OIL PRICE SLUMP WORSENING NIGERIA'S CASH CRUNCH

Low oil prices are aggravating a cash squeeze in Nigeria that is crimping upstream investment.

The current oil price slump is compounding Nigeria's inability to fund its 60%, equity cash call in joint venture agreements with foreign companies. The debt crisis is hindering spending for exploration and development and threatens to squeeze outlays for maintenance needed to sustain current productive capacity.

Some industry officials in Nigeria claim the country's production will drop next year if the cash crunch is not resolved soon.

Meantime, three major oil companies have transferred some of their interests in Nigerian offshore blocks to other companies to spread the capital burden for deepwater exploration and development.

CASH SQUEEZE

State owned Nigerian National Petroleum Co. (NNPC) says it is in arrears with foreign oil companies for $350 million, but the foreign companies place the amount at about $500 million.

According to local press reports, Oil Minister Don Etiebet said the government has approved payments totaling $150 million to the foreign JV partners.

Early this year, say industry officials, NNPC's indebtedness reached a total of $750 million. Officials fear the companies' oil production in Nigeria is being hampered by the debt burden, in turn hurting Nigeria's foreign exchange earnings from oil exports.

Several multinationals have been forced to suspend payments to oil field contractors and postpone further investment in big joint venture projects until the government gets the debt paid.

NNPC, which holds a 60% equity in production JVs, was in arrears only $20.6 million at the end of November 1993.

Officials warned the government that unless it resolves the cash call crisis by yearend 1995, oil productive capacity currently pegged at 2 million b/d would drop by 25%.

Bill Edman, Chevron Nigeria Ltd. managing director, warned that falling oil prices will rein further investment in frontier E&P. Edman said the current oil price of $13 14/bbl is a disincentive to any meaningful investment in Nigeria's oil industry.

In its 1994 budget, the government projected oil revenue of $10.5 billion with a Nigerian oil sales price of $14/bbl. In that budget, the government earmarked $3.13 billion for JV operating costs and cash call obligations for exploration and production work.

NNPC has JVs with Chevron, Mobil Oil Corp., Royal Dutch/Shell Group, Agip SpA, Ste. Nationale Elf Aquitaine, and Texaco Inc.

However, Nigerian oil recently sold for as little as $12 13/bbl. Accordingly, the government has asked JV partners to reduce overall operating budgets so that it can slash its budget to about $2.2 billion.

Foreign companies see that projected outlay level as inadequate because NNPC's 200,000 b/d cash call production account is in jeopardy now from plunging oil prices and the current debt squeeze.

They estimate Nigeria's industry will need at least $3.6 billion this year to operate and maintain productive capacity at current levels. That would put NNPC's share just for maintaining current production at about $2 billion insufficient to support enough drilling to sustain output at that level for 1995, much less increase productive capacity.

JV's account for 90% of Nigeria's oil production.

Nigeria is producing at maximum capacity of 2 million b/d, including 175,000 b/d of condensate, and is pressing efforts to boost productive capacity to 2.5 million b/d. Its crude oil production quota, set last Near by the Organization of Petroleum Exporting Countries, is 1.865 million b/d.

NNPC's indebtedness was deemed tolerable until midyear 1993. But since the military coup and inception of Gen. Sani Abacha's regime last November, cash call payments have become all but impossible. In January, two checks in naira currency from NNPC to Shell Petroleum Development Co. for local outlays bounced at the Central Bank of Nigeria.

The government contends its cash call crisis can be managed through efforts to reduce its stake in JVs and selective cuts in exploration and some operating costs (OGJ, Feb. 14, Newsletter).

Etiebet reportedly told foreign companies those efforts would not reduce productive capacity, but some officials warned that if cuts in exploration spending and delaying projects did not produce the needed savings, cuts in maintenance might be forthcoming. And that will slice productive capacity by 1995.

INTERESTS TRANSFERRED

Under production sharing contracts (PSCs) signed with NNPC in 1993, Agip unit Nigerian Agip Oil Co., Elf unit Elf Nigeria Ltd., and Exxon Corp. affiliate Esso Exploration & Production Nigeria Ltd. were to fund all up front exploration and development costs and share proceeds with NNPC.

Those costs have been postulated at $2.2 4.7 billion if full commercial development of any major discoveries occurs. That would entail development of a hypothetical 200 million 1.5 billion bbl discovery in water depths of 200 2,000 m.

Agip signed a PSC covering exploration on two deepwater blocks in the Gulf of Guinea (OGJ, July 12, 1993, p. 38). Agip now holds a 46% interest in and will remain operator of the two blocks with Amoco Corp. holding 35% and another Exxon affiliate 25%.

Elf last year signed PSCs for two onshore blocks in the Benue basin and two blocks in 200 1,200 m of water in the Atlantic Ocean south of the OML 100 permit area where Elf Nigeria began producing oil in Aria and Odudu fields in 1993 (OGJ, May 10, 1993, p. 28). Elf retains operator;hip and now holds 40% in the offshore blocks, with 30% each going to an Exxon unit and Chevron Corp.

Esso E&P Nigeria retains operator-ship and an 80% interest in its 500,000 acre Block 9 about 47 miles off Nigeria. Amoco holds the remaining 20%. The PSC award marked Exxon's return to upstream operations in Nigeria (OGJ, May 31, 1993, p. 26).