Atlantic Energy AndThe NPDC Operatorship: Follow The Money
There wasmore than a bit of misplacement of emphasis of issues by the Nigerian oil producing Communities protesting the relationship between the state hydrocarbon company Nigerian Petroleum Development Company(NPDC) and Atlantic Energy, its funding partner.
The complaint, aired at the National Assembly, thecountry’s bicameral house of legislature, in late April 2013, was largely about Petroleum Rights. The Communities accused Diezanni Allison- Madueke, the Minister of Petroleum of having secretly transferred production rights in four large oil blocks (OMLs 26, 30, 34, and 42) to Atlantic Energy Drilling Concept Limited.
This claim is not true in the literal sense, but there’s a lot more in the transaction between Atlantic Energy and NPDC, the operators of those blocks, that the public ought to know about, and doesn’t.
“The role of Atlantic Energy in the divestment issue is just the provision of funding, which both NNPC and NPDC have explained”, says Atlantic Energy chief, Jide Omokore. “The Strategic Alliance Agreement entered into between Nigerian Petroleum Development Company Limited and Atlantic Energy Drilling Concept Limited was not a divestment of Assets nor transfer of Operatorship but simply an alternative funding agreement in order to meet the Nigerian Petroleum Development Company Limited’s cash call obligations in the affected OMLs”.
This is all very true, so why are so many people worried?
The answer is thatthe details of the transaction hint at a hand over of free money, from the Nigerian National Treasury, to a company to play with.
Is this some slush fund? A lot of people think that this is what the National Assembly should be investigating.
Prior to Shell’s decision to divest from OMLs 26, 30, 34, and 42, NNPC, as the government’s “eye” in these operations, had always had the 55% equity. Since they were not operators, they didn’t need upfront money. They paid their share of the expenses and received 55% of the volume of the crude produced.
Then, suddenly, the Nigerian National Petroleum Corporation (NNPC) said it wanted to operate those assets,fine. As of right it could.
The corporation said that the operatorship would be done on its behalf by NPDC, its operating arm, fine.
Now that it was going to operate(be the primary managers of the assets), it required funding.
Couldn’t it find a way of raising the money on the back of the assets? Nigerian banks would rush to fund NPDC’s operatorship. These assets are producing crude oil, at $90+ a barrel at the time and they generate cash flow from Day 1!!!!!.
No, NPDC suddenly and dramatically signs a funding agreement with Atlantic Energy, which ensures that, as its “fees” for funding NPDC, it is entitled to collecting crude oil, for the life of these assets.
What this means is that the volume of crude oil, for which there will be money in the country’s coffers, falls short by a size equal to what Atlantic Energy collects.
Don’t take our word for it. Just take a look at the part of the Strategic Alliance Agreement, below. This is what the Conversation in Abuja should be about, and not whether the minister has secretly transferred production rights to Atlantic Energy.
NPDC/ATLANTIC ENERGY STRATEGIC ALLIANCE AGREEMENT(OML 34) –EXCERPTS FUND1NG OF PETROLEUM OPERATIONS
8.1 ATLANTIC shall provide all the funds required for NPDC’s 55% share of Petroleum Operation Costs, subject to Article 8,2 and in accordance with approved Work Programme and Budget. A review of the Work Programme shall be concluded by Project Management Team subject to approval of the Management Committee within fifty (50) days from the Effective Date to estimate the capital investments for the Development and the required initial Working Capital. Based on this review the Management Committee shall within seven (7) days approve the amount for the capital investments, which shall be covered by the parent company guarantee.
8.2 The costs incurred by the Parties in carrying out Petroleum Operations shall be recovered by the Parties through Cost Oil or Cost Gas, in accordance with Article 10 and the Accounting Procedure as set out in Annex ‘C’.
8.3 All bank transactions shall be made through bank accounts opened and maintained by ATLANTIC exclusively for the Petroleum Operations.
