and looking forward to the growth of local capacity.

“Indeed, there had been some gains in the past in this regard. But you will also agree with me that it has brought with it a lot of challenges, to the extent that we have more or less encouraged portfolio managers rather than build competences and capabilities that the local content law was supposed to achieve.”

Eyesan explained that the return of portfolio managers made projects’ financing more difficult, “because when you have middlemen, sometimes, you have several layers in these middlemen that it becomes almost impossible to complete projects profitably”.

She said another challenge facing the oil and gas industry in Nigeria, which was causing the exit of the IOCs and discouraging new entrants into the sector, was the difficult and lengthy contracting process. She described it as an operational challenge, which NNPC Limited was not insulated from.

Eyesan lamented as dismal a situation where a contracting process would linger for 24 months, instead of two to three months obtainable in other climes.

Citing political and regulatory risks as one other challenge in the industry, Eyesan said the Petroleum Industry Act (PIA) was supposed to be an enabler for investment, explaining that if well implemented, it would enable and attract investment into the industry.

She said financial risk was another major encumbrance in the sector, explaining that currency and exchange rates instability make it difficult to structure financing deals that would deliver on the expected return. She added that investors were leaving the shores of Nigeria partly because of the financial risk.

The NNPC EVP further said, “First of all, we all agreed that virtually all the IOCs are leaving onshore, not to say they are leaving Nigeria completely, and we’ve articulated some of the reasons why they are leaving. Security is a major one, because if I’m not assured that I would get my money at the end of the day, then there is no reason why I would continue.

“The other risk that confronts participants in the sector is operational risk. We talk about insecurity in the Niger Delta and in the entire country as a whole. Again, I want to invest, I’m not assured my investment will be realised. That definitely will not make it possible for me to come.

“Technology deployment as well: when we are not able to deploy cutting-edge technology because we cannot afford it, it becomes even more difficult for us.

“There are other in-country reasons: stability in our regulations, stability in the fiscal environment. Until you solve those problems, it will be difficult for you to start saying you want to attract foreign investment.”

Amid excess liquidity fuelled by injections from Federation Account Allocation Committee (FAAC), Nigeria’s Deposit Money Banks (DMBs) and merchant banks in the past 13-days deposited a whooping N2.41 trillion with the Central Bank of Nigeria (CBN).

The banks’ rush to deposit cash with the CBN is in a bid to abide by the apex bank’s regulation on Capital Adequacy Ratio (CAR).

Through the CBN’s Standing Deposit Facility (SDF), DMBs and merchant banks have deposited N2.41 trillion so far in November 2023, rather than lending to the real sector.

A SDF is an overnight deposit facility that allows DMBs and merchant banks to park excess liquidity (money) to CBN and earn interest.

According to financial data released by the CBN, DMBs and merchant banks, through the Standing Lending Facility (SLF), borrowed N377.71billion from the CBN in the past 13-day.

THISDAY gathered that increased liquidity position in the banking sector is influenced by injections via the Federation Account Allocation Committee (FAAC) of about N903.48 billion in September, N1.80trillion in August and N1.89trillion to the three tiers of government in July 2023.

With the excess liquidity, Money Supply (M3) increased to N67.18 trillion as of September 2023 from N49.33trillion in September 2022.

M3 is a measure of the money supply as well as large-time deposits, institutional money market funds, short-term repurchase agreements (repo), and larger liquid assets.

The applicable rates for the SDF and SLF has increased by 50 basis points to 11.50 and 19.50 per cent, respectively, following the hike in the policy rate by 50 basis points to 18.75 per cent in June 2023.

The Monetary Policy Committee of the CBN unanimously narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.

The Central Bank has consistently maintained a hawkish monetary policy stance since May 2022, to tackle rising inflation rate (27.33per cent as of October 2023).

SDF so far this year has witnessed significant patronage as DMBs and merchant banks deposit reached highest peak of about N876.87billion in July 2023, highest so far this year.

However, the CBN has over the years maintained that strong patronage at the SDF confirm healthier liquidity in the banking system.

