A Review of the Nigerian Energy Industry

Nigeria’s Bonga field development: A fraudulent investment

11 November 2018, Sweetcrude, Port Harcourt — A production sharing contract is not a complex arrangement. It is simply a financing arrangement whereby the financier puts forward private equity to develop the assets of an owner/occupier who could not command the kind of cash put forward by the financier, with the understanding that the repayment of the financier’s private equity becomes a priority at the point the investment starts to yield income. This was the kind of contract the NNPC entered into to exploit the vast potentials of the Bonga Oilfield, an oilfield that occupies a seabed space of about 60 km2, lying 120 km off the coast of Nigeria’s Niger Delta. Discovered in 1993 with a projected production lifespan of 20 years, Bonga posed more challenges to Nigeria than cash. The idea of exploiting together all its assets estimated at about 600 million barrels of crude oil, including Bonga South West, discovered in 2001 and Bonga North, discovered in 2004 in a comprehensive and well-coordinated operation, was answerable, as experts advised by the installation of Floating, Production, Storage, and Offloading (FPSO) vessel. The Production Sharing Contract became necessary as Nigeria did not have the financial capacity to defray its own part of the $USD3.6B required to develop the oilfield and the FPSO platform.

Production Sharing Contracts are not new. Most railway systems, highways, airports and projects with heavy financial outlays are developed by production sharing contracts in public-private partnership arrangements. In order not to shortchange either partner, the project for the production sharing contract must have a defined and ascertainable budget, it must have projected timelines, the financier’s investment and projected earnings must be defined either in accordance with agreed timelines or a defined income target, all contingencies, including acts of God must be factored into the projections and most importantly, the production, supply, and invoicing chain must be transparent and available to both partners. It appears that the Bonga production sharing contract was fraudulently designed to benefit only the Shareholders of SNEPCO and the few government collaborators who are privileged to serve as the Inspectors and Monitors of the NNPC.

The Bonga FPSO has an installed production capacity of 225,000 barrels of crude oil per day; its recorded performance is average, 93% of installed capacity. Its storage capacity is two million barrels and is known to feed a shuttle tanker with about Seven Thousand Cubic Metres of Crude per hour or One Million Barrels per day. All these stats exclude the natural gas factor. With such production statistics, the ten year limit stipulated in the Bonga Production Sharing Contract in which Nigeria opted, wisely in my humble view, for a Cost Recovery regime known to that genre of contracts as First Tranche Recovery, Capped Cost Recovery, Simultaneous Profit Shares, against three other cost recovery models, Nigeria should have paid up its liabilities to SNEPCO and not only reversed the profit sharing ratio to 80% for the NNPC and 20% for SNEPCO but should have gone further to retain full ownership and control of the Bonga FPSO and its operations, a feature in the contract. Nigerian engineers demonstrated last year that they could revamp the complex web of pipelines, trees, and risers that feed the FPSO. Note that apart from Profit accruable to the country from production of oil and gas, Nigeria stood to make stupendous gains through Royalties, Bonus (that is, signature or production), Fees in form of Rental Fees as well as Taxes and Duties and Domestic Market Obligations, the aspect of the production quota that is released into the local supply market to meet local demands.

Between 2016 and 2017 SNEPCO proudly published production figures in which they claimed to have mined 702 million barrels of crude from the Bonga Oilfield. This, after Nigerian engineers operating on the platform, let it be known that SNEPCO had in 2010 celebrated its recovery of investment capital, cost of money invested and projected profit. It is a huge smear on a nation’s image that twenty-five long years after the discovery of the Bonga Oilfield and thirteen years after the commencement of robust operations with the FPSO, a multi-billion dollar investment has served and serviced the needs of foreigners and foreign capital. The Nigerian authorities are not worried that we still hold the short end (20%) of the profit sharing stick; that we are still hit yearly, quarterly and weekly by maintenance costs that pop up from the large store of the private investor’s avarice and imaginations. There is no doubt that for every new cost invented to undermine the country’s full earning potential with the Bonga FPSO, there is a gang of crooked Nigerian collaborators, whose personal interests override the country’s. And that is why the NNPC would continue to appear to a lot of informed Nigerians as USELESS and indeed INIMICAL to the development of Nigeria’s oil and gas industry. Would we be in this state with the Bonga Investment Folio if the NNPC had contracted a Blind Trust, say Arthur Andersen, Price Water House or Librands and Cooper to monitor the performance of the Bonga Production Sharing Contract for Nigeria?
More importantly, is it not time we demanded the publication of the accounts of the Bonga Oilfield? That is the least Nigerians expect from their government in a season where the demand for hydrocarbons is dwindling fast and when the Bonga Oilfield has only four productions years left.

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