Marginal fields licensing round (2013): Current state, prospects & delays

Dr. Chijioke NwaozuzuDr. Chijioke Nwaozuzu

02 June 2014, Sweetcrude, Port Harcourt – It is already a well known fact that Nigeria has the largest oil and gas reserves in Africa, with an estimated 37 billion barrels of oil reserve base and about 187 trillion standard cubic feet of gas. Presently, over a thousand oil fields have been discovered since the mid 1950’s with only 35% in production. To increase the country’s production capacity, increase petroleum reserves, diversify petroleum production sources, and prevent waste, the Nigerian Government has since 2001 promoted the acquisition and licensing of marginal fields. Marginal fields licensing rounds in Nigeria evolved from the Petroleum Amendment Act of 1996, which introduced paragraph 16A into the First Schedule to the Petroleum Act. The amendment provided that the holder of an oil mining lease (OML) can farm- out any marginal field which lies within the OML. Under the amendment, the President of Nigeria has the right to farm-out a marginal field, which has not been produced for a period of not less than ten (10) years from the first date of discovery of the field.

What Constitutes a Marginal Field?
The 2013 Guidelines for marginal fields bid round retained the definition of a marginal field as contained in the Petroleum Act 1969 (as amended). Some of the characteristics of a marginal field include: fields not considered for development based on unfavorable fiscal and market conditions; fields in which only one exploratory well has been drilled due to high gas and low oil reserves ratio; and fields that have been abandoned by the leaseholders for more than three (3) years for operational or economic reasons.

Marginal fields are generally fields discovered by the foreign oil companies (i.e. FOCs) / national oil companies (NOCs) and which, owing to prioritized investment options, were either not developed or relinquished. These fields which hold relatively lesser production potentials for the oil majors represent promising investment opportunity for smaller local oil companies with streamlined operations. Norton Rose Fulbright reports suggest that the totality of these marginal fields may hold an estimated two billion barrels of oil reserves. For example, twenty-four (24) fields were awarded in the first licensing round for marginal fields in 2001, which exercise was completed in 2003. Since then, over 100 million barrels have been produced from these fields. Currently, eight (8) are still producing from these fields and averaging an aggregate gross production of around 27,200 barrels of oil per day and 35 million standard cubic feet per day of gas. Others may be in various stages of development. Calgary-based Mart Resources and Nigerian-based Oando Energy Resources are presently significant players in marginal field investments in Nigeria. A report obtained by Leadership Newspapers on the marginal field operations shows that seventeen (17) marginal fields are redundant after almost eleven (11) years after they were awarded. The report indicated that the owners of the redundant fields were afraid that the Department of Petroleum Resources (DPR) might withdraw their ownership of the blocks and re-award them in the 2013 bid round. However, on the balance, the introduction of bid rounds for marginal fields has been a welcome development.

Marginal fields licensing rounds is also an opportunity for small / medium scale FOCs to enhance their investment portfolio in Nigeria by partnering with successful bidders. The attractive risk /reward profile of investing in Nigeria include: the country’s numerous proven / undeveloped field opportunities; high quality of sweet crude oil produced; established infrastructure for transportation and export of oil; and incentive-based fiscal regime (including lower sliding-scale royalties and substantially reduced petroleum profit tax, PPT).

The government in awarding these marginal fields to indigenous operators in 2003 hoped to increase oil production by about 1 billion barrels. It is clear that some progress has been made in marginal fields’ development as 8 out of the 24 operators have taken their fields to first oil. However, more still needs to be done, and six factors have constrained the activities of marginal field operators. The main factors relate to the lack of funding and the marginality of the fields. Other factors are: inadequate technical expertise, board / partnership wrangling in some cases and in other cases the presence of significant anti-entrepreneurial mentality among the operators.

Funding constraints is the main reason cited by the marginal fields’ operators for inability to progress on projects, as well as the necessity to invite foreign technical partners. The need to invite foreign partners has become inevitable given that most local banks have not co-operated with marginal field operators in putting these fields into production. However, such invitations run contrary to the core moral concept and principles of the marginal fields’ licensing exercise. The original principle behind this exercise whereby the government took undeveloped discoveries, which has proven oil, from the oil majors and awarded these to local companies, was to encourage indigenous capacity building in the upstream petroleum sector. The indigenous marginal field operators were expected to employ Nigerian geologists and petroleum engineers, acquire workstations for their use, utilize other local skills in field development (in the office and on operational site), put local talent on site to supervise well drilling and produce the oil, and in the event, increase the pool of technically capable oilfield personnel who can replicate the same exercise elsewhere in Nigeria and abroad. Therefore, to invite technical partners would mean that the country still has not ‘indigenized’ the development of these marginal oil assets.

The Petroleum Minister provided some justifications for a continuation of the policy on marginal fields programme. Firstly, the Minister commended the efforts of indigenous upstream operators citing that marginal field operators currently account for about 1% of the nation’s petroleum production and that of the eight (8) oil assets that have so far been divested by the IOCs, at least four (4) are held by active marginal field operators who have continued to demonstrate remarkable technical ability in operating significantly larger assets. Secondly, the Minister stated that the successful awardees in the 2001 round have addressed corporate social responsibility as a critical element. Thirdly, the operators have adopted development and production strategies that are in line with the nation’s Gas Flare Policy as well as global environmental guidelines on Green House Gas (GHG) emissions by ensuring full utilization of associated gas. Based on these modest achievements by the marginal field operators, the Minister explained that the Federal Government was encouraged to kick-off the second marginal field licensing round in line with the objectives of the local content policy. However, in designing the modalities for the 2013 bid round the Minister of Petroleum, Mrs Deziani Alison-Madueke and the DPR decided to take into consideration the constraining factors that affected the 2003 bid round winners. These corrections aimed at enhancing the reputation and credibility of the marginal field programme were reflected in the eligibility criteria, evaluation criteria, and the general guidelines.