8.4 ATLANTIC shall open and maintain project bank account(s) exclusively for funding Petroleum Operations and shall procure that NPDC shall have unlimited inquiry and audit mandate and a right to copies of all information and transactional documents including all accounts records and balances as they occur from bank accounts and project bank accounts referred to in Articles 8.3 and 84.
8.5 If additional Development Costs are required to add facilities not included in the development Programme, including but not limited to in-fill well, secondary recovery facilities, additional processing facilities, deeper wells and artificial lilt, ATLANTIC shall provide NPDC’s share of Petroleum Operations Costs required to carry out such additional development activities.
8.6 The additional capital investments referred to in Article 8.5 hereof shall be recovered by ATLANTIC through Cost Oil and Cost Gas in accordance with Article 10 and the Accounting Procedure, and ATLANTIC shall be entitled to receive a share of Profit Oil and Profit Gas over the additional production as provided for in Article 10.2 hereof.
8.7 ATLANTIC shall bear all losses associated with funding NPDCs 55% share of Petroleum Operations under this Agreement.
ARTICLE 9.
DEVELOPMENT PROGRAMME AND BUDGETS
9.1 ATLANTIC shall submit to the Management Committee for approval within
60 days of the Effective Date, the development plan which shall include the Development Programme and relevant Budget appropriately apportioned into yearly phases.
9.2 At the meetings of the Management Committee to consider and approve the Work Programme and Budget for each year, ATLANTIC shall submit a report on organizational structure to be utilized for conduct at Petroleum Operations in accordance with Annex B. During such meetings, ATLANTIC shall report on the actual performance of the organizational structure for the previous year.
9.3 The Development plan shall include the Work Programme and Budget, apportioned into quarterly phases, to be carried out under the Development plan during the remainder of the financial year. In respect of subsequent financial years, the Work Programme and Budget shall be submitted not later than 31’ August of the preceding financial year. Such Work Programme and Budget shall comprise all requisite services including, but not limited to. environmental studies, drilling and completion programmes, construction and assembling of field installations and equipment, as may be necessary to permit the production, storage, transportation and delivery of Crude Oil and Natural Gas from the Contract Area. The Development Programme and Budget shall be detailed as necessary.
9.4 ATLANTIC shall submit to Management Committee any revision of the Annual Development Programme and Budget. Any such revision of the approved Development Budget shall be made by agreement of the PMT, In the event of emergency or extraordinary circumstances that require immediate action, ATLANTIC may take actions it deems necessary to protect life and property and the interest of Parties and shall promptly notify Parties in writing within forty-eight (48) hours notwithstanding the provisions of this Article 9.4 any cost so incurred shall be recoverable.
ARTICLE 10
RECOVERY OF PETROLEUM OPERATIONS COSTS AND OIL AND NATURAL GAS ALLOCATION
10.1 Crude Oil and Natural Gas Allocation
The allocation of Available Crude Oil and Available Natural Gas shall be in accordance with Annex “C”. Annex “D” and this Article 10, as follows:
(a) Royalty Oil and Royalty Gas shall be allocated to NPDC in such quantum as will generate an amount of proceeds equal to NPDC’s Royalty applicable to the Contract Area.
(b) Cost Oil and Cost Gas shall be allocated to the Parties in such quantum as will generate an amount of proceeds sufficient to recover the following:
1. Un-depreciated costs associated to Capital Costs as defined in the Accounting Procedures incurred prior to execution of this Agreement shall be allocated to NPDC:
1. Development Costs and Production Costs related to the Production of P1 Developed reserves as agreed in the production profile attached hereto as Annex H shall be allocated to ATLANTIC;
Ill. Incremental Investment (Development Costs and Production Costs), made by ATLANTIC shall be recovered from incremental volumes (i.e. the monthly production from 2P reserves less the P1 Developed reserves as indicated in the production profile attached hereto as Annex 1-1) shall be allocated to ATLANTIC.
