Effect of government control on the performance of upstream oil and gas companies in Nigeria

• Main Author: Ahmad, Sunsi Sa'ad
• Other Authors: Kouhy, Reza
• Published: Abertay University 2014
• Subjects: 333.8
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.685317

International Oil Companies (IOCs) and Oil-rich nations (States) pool their resources together in order to explore for and exploit oil in the most effective and efficient manner. The IOCs are entrusted with the exploration and exploitation activities due to their technological expertise and financial capability. However, the uncertainties surrounding the exploration for oil constitute the major sources of risks in upstream operations. Similarly, moral hazard and adverse-selection problems emerge during the exploitation of oil reserves. Hence, States adopt a number of control mechanisms in order to maximise their take from the oil reserves. Thus, establishing Joint Venture Companies (JVCs) is considered to be one of such control mechanisms. The Nigeria Government has ownership (about 57%) in the JVCs operating in the upstream sector. The JVCs operate alongside other upstream oil and gas companies (non-JVCs) that do not have Government ownership. This study adopts an agency theory in order to critically analyse the principal-agent relationship expounded above. Therefore, using a multivariate regression analysis based on a panel dataset of monthly observations (1999 - 2007) this study examine the cost efficiency and gross margin of both the JVCs and non-JVCs with the aim of determining whether or not Government ownership in the JVCs has any significant and systematic effect on their performance. Findings of the study indicate that JVCs are more efficient and more profitable than the non-JVCs, as non-JVCs spend twice as much as the JVCs to produce a barrel of crude oil. Hence, it can be concluded that Government ownership really matters in improving the cost efficiency and gross margin of the upstream oil and gas companies operating in Nigeria. Similarly, due to perennial funding problem bedeviling the operations of JVCs in Nigeria, an alternative funding (AF) arrangement was introduced in 2003; so that the companies will provide funds as loan to cover for the Government share of funding shortfalls. Effect of the AF arrangement on performance of the companies on one hand and the Government Take on the other hand was determined by using Wilcoxon Sign Tests on both the pre-alternative and post-alternative funding performance measures such as capital expenditures, companies’ gross margin, companies’ drilling activities and Government Take. Findings of the study indicate that the alternative funding arrangement improved capital expenditures made by the upstream oil and gas companies as well as their gross margin. However, the findings indicate that such arrangement did not improve drilling activities. Therefore, the implication of these findings is that policy makers need to review such arrangements in such a way that not only the upstream oil and gas companies benefit from such arrangement but also the Government.