19 May 2014, Lagos – There is no better demonstration of how Nigerians suffer unduly on account of the padding of project costs by the International Oil Companies, IOCs, operating in the country than in the sudden request by the Nigerian unit of French oil giant, Total for a review of its Ofon 2 project.
Total Exploration & Production Nigeria, TEPN, Financial Vanguard reliably gathered, is seeking additional $3.78billion to an existing $2.85billion originally proposed for the project. If approved, this will bring total costs for the project to $6.63billion, representing a whopping 132.6 per cent increase, a development that is giving the Nigerian National Petroleum Corporation, NNPC, a majority partner in the Joint Venture, JV, grave concerns.
While cost padding is not peculiar to Total, as it cuts across all the multinational operators, this particular review stands out as the price of crude per barrel is being estimated above the $77.5per barrel being proposed by the Federal Government in the 2014 national budget; thus making Ofon 2 the most expensive project in Nigeria today.
Since November 2008, when the project was approved, Total has reviewed the costs twice, even as the project which should have been delivered in 2011 is still faced with a number of issues.
The Ofon field is located in the Oil Mining Lease, OML 102, offshore Nigeria, in 40 metres water depth and is a Joint Venture development of the NNPC (60%) and Total E&P (40%). According to Total, “The main objectives of the Ofon Phase 2 project are to monetize the gas, develop additional reserves of oil and gas and drill 24 additional production and water injection wells in 2015.
“When completed, 106 million standard cubic feet (scf) of gas per day will be sent to the domestic gas market thereby boosting the Government’s aspirations on power.
“The new project will also add approximately 40,000 barrels of oil per day to Nigeria’s production.”
Ironically, the National Petroleum Investment Management Services, NAPIMS, the investment arm of the NNPC, had in October 2010, declared the project of “no value to the Federal Government of Nigeria.”
Financial Vanguard also gathered that NAPIMS had rejected the initial expenditure estimates for the project on the grounds that it was “too expensive” but Total had used its influence at the Presidency and the Ministry of Petroleum Resources “to get it approved at over $1billion above the original estimates.” This is also a common practice among oil majors. Lending credence to this, NAPIMS in its economic analysis of the project in a memo dated August 9, 2010, with reference number; NAP/PL/01.04 exclusively obtained by Vanguard, concluded after its review of the estimates that: “… the economics of the project based on the updated FDP (Field Development Plan) is not robust and adds no value to the Federal Government of Nigeria.”
It added that “On the basis of the above, the updated FDP request should not be granted until a meeting is held between NAPIMS and TEPNG (Total) to review the project with the objective of improving its economic viability.”
NAPIMS apparently based its conclusion against the backdrop of initial capital expenditure (CAPEX) estimates of $2,784MM contained in the FDP of November 2008, but which was reviewed by Total in August 2010, to bring CAPEX costs to $5,476MM.
Even two years after, NAPIMS continued to express concern over escalating costs for Ofon 2, as in another memo dated January 24, 2012 with same reference, which acknowledged that “an updated FDP was received in 2011 December for the review with CAPEX of $5,270MM.”
However, in its economic analysis of the new estimates for Ofon 2, which included “the three CAPEX scenarios of the approved FDP and the new scenario as proposed in December 2011,” NAPIMS reiterated the unviability of the project.
It maintained: “…the economics of the project based on the updated FDP is not robust and adds little value ($48MM) to the Federal Government of Nigeria at the most pessimistic crude of $50/bbl and could be as high as $2,690MM in a $100/bbl regime.”
NAPIMS therefore, requested that “Specific attention should be given to the possibility of CAPEX over-run, as a 20 per cent overrun could threaten the entire viability of this project which could only be remediated by an upside price regime of about $80 and above.”