Eligibility & Evaluation Criteria
A total of thirty-one (31) fields were offered in the second licensing round, with sixteen (16) of these located onshore and fifteen (15) in the continental shelf. The Petroleum Minister encouraged companies wishing to participate in the bid round to form consortia that would enable them leverage upon one another’s strengths.

To be eligible, a company must be registered in Nigeria and at least 51% of the beneficial interest of the company must be owned by Nigerian citizens; no single shareholder may own more than 25% of the shares in the company; the company must have upstream oil and gas experience; and the company’s Memorandum and Articles of Incorporation must authorize the company to conduct oil & gas exploration and production activities.

In addition, foreign companies may participate in the process by either incorporating a Nigerian branch with the Corporate Affairs Commission in Nigeria along the lines stipulated in the above eligibility criteria, or may wish to enter into joint venture (JV) arrangements with one or more local Nigerian companies. Considering past experience with marginal fields bid winners, the Nigerian Government is favorably disposed to joint applications. DPR permits successful companies emerging from the bid round to engage with foreign financial and technical partners to jointly develop and produce the fields. The implication is that FOCs may decide to engage with the licensing process directly, or wait to engage with successful bidders.

A committee made up of representatives of DPR, leaseholders and external financial advisers are to assess the bid submissions with the objective of identifying those bids that are most likely to be successful in operating the marginal fields as well as further developing the Nigerian oil industry. Successful companies are to be notified and given further instructions on how to prepare and submit a more detailed technical and commercial bid.

The evaluation criteria includes: information on shareholding of Applicant Company; technical and managerial skills; ability to pay the signature bonus; compliance with provisions under the Nigerian Content Act; extent of compliance with local corporate social responsibility; and experience / technical ability in operating oil fields. A signature bonus of US$ 300,000 is to be paid per field. Payment is to be effected within 90 days from the date of award of a field. Given this elaborate set of criteria, it is unlikely that the exercise will be completed within a six- month timeframe.

Variations between the 2001 & 2013 Guidelines & Potentials for Delay
There were significant differences between both guidelines. Firstly, the 2001 guideline did not provide a timeframe for the completion of the licensing round, and indeed took around 24 months before completion. Contrarily, the 2013 guidelines stipulated a timeframe of six (6) months for the bid round, which may not be feasible in practical terms considering the robustness of the evaluation criteria.

Secondly, the stipulated signature bonus of US$ 300,000 in 2013 bid round represents a 100% increase from the 2001 licensing round which signature bonus was US$ 150,000. It is likely that the reason for this increase in the size of the signature bonus was to qualify candidates with significant financial muscle.

Thirdly, unlike the 2001 round external financial advisers were included in the selection committee under the 2013 guidelines. Perhaps, this inclusion was made to vet the financial capabilities of applicants and will likely result in significant delays to the bid process since some of the financial institutions are not based in Nigeria.

Fourthly, one of the newly included criteria for qualification in the 2013 round is the requirement of “25% maximum equity for shareholders within an applicant company”. Perhaps, this approach was based on past experiences with successful bidders in the 2001 round whereby some of them failed to carry out the development of their fields and still were reluctant to introduce new investors in the companies. The “25% equity provision” may have also been intended to resolve the twin issues of ownership disputes and non-alignment of interests.

Fifthly, the 2013 guidelines specified that successful bidders will be selected on the basis of the highest score using the evaluation criteria. The 2013 guidelines also stated that on completion of the bid evaluation process, the selection committee will make a recommendation to the Hon Minister of Petroleum and subsequently to the President. The 2001 guideline did not specify such recommendations, and this current provision will not only delay the selection process but may affect the public perception of transparency in the process. If this process of recommendation feeds into the politics of 2015 elections there may be further delays in the release of the list of successful applicants and a further undermining of the integrity and credibility of the process.

Enhancing the Credibility of the Marginal Fields Licensing Programme
Without a doubt, the marginal field licensing round will provide opportunities for indigenous companies who lack the capacity to purchase any of the oil blocks divested by the FOCs to form a consortium to bid for any or some of the marginal fields.

The methodology for the 2013 licensing rounds is aimed at correcting past mistakes. Firstly, the issue of technical partnerships has been given much attention because of the previous mismatch of partnerships which has led many of the 2001 awardees to end up in litigation with their technical partners. Most of them were engrossed in fighting in court instead of developing work plans and field development programmes.

Secondly, the 2013 bid round sought to address the issue of financing to ensure the bankability of marginal field projects. The basic approach to enhancing the bankability of these projects is to ensure that the return on investment (ROI) and the Net Present Value (NPV) of these fields are reassuring for banks and other financial institutions. Most marginal fields are relatively low in reserves, and so those fields that are contiguous (i.e. close to one another) should be brought together and synchronized to make them more bankable.

Thirdly, the reputation of this programme could also be enhanced by granting incentives (in the form of concessions) to performing awardees to enable them secure more fields while forcing non-performing awardees to relinquish their assets.

Baring the expected delays arising from the vetting of applications by external financial institutions and the likelihood that the upcoming politics of 2015 elections may affect the timing and outcome of the process, the marginal field development programme is still a positive idea.

It is expected that when the selection process for the 2013 bid round is completed, that operators may likely produce a minimum of 10 million barrels of oil (recoverable) out of every oil-in-place volumes of about 50-60 million barrels. However, with more diligent and resourceful work programmes, the recoverable could be raised to 30 million barrels.

*Dr Chijioke Nwaozuzu, a petroleum policy expert wrote from the Emerald Energy Institute, University of Port Harcourt. Email: Tel: +234-70 6874 3617 (SMS Only).

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