Lessons from Nigeria’s 2020 marginal bid round

After many years without a licensing round, the 2020 marginal oilfield bid, already being closed out, offers the nation’s oil sector a glimpse into the future. KINGSLEY JEREMIAH takes a look at the process.

Before embarking on the 2020 marginal bid round, which was announced at a time Nigeria’s Petroleum Industry Act was in the pipeline, the country had waited 17 years without any oil and gas licensing round. This development, which was seen as part of the current challenges that the country is facing with oil production, received general condemnation as well as calls for the country to strengthen the process of awarding oil blocks.

Coming into force from the Petroleum Amendment Act of 1996 with the first licensing round in 2002, Marginal fields were developed to discourage the continuous holding of undeveloped fields by International Oil Companies (IOCs) and pave way for indigenous players in the oil and gas sector.

Initially, the nation had planned to earn about $14.1 billion (N4.314 trillion) from 300 million barrels of crude oil, targeting a daily earning of $4.23 million from an average of 90,000 barrels of oil per day. But inherent challenges in the award of the oil blocks where people without technical and financial capabilities got oil blocks as well as other prevailing challenges frustrated the projected objectives.

The last time the country awarded such a block in a bidding process was in 2002. Although an attempt was made in 2013, it was not until 2020 that the defunct Department of Petroleum Resources, now the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), announced the bidding process with 57 fields being put up for award. In the past 21 years, about 87 such fields have been developed, including the 57 currently being finalised by the Federal Government.

Sadly, of the 24 marginal fields awarded in the last round in 2002, just about 50 per cent achieved production, with the Federal Government having to revoke a number of the non-producing licences.

Although the announcement by the government for the 2020 bid round came at a time when the global oil sector was in turmoil due to the Covid-19 outbreak and worsening economic downturn, the need for the bid round remained critical given dwindling oil reserves and production in the country. It was also necessary as Nige
ria also needed to generate more revenue to finance the budget.

Recall that Nigeria had shortly after the 2003 bid round, said it would, in 10 years, boost crude oil reserves to 40 billion barrels and daily production to four million by 2020. However, instead of increasing, as of 2018, two years to the target, the reserves declined by a whopping 961.47 million barrels between 2012 and 2016 alone. According to the defunct DPR, the reserves, which stood at 37.200 billion in 2010, dropped to 36.247 billion in 2011. It was 37.139 billion in 2012 before it went down to 37.071 billion in 2013. In 2014, it stood at 37.448 billion, and later dropped to 37.062 billion in 2015 and remained at 37.453 billion in 2016.

While the clamour for licensing round was on, most stakeholders were vigorously canvassing improvement in the process of awarding oil blocks, insisting that discretionary award of oil licenses remained a basic issue that must not continue.

They were also insisting on the need for transparency, accountability and strategies that would block loopholes to ensure that government officials do not capitalise on weak regulations to influence the process.

Sadly, Nigeria has been in the eye of the storm since the award of Oil Prospecting Licence (OPL) 245 to Malabu Oil & Gas Limited which exposed the level of corruption in the award of oil blocks.

A report conducted by the Natural Resource Governance Institute (NRGI) in 2017, noted that the weakest link in the nation’s oil and gas industry, especially in terms of value addition, is in the area of licensing.

According to the report, only 30 per cent of the previously allocated oilfields (oil blocks) have reached commercial production.

The oilfields are performing below expectations because the awards are caught up in several court cases that question the objectivity of the licence award process.

However, the handling of the 2020 marginal oilfield bid round appeared to be a step toward the projected future licensing round in Nigeria’s extractive sector thanks to NUPRC.

With indications, it appeared that the NUPRC may be closing out on the 2020 marginal oilfield bid round in a manner that shows strict adherence to the rules guiding approvals and issuance of licences in the upstream sector of the nation’s oil and gas industry.

Although stakeholders are more interested in sustaining the efforts in the upstream segment considering the uncertainty of fossil fuel, the move by the Chief Executive Officer of the commission, Gbenga Komolafe, to ensure that law and due process were followed in the award of licences to operators could be an elixir.

Komolafe, who came into office on the backdrop of the PIA and after the fields had been awarded, noted that while a total of 665 entities expressed interests and 161 entities emerged as potential awardees, signature bonuses for 119 awards were fully paid, nine awards were partly paid for and 33 awards were not paid for.

This development, according to him, has resulted in various challenges inhibiting the close-out of the exercise, stressing that the marginal field guidelines provided for 45 days for the payment of the signature bonus, which has since elapsed.

He had insisted that the agency was doing everything possible to allay concerns and challenges facing the investors.

Komolafe had stated categorically that under his leadership, no marginal field operator would be allowed to “trade” in papers issued by the organisation.

He stated that the rule of law would be strictly followed in the issuance of final licences to the winners, stating that no amount of pressure will make the commission award final documents without due process.

“NUPRC management, on its assumption, set up a committee to look into issues surrounding the bid round and come up with strategies to resolve them. And some of these issues include the formation of SPVs, equity participation, and part payments.

“The committee has had engagements with some awardees and will progress with these meetings with another set of awardees slated for next week in Lagos.

“Furthermore, the commission, through the Alternative Dispute Resolution Centre (ADRC), offers an opportunity for co-awardees of marginal fields to resolve issues speedily and amicably,” he said.

The regulator equally noted that for fields whose Special Purpose Vehicles had been signed, there might not be any need for a farm-out agreement as implied in PIA 2021, as Komolafe noted that the commission would take necessary measures to assist the awardees to take over the assets for development and accelerated first oil.

The challenge the country has had over the years is that the wrong people are left in control of the nation’s key revenue sources even when they are without the needed technical and financial capacities. Attempts to ensure that the current licensing round ended on a good note without such tendency must be applauded, especially given the current state of the nation’s oil and gas sector.

In previous licensing rounds, the Chairman/Chief Executive Officer of International Energy Services Limited, Dr. Diran Fawibe, had told The Guardian that some “moneybags” with political influence still get oil blocks, even when they were not basically interested in investing in the long term.

The Nigerian oil sector, which is the country’s highest revenue and foreign exchange earner has been at a crossroad, a development, which must force the NUPRC to sustain the momentum on ensuring that the process of the licensing round is protected till the very end.

An energy economist at the University of Ibadan, Prof. Adeola Adenikinju, said while the process of licensing is being criticised, the 57 marginal fields would help increase Nigeria’s production, export and revenue.

Adenikinju maintained that the government needs all the revenue it could raise to pursue its developmental agenda, adding that NUPRC should continue to provide support and guidance for the newly marginal field operators to ensure that some of the past sources of friction that hindered performance were addressed.

“The use of alternative dispute resolution mechanisms to resolve some of the legal and contractual issues in the operation of the marginal field instead of the existing legal process would be quite helpful. Eventually, the passage of the Petroleum Industry Bill would be useful for the entire industry,” he said.

Chief Executive of Dutcheess Energy, Olatimbo Ayinde, had earlier watered down the impact of declining investment and decarbonisation, stressing that fossil fuels would remain for a longer time than projected.

“Hydrocarbons are here to stay for a while,” Ayinde said, adding “We have to be realistic, or have to change all the cars in Africa, for example. So, the demand will still be there.”

She noted that while alternative fuel is being considered, the country would leverage on gas, stressing that the huge gas in the country will provide a double-edged plan for the investors.

The provision of the marginal fields before the PIA did not consider fields by license holders for development because of assumed marginal economics under prevailing conditions.