NPDC Forty per cent (40%) ATLANTIC – Sixty per cent (60%)
Thereafter, Profit Oil shall beallocated in the following ratio:
NPDC — Seventy per cent (70%)
ATLANTIC – Thirty per cent (30%)
iv. Up to the full recovery of Development Costs regarding non associated gas by ATLANTIC.
Profit Gas shall be allocated in the following ratio:
NPDC – Thirty per cent (30%)
ATLANTIC Seventy per cent (70%)
Thereafter, Profit Gas shall be allocated in the following ratio:
NPDC — Seventy per cent (70%)
ATLANTIC – Thirty per cent (30%)
v. Up to the full recovery of the Development Costs for the development of contingent resources, Profit Gas shall be allocated in the following ratio:
NPDC – Thirty per cent (30%)
ATLANTIC Seventy per cent (70%)
Thereafter, Profit Gas shall be allocated in the following ratio:
NPDC — Seventy per cent (70%)
ATLANTIC – Thirty per cent (30%)
10.3 Each Party shall take in kind, lift and dispose of its allocation of Cost Oil and Profit Oil in accordance with the Lifting Procedure (Annex D).
The PPT and Tax Gas payable under this Agreement represents the NPDC’s tax obligations as Concessionaire. ATLANTIC’s tax obligations which shall be paid under CITA shall be paid by ATLANTIC from its profit.
10.4 Either Party may at the request of the other, lift the other Party’s Cost Oil and Profit Oil pursuant to Article 10.1 and the lifting Party shall within thirty(30) days transfer to the account of the non-lifting Party the proceeds of the sale to which The non-lifting Party is entitled. Overdue payments shall bear interest at the annual rate of three (3) months LIBOR.
10.5 Either Party may, with the consent of the other Party, purchase any portion of the other Party’s respective allocation of Cost Oil and Profit Oil from the Contract Area.
10.6 Parties shall meet on a monthly basis as may be agreed to reconcile all Crude Oil allocated and lifted during the period as per Annex “E”.
ARTICLE 11
VALUATION OF AVAILABLE CRUDE OIL
11.1 Available Crude Oil shall be valued in accordance with the following procedures:
(a) On the commencement of production from new reservoirs, ATLANTIC shall engage the services of an independent Laboratory of good repute to determine the assay of the new Crude Oil.
(b) When a new Crude Oil stream is produced, liftings shall be made for a trial marketing period of three (3) calendar months or the period required to lift the first three (3) cargoes, whichever is shorter, During the trial marketing period ATLANTIC shall:
(i) collect samples of the new Crude Oil upon which the assay shall be performed as provided in Article 11.1(a) above;
(ii) determine quality and yield pattern of the new Crude Oil;
(iii) share in the marketing such that each Party markets approximately their proportionate share of the new Crude Oil, notwithstanding the fact That a Party’s share of Available Crude Oil may be lifted in the process; payments Thereafter shall be made in accordance with Article 0.5;
(iv) exchange information regarding the marketing of the new Crude Oil including documents which verify the sales price and terms of each lifting;
(v) Apply the actual F,O,B. sales price to determine the price of each lifting. Such F.O.B. sales pricing for each lifting shall continue after the trial marketing period until a valuation of the new Crude Oil has been completed but in no event shall it be longer than ninety (90) days after conclusion of the trial marketing period.
C) As soon as practicable but in any event not later Than sixty (60) days after the end of the trial marketing period, ATLANTIC shall review the assay, yield, and actual sales data. ATLANTIC shall present a proposal for the valuation of the new Crude Oil. A valuation method either spot related or any other method acceptable to both Parties shall be established for determining the price for each lifting of Available Crude Oil. Such valuation method shall be in accordance with the Official Selling Price published by NNPC or relevant government authority. It is the intention of the Parties that such prices shall reflect the true market value of the new Crude Oil. The valuation method determined hereunder (including the product yield values) shall be mutually agreed within thirty (30) days from the aforementioned meeting failing which; determination of such valuation shall be referred to an independent consultant.
