Giving Nigerian Firms Voices in the Oil Sector

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The participation of local players in the oil and gas sector, especially strong operators with the capacity to develop technically-challenging oil fields, is mounting and this is backed by the declaration by the Ministry of Petroleum Resources who is bent on getting them to play more roles in the sector, Nume Ekeghe reports

AMNI Petroleum, Shoreline Energy, Aiteo, Neconde Energy, Seplat Petroleum and Belema Oil are strong operators with the capacity to develop technically-challenging oil fields. And getting them to play more roles in the sector, according to the Minister of State for Petroleum Resources, is beyond lip service. He has the backing of President Muhammadu Buhari in this onerous task.

Indeed, the participation of the local players has given rise to a boost to the reduction of gas flaring in Nigeria, with several Nigerian marginal fields recognised under the United Nations (UN) Clean Development Mechanism for their successful reduction of flaring and valorisation of natural gas.

Following its marginal fields licencing rounds in the 2002/03 rounds, which resulted in the award of 24 fields to 31 indigenous companies, Nigeria’s Department of Petroleum Resources (DPR), last year, released guidelines on 2020 licencing round.

Under the 2020 licensing round, 57 fields located onshore, swamp, and shallow offshore terrains are on offer exclusively to local operators while opening up various avenues for partnerships with international capital and technology providers.

With many oil-producing economies recording low revenue as a result of the COVID-19 pandemic, the DPR embarked on the licencing round, not just for field development but also to earn foreign exchange for the country.

The Federal Government, according to report, may earn no less than $5.7 billion, if it succeeds with its ongoing bid rounds for the 57 marginal oil fields being offered to investors.

Although no specific cost is attached to each oilfield by the DPR, the regulator said the fields have a lower cost of investment ($50-100 million) and risk of development as compared to major capital projects.

If all projections become real as expected, the additional $5.7 billion prospect is much higher than the loans the government sought from Bretton Woods institutions within the last few months, and which will help in addressing the effects of the Coronavirus pandemic.

According to Wood Mackenzie, the 25 largest oilfields have the potential of unlocking $9.4 billion of investment over the first five years and generate over $38 billion in revenue as the fields last. Interestingly, over 600 companies indicated interests in the fields in the thick of the pandemic.

There are some successful marginal field players, such as Seplat Petroleum Development Company Plc, that have shown interest in acquiring more assets.

This much was confirmed by Chairman of Seplat, Dr ABC Orjiako, who said the company was continuously looking at acquisition opportunities.

“We concluded a very successful acquisition in 2019, despite the collapse of oil price globally and despite the hardship in the global economy. We remain focused on acquisitions. We have continuously maintained that we are committed to price-sensitive acquisitions. That means we do not overpay.

“So, as the industry changes, it means that the prices that buyers are willing to pay will continue to change, and we will adapt and continue to do our acquisitions,” he said.

According to Wood Mackenzie, opportunities clearly exist in Nigeria’s 2020 marginal field bid round, even as it warned that investors will need to carry out an in-depth screening process to assess the commercial viability of the fields on offer and identify high potential targets.

“Our commercial review gives investors the data and insights to screen opportunities using their own priorities. Additionally, the ability to design robust field development plans will be key to optimising the initial capital investment, time to first oil, subsequent development opportunities, and cash flows,” it said.

On the development of the oil and gas industry, Auwalu said: “The industry has grown over the years from exploration licences granted to several companies to have strong national aspirations. We have nine basins that are critical to the nation for oil and gas. We have the technical capacity to produce 2.79mmb/d. About 200 per cent of proven reserves produced in Nigeria in 1970 were replaced by new reserves. The oil and gas sector remains critical in driving the economy.

“DPR’s licence remains an enabler of investments. We are also trying to ensure that standards are followed through conformity assessment and technology adaptation.”

Before now, there was insignificant regard for marginal fields in the oil and gas sector of the nation’s economy. This is so because the marginal fields have negligible reserves and production potential, which are, however, deemed immaterial for a variety of reasons.

Some of the reasons for classifying them as inconsequential are that they have remained untapped or unexploited for a period of over 10 years. Notably, the marginal fields exist under current Oil Mining Leases (OMLs).

As a result of their seeming unimportance and subsequent disregard on the part of the operators in the oil and gas sector, less attention was paid to them, chiefly because of their outward semblance as something that would be unprofitable if ventured into.

However, the multinational companies that seemed to have discovered their inherent potential were committed players in that ‘neglected’ area of the oil sector and had profited from their operations in advance as local operators were disinterested in venturing into such insignificant sub-sector and were not licenced for operations.

However, realising the importance of the marginal fields, the Ministry of Petroleum Resources and the Department of Petroleum Resources (DPR) that are the supervising parastatals of the oil and gas industry have reasoned that that leaving the marginal fields in the care of multinational oil companies would be to the detriment of the local operators.

Through their actions, the marginal fields are being leveraged for the development of acreages and opening various avenues for local capacity opportunities.

In the circumstances, it has begun the licencing of the marginal fields so that local players in the industry will participate fully in the operations of the sector.

Experts have noted that one of the key objectives of the marginal fields licencing round is to promote indigenous participation in the petroleum sector and to foster technological transfer. The licensing round is exclusively intended for participation by indigenous companies. Indigenous companies indicate those firms that are duly registered to carry out exploration and production (E&P) operations in Nigeria with 100 per cent indigenous shareholding.

