Waiting for 2020 Marginal Oil Fields Award

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By Chris Paul

As the industry awaits the signature of President Muhammadu Buhari, Participants at the recently concluded 2020 Marginal Fields Bid Round (MFBR) must be practically holding the edge of their seats each day, waiting for the Directorate of Petroleum Resources (DPR) to give them the good news that ‘Mr. President has signed their letter of award.’ But then, there are critical issues and perspectives that do not give an owner of the field enough comfort. They are critical matters that sustain the umbilical cord of the Field owner and Lease Owner.

In jubilation over a letter from the DPR on 18 December, members of the 2020 Marginal Fields Bid Round (MFBR) will read the texts of the letter, so many times, to themselves over champagne. ‘At last… we got it!’ they will say to themselves. Signed by the Director/CEO, Engr. Sarki Anwalu, with the heading: 2020 Marginal field bid round (MFBR) Exercise: Notification Of Technical And Commercial Bid Status, the letter reads “Following your participation in the 2020 Marginal Field Bid Round (MFBR) exercise, I am pleased to notify you that your company has been shortlisted alongside other companies and potential awardee (s) for an asset.

Kindly note that relevant information on the next step in the bid round exercise will be communicated to you in due course…”

The last time industry players saw such correspondence, from the nation’s oil and gas police and felt like this; was over 17 years ago, when 24 fields were on offer and bid for by 171 companies.

The event which ran for almost four months in the 2020 round, took place from July-September, including few days in the next month used for the conclusion of the bid analysis by the DPR.

The process created a three-layered platform, in which no one had one asset allocated to him, alone. In other words, three tiers of frontrunners are likely to emerge in the result of the marginal field bid round. The first tier contains a list of two companies awarded the same field. The second tier comprises a list of three companies awarded the same field, while as many as 10, awarded the same field are on the tier three list.

Spread across onshore; swamp and shallow water and coming with combined resources of around 800 mmbbl oil and 4.5 tcf gas, this year’s bid round had (on offer) 57 fields; with only 161 companies out of the 600 companies that participated, making it to the three-tier shortlist.

Four out of the 57 fields are left unawarded, although sources could not confirm if Abigborodo and Hely Creek are included on the list. The two assets were on offer at the time of bidding, but have since been ordered by a Federal High Court to be removed.

A determining factor in winning a field, signature bonus (SB) payment per field would be shared by several companies attached to the asset. Should the other competing companies be unable to pay their share of the SB, a company might find itself, becoming the, sole holder of a marginal field license.

Government’s will, to please everybody, according to government sources, is what has dragged the process of approval of the award list for over two months; as pressure from several bidders who bid, paid all the fees and made it through all the milestones, has seen the agency end up with 161 winners.

At a time the federal government is scrounging every window to fund the ebbing economy, the DPR has made it evidently clear, in the last one year that it will be very strict with signature bonus payment, as they have been with royalty, lease rentals, and other tariffs recently. For the agency, you are out once you cannot pay your SB stake.

DPR definition of a marginal field is a discovered resource that has been left unattended for more than a decade. Majority of the underdeveloped fields were previously held by Shell, ExxonMobil, Chevron and Total, as the grand total of the resources on offer revolve around 800 mmbbl oil and 4.5 tcf gas.

Similarly, according to BudgIT, marginal fields are oil fields that have been discovered by major international oil companies (IOCs) in Nigeria in the course of exploring larger acreages and which fields have not been developed for more than 10 years. When identified, the IOCs may decide to farm out this field to another company to exploit it as a sole risk venture. This means the contractor would bear all the costs and risks of exploitation and also to earn the entire rewards from exploitation.

“Farm-out” means an agreement between the holder of an oil mining lease and a third party which permits the third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the leases.

Located onshore and in the shallow waters, BudgIT reports that there are about 178 marginal oil fields, in Nigeria; while by the provisions of the Petroleum (Amendment) Act of 1996, the President has the power to declare a field as a marginal field where a discovery has been made in such a field that has been left unattended for 10 years. The major reasons for awarding marginal fields are to create new and diverse investment and boost reserves.

The Marginal Fields programme was introduced to encourage indigenous participation in the oil industry and also to increase government’s take on undeveloped acreages. The programme was developed to discourage continuous holding of undeveloped fields by International Oil Companies (IOCs). The creation of marginal fields was therefore designed, to reduce the rates of abandonment of depleting fields and assure the government’s take in acreages that would otherwise have become unproductive.

