How Not to Waste Family Jewels

Muhammadu Buhari

Patrick Okigbo

Nigeria’s government intends to auction some marginal oilfields. What should Nigerians do to improve the outcomes and ensure history does not repeat itself?

Let’s start with a hypothetical scenario which, in a few minutes, will become obviously an empirical one. Imagine that your father inherited land from your forefathers to hold in trust for you and subsequent generations. For decades, he has leased out portions of the land to farmers for rent and a share of their harvest. However, he has been unable to collect neither rent, share of the harvest, nor reclaim the land. Your father has just announced his intention to lease out more land. Given his track-record, will you support him or insist on a change in approach before you lend your support? These are the decisions you have to make as Nigeria plans to auction more marginal oilfields.

A marginal oilfield is any land where crude oil has been discovered but, for whatever reason, the owner of the lease has decided that production will not be commercially-viable. If the land is left undeveloped for 10 years, Nigeria’s president is empowered by law to reclaim it and offer it up for auction. The fact that an oilfield is not viable for one party does not mean that it won’t be attractive to another party. Different return profiles for different oil companies.

There are three main reasons why Nigeria seeks, from time to time, to lease out its marginal oilfields; to increase revenues, proven crude oil reserves, and daily crude oil production. Like the hypothetical family above, Nigeria has performed woefully on all counts with all the oil license bid rounds held since 2000. For instance, about $0.75 billion in rent (or “signature bonus”) is yet to be collected from the lessors. Nigeria’s target of 40 billion barrels of proven crude oil reserves by 2020 will not be met. Instead, it has declined from 37.45 billion barrels in 2014 to 36.97 billion barrels in 2019. Similarly, crude oil production targets of 4 million barrels of oil per day by 2020 is an illusion. Production has dropped from 2.3 million barrels in 2014 to 1.6 million barrels in 2019.

There are no great surprises here. None of the oil license bid rounds of the last 2 decades upheld the principles of transparency. Rather, licenses were awarded to companies without the requisite technical and financial capabilities. It is no wonder that of the 175 marginal oilfield licenses issued between 2000 and 2007, only one have gone into production.

Over time, Nigeria’s oil license bid rounds have seen a decline in interest from serious investors. For instance, only 57 percent of oil blocks offered in 2005 drew a bid; by 2007, the number dropped to 40 percent. The fact that the Minister of Petroleum Resources is empowered by law to award or revoke licenses based on his or her discretion has turned the licensing process into a channel for dispensing political favours. This has dissuaded many serious investors from participating.

On the use of proceeds, common sense dictates that funds from the sale of a jewel should be tied to specific national development objectives. Yet, this has not been the case with any of the signature bonuses collected over the last 20 years. Instead, like the Biblical prodigal son, the government has spent most of the funds on Nigeria’s bloated bureaucracy.

The Buhari administration recently announced her intention to auction off some marginal oilfields. Should Nigerians support this initiative?

The short answer is in the affirmation especially as Nigeria is in dire economic straits and needs to unlock value from its dormant assets. However, if Nigeria’s decades-old history with licensing marginal oilfields is anything to go by, the proposed auction will be another wanton waste of the family jewels. It will not deliver the expected increase in revenue, increase in proven crude oil reserves, or increase in daily crude oil production unless the government makes the process more transparent.

There are specific actions the administration can take to improve the outcomes of the licensing process. As a pre-requisite, President Muhammadu Buhari should declare that he would not invoke his discretionary powers as Minister of Petroleum Resources during this process. This is a critical requirement to rebuild the trust and confidence of the serious investors that this licensing process is not just a charade or a way to take care of political loyalists before the end of this administration.

Before the commencement of bidding activities, Nigerians should insist on evidence of the following four key deliverables. One, a comprehensive national economic development plan and how the expected signature bonuses would be used to implement the plan. Two, a national data repository that would be used as the single source of verified data for all parties interested in the bid. Three, widely published information on the asset value to eliminate any arbitrage opportunities resulting from information asymmetry. Four, the terms governing the licensing round should be open, transparent, clear and easy to understand so the interested public can track how the government is managing the process on their behalf. Very importantly, the pre-qualification criteria should be empirical to eliminate bias.

During the bidding process, the selection criteria should be stringent to limit the pool of bidders to only firms with the requisite financial and technical capabilities. Comprehensive details of all prospective bidders should be published on platforms that are easily accessible by Nigerians. The successful firms must pay their signature bonuses in full. All payments should be made into government accounts.

In the post-bid phase, firms must post performance bonds to be drawn down by the government if they fail to commence work on the oilfield. The government should include a “drill-or-drop” clause so it can easily reclaim the license on grounds of non-performance by the winning bidders. The National Assembly should provide oversight. The Nigeria Extractives Industry Transparency Initiative should audit the processes while civil society organisations should provide monitoring.

Without significant changes to the oil licensing process, the proposed 2020 oil licensing rounds would be another channel for peddling patronage without any commensurate benefits to Nigeria. This is the time to actively engage with President Buhari to ensure he understands that business-as-usual processes will deliver as-usual-results. This will be bad for Nigeria and bad for the anti-corruption persona President Buhari has so diligently cultivated over the last half century in public life. His ability to derive value from the latent assets would bolster Nigeria’s chances. This is a unique opportunity to write his name in gold. Can he?

Okigbo is the Founder and Principal Partner at Nextier, a public policy advisory firm