Critical stakeholders and watchers of developments in the nation’s oil sector are of the view that Nigeria’s marginal fields licensing rounds have been the cornerstone of the country’s upstream local content development strategy since the early 2000 and previous rounds gave birth to what is now strong local and regional African exploration and production (E&P) companies.

It should be noted that previous marginal fields licencing rounds had engendered the opportunity for local players to make a difference in a sector that had been hitherto dominated by international oil companies and international independents.

Marginal fields

In the Nigerian context, marginal fields are oilfields with reserves and production potential and are deemed marginal or insignificant because of certain considerations, which include being untapped for a period of over 10 years. Markedly, the marginal fields exist under current Oil Mining Leases (OMLs).

Could it be that they are regarded as insignificant simply because they account for less than five per cent of the country’s total production output?

An investor’s guide to Marginal Oil field acquisition prepared by the government indicates that Nigeria has an estimated 2.3 billion barrels of crude oil reserves in over 183 fields classified as marginal.

The majority of the fields were previously held by Shell, ExxonMobil, Chevron and Total, with estimated total resources on offer around 800 mmbbl oil and 4.5 tcf gas.

According to the DPR, only nine marginal fields are currently producing from the 30 fields awarded during the last bid rounds, while 11 operators lost their oil licences over failure to meet government’s criteria to keep the licences 15 years after they were awarded the franchise.

Responding to some of the concerns expressed at the early stage of the bid, DPR Director, Auwalu Sarki said fields that are under litigation were not included in the 57 fields being offered to investors.

According to the DPR guidelines, wholly-owned indigenous oil companies and investors with substantially Nigerian interest operating as oil exploration and production businesses would participate in the bid for 57 oil fields put up for auction.

Also, companies whose promoters are either indebted to the government, or currently holding oil assets not operated in a business-like manner would not be pre-qualified to participate in the bid.

Some of the main objectives of the marginal fields, the licencing round is to promote indigenous participation in the petroleum sector and to foster technological transfer. The licensing round is completely intended for participation by indigenous companies. That is, firms duly registered to carry out E&P operations in Nigeria with 100 per cent indigenous shareholding.

In managing the bid exercise, the DPR developed a transparent process flow through its published guideline otherwise known as the Guidelines for the Award and Operations of Marginal Fields in Nigeria, where it outlined the nine key steps involved in the round.

Sarki said the last bid round conducted in 2003 was fraught with litigations and other challenges, which hampered the development of some of the awarded 24 marginal oilfields, a situation that never benefited the country.

Though the current exercise is yet at the evaluation stage, Sarki expressed his optimism that the current exercise would not be encumbered by similar issues because of the processes put in place by the government.

The DPR boss said: “We have learnt from mistakes made in the past and have come up with workable solutions to ensure that the objective of the development of our marginal fields is achieved.

“This time around, our awardees will be credible investors with technical and financial capability.

“There is also the Post-general award condition. This deals with the transfer of interest post-award. It means awardees cannot transfer more than 49 per cent interest to another party post-award.

“The conditions also include termination of rights of interest holders which gives the minister the power to withdraw the interest of a party who fails to meet its obligations in terms of joint awardees.”

He noted that the DPR would reduce the years spent in courts over disputes that usually led to non-performance of the marginal fields, stating that the government would henceforth withdraw such awards.

He said: “We believe that these steps will bring about a sustainable development of our marginal fields.”

On the 2020 marginal field bid round, Sarki noted that the objective of the 2020 exercise was meant to deepen the participation of indigenous companies in the upstream segment and provide opportunities for technical and financial partnerships for investors.

According to him, the existing 16 marginal oil fields contribute two per cent to the national gas reserves and their operations have brought peace and development to host communities in the Niger Delta as well as numerous employment opportunities to indigent youths.

Due to the capital-intensive nature of oil and gas operations, and current liquidity constraints due to the crash of oil prices and the COVID-19 pandemic, it is very likely that existing and future Nigerian operators of marginal fields will be on the lookout for regional and international partners.

As such, direct and indirect participation of international players is possible within marginal fields sub-sector in Nigeria, be it under services or technical assistance contracts from technology providers or under capital injections from funds or private equity investors.

But what are the implications of the licencing round of marginal fields bid round? Again, the DPR director hinted that there is a carefully laid out process, including the negotiation of farm-out agreements with holders of the OMLs (Farmors) within which the marginal fields exist. The Farmors will be entitled to an over-riding royalty interest as well as a negotiated $/bbl tariff for hydrocarbons transportation/processing.

Recently, the DPR announced that it had shortlisted 161 successful companies to advance to the next and final stage of the bid round process for the 57 marginal oilfields.

Revealing this in Lagos, the Head, Public Affairs of the DPR, Paul Osu, said the firms were selected from the more than 600 companies that applied for pre-qualification.

Osu said: “The 2020 marginal oilfield bid round process is still ongoing in line with our published timelines on DPR’s website and bid portal. The current status is that 161 successful companies have been shortlisted to advance to the next and final stage of the process.”

He disclosed that the bid rounds began on June 1, with the DPR putting measures in place to ensure that the awardees would be credible investors with technical and financial capabilities.

Being the second marginal fields bid round to be conducted in Nigeria, aside from the transparent process emplaced by the industry regulator, the greater success of the exercise lay in the outcome of the Joint Operating Agreement (JOA), where more than one company bid for and is awarded a marginal field. The JOA is a condition precedent to the execution of the farm-out agreement that will be negotiated and executed by the parties to regulate their combined operations in the field.