CBN had maintained that the strong patronage at the SDF confirmed healthier liquidity in the banking system, stressing that banks and merchant banks were in search of better yields.

THISDAY can report that the current inflation rate in Nigeria is above yield on Treasury bills (T-Bills) and DMBs are looking for risk-free investments, which SDF has provided since MPR hike.

Conversely, DMBs and merchant banks deposited N2.95 trillion with CBN in October 2023, representing an increase of 273 per cent from N790.9 billion in September 2023.

Between January and October 2023, DMBs and merchant banks deposited N8.34 trillion with CBN, an increase of 158 per cent from N3.24 trillion in corresponding period of 2022.

Analysts believe financial institutions prefer depositing with CBN as it is safe and risk-free, stressing that the present business environment has forced banks and discount houses to lend cautiously in the real sector.

The CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka, noted that the surge in DMSs deposit with CBN to uncurtaining in the business environment over rising insecurity, among others.

He stated that, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from: insecurity, supply chain problems, rising inflation and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.”

He added that, “As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”

The Chief operating officer of InvestData Consulting Limited, Mr. Ambrose Omordion stated that CBN is the last resort where DMBs deposit excess liquidity that comes with an attractive yield.

He explained that, “When a bank goes to borrow from CBN, it is a sign the bank is having liquidity challenges. The latest report by CBN revealed stability in the banking sector and most of them have a strong capital base to lend to the real sector and expand.

“The LDR policy of CBN is meant to encourage bank to lend to the real sector and of recent, the private sector lending has witnessed trajectory and a bit of disruption due to hike in global interest has slowed down customers borrowing from the banks. The hike in interest rate has impacted the cost of funds, which is expected to change the direction of who banks lend to customers.

“For me, the growth in deposit with CBN is a sign that these banks have enough liquidity and are taking preventive measures to checkmate Non-performing Loan (NPL). In addition, the high interest depositing with CBN is also another alternative for banks to make more money and improve on profitability.”

On his part, the Managing Director, Highcap Securities Limited, Mr. David Adnori said the SDF policy has not completely driven DMBs and merchant banks lending to the real sector.

According to him: “The banks were investing in government bonds and Treasury bills rather than lending to the real sector. The federal government is aggressively issuing bonds and T-Bills to finance budget and it is where banks are investing.”

He added that: “It is noted that interest income of the banks decline as the rate on T-bill and bonds dropped for the first six months of this year. If banks had granted loans to real sector as directed by CBN, they could have charged higher interest and generated more money.

“Mind you, the risk of lending to the real sector is high even though the CBN wanted them to lend. Most of the DMBs and merchant banks are very sceptical lending to the real sector. The SDF policy introduced in 2019 is a very good policy but unfortunately, the operating environment does not support its impact.”

Analysts at CSL

Stockbrokers Limited had in a report said, “In our view, measures such as these fail to address the fundamental issues behind banks’ reluctance to lend and would only result in banks looking for innovative ways to get around the rules.

“The low-risk appetite among banks for lending to the real sector can be attributed in no small measure to the high risks in the operating environment which hinders the survival of SMEs and the profitability of businesses in general. Also, the absence of reliable credit history and effective institutions also hinder banks from lending to the real sector.

“Consequently, banks prefer investing a huge chunk of their liquid assets in the government instruments given that they do not have CAR implications, are tax-free and do not result in Non-Performing Loans (NPLs)”

The bank had when issuing the guideline said, “With reference to the circular to all banks and discount houses, Re: Guidelines on accessing the CBN Standing Deposit Facility, Ref: FMD/DIR/GEN/CIR/05/020 and dated November 6, 2014, after further review, the remunerable daily placements by banks at the SDF shall not exceed N2billion.

“The SDF deposit of N2billion shall be remunerated at the interest rate prescribed by the Monetary Policy Committee from time to time. Any deposit by a bank in excess of N2 billion shall not be remunerated. The provisions of this circular took effect on July 11, 2019.” [THISDAY]

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