New costs estimates
No doubt, the fact that it was able to get approvals over and above the NNPC for the first and field plans, may have spurred Total to seek the additional $3.78billion, which is already generating a lot of furore in the industry. Total in a presentation on the Modified Carry Agreement, MCA on Ofon 2 to the NNPC in February 2014 to defend its latest request noted that “NNPC reserves the right to reject any EPC (Engineering Procurement and Construction) contract award cost or firm contract cost that it deems unreasonable over and above the initially used best estimate cost.”
But industry watchers are concerned about the impact of the escalating costs on the common Nigerians, who are deprived of basic social infrastructure such as schools, roads, pipe-borne water, electricity, hospitals, housing to mention just a few.
In fact, under the 2014 budget proposals, the additional $3.78 billion or N604.8billion at an exchange rate of $1 to N160 being requested by Total, could confidently fund entire Health (N493.46billion); Power (N62.45billion); Water (N38.38 billion) budget proposals and even part of the Housing (N18.51billion) estimates.
Contractors are to blame
But Total in response to Financial Vanguard’s enquiry blamed contractors handling various arms of the Ofon 2 project for the steep cost escalations.
The explanation came as Total recently reported a 10 per cent drop in first-quarter net profit and a drop in oil and gas output in its global operations on Wednesday.
It attributed output drop by 1.5 per cent in Libya and Nigeria, to “security issues” even as it expected to deliver the “Ofon Phase 2 in Nigeria in the second half of the year.”
The Ofon Field Development Project Phase 2 was launched in 2007, to enhance production from the mature Ofon field. Under the original agreement, Ofon should have gone into production in 2011, but the oil company did not award most of the contracts until 2011.
According to Total, the financing agreement put in place with the NNPC in 2008, was below $3 billion. A Ministry source revealed that “…the first thing their (Total) new MD did on assumption of office was to ask for additional billions of dollars more, even when they have not yet delivered on the project.”
Financial Vanguard gathered that the development is not only peculiar to Total, as this is a common practice with all the international oil companies, IOCs, who go for approval for additional costs for their s JV projects over and above the NNPC, the majority partner. The source added that this practice has considerably weakened the power of the NNPC to checkmate the excesses of the foreign oil companies, saying, “This is a country where any top manager of an IOC can easily have access to the Presidency to get whatever they want. So even if the NNPC refuses, it’s only a matter of time before they get what they want.”
Cost is still under review
However, a spokesman for TENP, Mr. Charles Ogan, in an email response to Vanguard’s enquiry, dismissed the allegations, saying, “All these numbers are totally incorrect.”
The numbers he referred to were deliberately inflated in order to get prompt response, as it is a common practice by the IOCs not to respond to issues relating to production and costs.
According to Ogan, “Neither NNPC nor Total has any commercial or pecuniary interest in having higher costs as such expenses decreases the revenues of the joint venture.”
But he could not give further details on the cost because, “NNPC and Total are still reviewing the final costs and we are therefore unable to comment further on this matter until the necessary agreements and approvals are given by the joint venture partners.”
The NNPC could also not comment officially on the issue, but Ogan noted that Total as the operator of the JV usually presented “all cost proposals, projects and other JV expenditure to NNPC for approval and are monitored audited and expenditure finally approved by NNPC and/or other partners.”
He added that “the joint venture accounts are also audited by NEITI and other stakeholders,” while pointing out that “royalties and taxes payable on joint venture production is over 85 per cent and that NNPC receives its 60 per cent share of any profits paid after payment of royalties and taxes.”
Nigerians pay 60% of costs
But what Ogan failed to note in his explanations is that Nigerians bear 60 per cent of the burden of whatever costs are incurred by the JV, and as such, the impact of the costs is more on Government than the IOCs. Furthermore, the 60 per cent profit the NNPC gets is net after costs, as such, the 85 per cent royalties and taxes would have been removed before profit sharing. As such, NNPC, as the 60 per cent equity partner, also pays 60 per cent of the 85 per cent costs, which government pays from taxes paid by Nigerians. Recall that rising costs was one of the reasons that the Federal Government, during the President Olusegun Obasanjo’s regime sought to review the sharing formula, saying that operators could no longer take 100 per cent of costs before sharing profit, as there was very little left afterwards.