Experts say the 25 largest oilfields have the potential to unlock $9.4billion of investment over the first five years and generate over $38billion in revenue over the life of the fields.

Wood Mackenzie, an oil and gas consulting firm, with over 20 years of experience covering upstream projects in Nigeria, created a team of regional upstream experts and valuation analysts to carry out an in-depth economic assessment of the marginal fields on offer. Their objective was to identify the most likely scenarios for field development and hydrocarbon evacuation. It explored the field and reservoir characteristics, field location and proximity to existing infrastructure, capital investment requirements, operating costs, fees and tariffs, marginal field fiscal terms and the potential production profile. The firm estimated that out of the 57 assets, 42 fields have positive post-tax Net Present Value (NPVs) with the highest valuation of over $150m and an average valuation of $31.5m (using a 10% discount rate). This, however, is not the only investment criteria.

Wood Mackenzie’s recent industry perspective, of the 2020 bid round, survey revealed that criteria are being used to support investment decisions on Nigeria’s marginal fields, include reserves upside, investment requirements, and rate of return.

More than two third of investors expects a rate of return of over 15%; and according to Wood Mackenzie,37 fields fit the bill, a third of respondents expect returns above 20%; only 29 fields exceed these higher expectations. Initial capital investment for the twenty two fields, with over twenty percent (20%) returns will require up to $200m before first oil and gas; of these, 12 fields have remaining resources of more than 10 million barrels of Oil.

Since the signing of farm out agreements in 2003,between the multinational oil companies, the Nigerian National Petroleum Corporation and the indigenous companies, the marginal field initiative has come to stay within the Nigerian oil industry.

Challenges such as security of operations, funding, lack of technical know-how, quota restriction, lack of infrastructure, collaboration, fiscal terms & incentives, inconsistency in government policies, gas development, non-availability of rigs and violation of agreement terms have been reported as disturbing the progress of the initiative.

The road to Nigeria’s marginal field initiative began, in 2003, when the Nigerian government through the Petroleum Ministry and supervising agency awarded 24 of its marginal fields to 31 Nigerian Exploration and Production companies, as part of its strategy to fulfill its national aspiration.

Out of the 24 fields, only about seven have been on production, since the award; as the challenges, stated earlier, made it difficult for the remaining fields to come on production. At the time also, the government was not able to realise its objectives for commencing the marginal field initiative. Through the initiative, the government intended, then and now, to increase its oil and gas reserves and collect payable revenue when the fields on are on production;

Situated within existing acreages in the country, there are 116 marginal fields with 1.3 billion barrels of reserves as the marginal fields; exclusive of matured fields that have been abandoned using only primary recovery methods with only some on gas lift or water or gas injection.

Since, tripartite agreements were signed, in 2003, between the Nigerian National Petroleum Corporation, multinational companies and the marginal field companies; no appreciable progress has been made due to the challenges.

According to reports, marginal fields contribute a minimal 2.1% to the total crude oil production and 67% of marginal fields allocated in the 2003 licensing round have not produced a single barrel of oil, close to 20 years later.

The under-utilisation of the marginal fields and its consequent minimal contribution to Nigeria’s oil revenue were caused by certain major issues which include: discretionary decision-making, political interference and lack of transparency, which remains the bane of the process of awarding marginal oil fields.

As the institution in charge of managing the exploration licenses, DPR does not publicly provide the criteria for prequalification of awardees. Described as opaque, BudgIT insists the entire process produce winning companies with close ties to government officials adding that ‘this factor alone significantly affects the field performance, as most of the awardees do not have the technical skills to exploit the skills. This is also the reason why most of the marginal fields are dormant.’

Lack of process integrity was connected with the sudden suspension of the 2013/2014 bid rounds; and this deters investment. Additionally, affecting production growth, greatly, is infrastructure constraints resulting from attacks on the pipelines and oil theft in the Niger Delta, because the marginal fields are onshore.

It is instructive that many of the challenges that impacted the success of the last bid round, such as insecurity and corruption, have become worse than they were back then.

The shortlisted companies must meet certain conditions that must be satisfactory to President Muhammadu Buhari before they can throw that big party, virtually or in-person, upon his signature.