Rising costs and sharing formula is also behind the industry reforms, which started during the Obasanjo regime, culminating in the Petroleum Industry Bill, PIB, still before the National Assembly more than 10 years after.
While awaiting the passage of the PIB, the NNPC has become stricter in its budget approvals in order to cut down costs, even in the face of delayed project cycles to get the IOCs to be more prudent in their proposals. Indeed, Total’s Chief Executive Officer, Mr. Christophe de Margerie, in an interview with Bloomberg TV in January, had also complained that “Costs are becoming too high.”
He had noted that “Our industry is facing a huge amount of cost pressure. More is being spent to produce less. Our clients are seeing the rate of return on capital dropping and they’re being challenged by investors who want them to be more disciplined.”
With regard to the delay in delivery, Ogan said this was as a result of a protracted court case. He said that “as a result of a court injunction put in place by an aggrieved party, no work took place for four years, which meant that the project that should have gone into production in 2011, did not award most of the contracts till 2011.
“This delay and the upswing in contractor pricing meant that the cost of the project has increased.”
He insisted that the project had advanced substantially, as the following had been completed: The living quarters platform, substantially built in Nigeria was installed in December 2013, the new production topside platform (OFP 2) with a weight of 16,000 tons was installed on January 07, 2014. The two bridges linking the existing production platform (OFP1) to the new production platform (OFP2) and the new OFP2 to the living quarters platform, were installed on April 07, 2014. All new pipelines, including the new 70km gas export line, were laid by April 25, 2014.
Contractors for the project
Total, which blamed contractors for the escalating costs, did not identify them. However, Offshore-technology.com listed some of the contractors for the Ofon 2 project to include:
Technip – a turnkey contract for supplying topsides of the Ofon 2 fixed platform (OFP2), in May 2007. The scope of works will include load-out and transportation of the 16,000t topsides from South Korea to the field, engineering, supply and installation of the equipment through Unideck floatover method.
Nigerdock, an engineering and construction firm in Nigeria, started construction of the Ofon 2 platforms in March 2012. In October 2011, Saipem was awarded the contract to provide EPC, fabrication and installation of the OFP2 jacket and living quarter platform for phase 2. Fabrication of the 900m, 1,970t jacket and 4,500t piles will take place in Rumuolumeni Yard in Port Harcourt, Nigeria. The vessel, Saipem 3000, will provide offshore activities when the project comes on line.
The EPC and commissioning contract for the phase 2 was awarded to Eiffage Construction Métallique, in November 2011.
The value of the contract is $424m. Aveon Offshore was awarded a $50m contract to fabricate OFQ jacket, helideck, utility deck and piles for the LQ platform, in December 2011. The subsea systems are expected to be installed in March 2013.
Sofresid and OOPE are the engineering consultants. Akmos Global Services is the spare parts supplier for platform maintenance.
A consortium of Actemium Oil & Gas Engineering (AOGE) and Yokogawa was selected for providing the detailed engineering, functional analysis, HIPS detail studies, instrument database management, supply of machines vibration monitoring system and electrical network power shading 5,000 I/O, and Nexans will provide Halogen-free thermoset compound SHF2 or XLPE low smoke PVC outer sheath to reduce gas flaring.
Total listed some new facilities to be added to the existing complex to include a new processing platform; two new bridges to link the production facilities; two well head platforms; a living quarters platform to accommodate about 124 people; a 70- kilometre 12-inch gas export line; 40 kilometres of infield lines and cables linking the well heads to the central complex; 24 new wells. Total also noted that the project “has been a tremendous technical and technological offshore undertaking with substantial Nigerian content designed to maximize revenue for the joint venture and the Federal Government.”
– Clara Nwachukwu, Vanguard