As stipulated in sub section 3a-b of paragraph 16A, Schedule one of the Petroleum Amendment Act 1996, the President must be satisfied that the winning companies will administer their assets in a manner that must benefit the country’s economy and Nigerians; also that the parties to the farm-out are in all respect acceptable to the Federal Government.

Certain provisions in the DPR guidelines describing the nature of title under marginal fields can be equated to a sub-lease in which there is a head lease between the Government as lessor and the OML holder as lessee on the one hand and a sub-lease between the OML holder (the “farmor”) and a marginal field holder (the “farmee”) on the other hand. Generally, a lease is a contract between parties which grants exclusive possession of land or part of it to hold for a term of years. A sublease like any other lease also confers interest in the asset which must be in accordance with the terms of the head lease.

Published in the 4 May 2017 edition of Mondaq, an online publication and titled Nigeria: Marginal Fileds In Nigeria: Who Owns The Field?, Oyeyemi Oke maintained that the possibility of a farm – out to be renewed indefinitely is not in tandem with “the reversionary principle as such a farm – out agreement cannot be described as a clear-cut sublease. Also, the 2013 Guidelines does not make matters any clearer. As the word “renewed in accordance with the law” leaves room for ambiguity. In my view renewal in accordance with the law would mean that the marginal field would be renewed by the government just like any other lease and not renewed by the sub-lessor.

Also, the Presidential Consent to a farm – out agreement between an OML holder and the Marginal Field Operator by virtue of Paragraph 16(A) (3) of the Petroleum (Amendment) Act 1996 can be said to have conferred legal title on Marginal Field holders.

This is predicated on the fact that the Presidential Consent under the Petroleum Amendment Act is similar to the Consent of the Governor under Section 22 of the Land Use Act (Cap L5, LFN 2004).

By virtue of Section 22 of the Land Use Act, any form of transfer or assignment of land confers legal title to the transferee of assignee of such land.

The sustainability of this argument may be challenged on the basis that under Farm – out agreements, there are provisions which gives the farmor the right to participate or “back-in” in the development of additional reservoirs. This clause no doubt fetters with the title of a farmee as legal title should not be subject to any other superior right.

In as much as there is the freedom to contract between parties, the ability of this provision to pass the legal test is doubtful on the grounds that the rights conferred on a farmee is a legal right by virtue of Presidential Consent and a legal title should not be subjected to any other superior right.”

Provisions in the guidelines, he stated, also support the fact that a marginal field is treated as separate and distinct from an OML. Upon a farm – out, the Guidelines provide that the Marginal Field owner assumes the legal rights and obligations of the OML holder as it relates to the marginal field. Paragraph 20 (Rights and Obligations) of the Guidelines provides as follows:

The Farmee shall have all the right of the OML leaseholder in respect of the Farm-out Area containing the fields once the farm-out is concluded and all the rights interests and duties of the previous leaseholder shall be transferred to the new leaseholder;

Farmee shall have the right/obligation to deal directly with the DPR and other administrative authorities as the new leaseholder; and

All rights, interests, obligations and liabilities of the Farmor in respect of the Farm-out Area containing the fields shall automatically transfer to the Farmee and the Farmor shall be relieved of the same as from the date of the execution of the Farm-out Agreement.”

He then concluded that the ownership of a marginal field may be vested in the farmee due to excision of the field from the original OML “however; the interest vested is subject to the validity of the OML as provided expressly in the Petroleum (Amendment) Act. This no doubt creates some level of uncertainty and insecurity as to what happens in the event that an OML under which a field falls expires.

The hard position of the law using the statutory rule of interpretation is that the once the validity of an OML is affected the field automatically stands affected.

This position no doubt appears scary for marginal field operators, a situation that has necessitated DPR’s practical approach.

According to him, the regulatory agency is of the view that a marginal field should not be affected by the validity or expiration of an OML. Without a doubt, this approach mitigates the perceived “hardship” in adopting a strict interpretation of the Petroleum (Amendment) Act 1996.

Nonetheless, this approach may not be in accordance with the clear provisions of the legislation as the Act clearly creates a “legal placenta” between the OML and a marginal field.

As the shortlisted companies await their fate in the next level of the marginal field bid round, they would have this unsettling provision of the Act to contend with in the event they become winners of the various fields on offer.