Leveraging marginal fields for improved national reserves, local content

Nigeria’s marginal fields sub-sector has been the cornerstone of the country’s upstream local content development strategy since early 2000, and previous rounds gave birth to what are now strong local and regional African exploration and production (E&P) companies. 17 years after the last bid round, the Department of Petroleum Resources (DPR), recently completed the process with fewer complaints or litigation as against the norm. With the award party over, the real work begins as the goal to increase oil reserves and revenues must align with local content capacity building at a time oil majors are reviewing their portfolios ahead of energy transition. FEMI ADEKOYA writes.

The DPR, Nigeria’s oil industry regulator, last October, declared that the country is now aiming to increase its oil reserves, including condensates, substantially to 40 billion barrels by 2025.

DPR Director/Chief Executive Officer (CEO), Sarki Auwalu, said government would achieve its target through the expected upsurge in exploration programmes from the small, marginal fields and planned reform of the oil sector that would stimulate investment.

This is in addition to expanding the scope of local content development through technology transfer and skills acquisition, attendant job creation during the field development stage and multiplier effect in the host communities in terms of allied economic activities.

Nigeria crude reserves, which stood at 38 billion barrels in 2015, have been steadily declining over the past five years due to a combination of factors, including lack of funds, security challenges in the oil-producing Niger Delta region and uncertainty over the government’s oil sector reform that has stifled investment in new exploration programmes, industry analysts say.

“Nigeria’s target of 40 billion barrels oil/condensate reserve by 2025 is a realistic and achievable target,” Auwalu said.
“The policies and programmes being implemented by the federal government, including the ongoing bid rounds for marginal oil fields, reforms in the oil and gas sector are geared toward realising these aspirations,” he said. He added that Nigeria also aimed to increase its gas reserves to 210 trillion cubic feet (tcf) by 2025 and to 220 tcf by 2030.

Nigeria’s oil reserves were 36.8 billion barrels as of January 2020, a drop of 0.2 per cent from a year earlier, the DPR had said, with the country missing a target of growing reserves to 40 billion barrels as investment dries up, which was originally set for 2020, and later extended to 2023, and crude oil production to three million b/d.

Exactly one year after, the marginal fields bid round which began on June 1, 2020 culminated in the handing over of 57 marginal fields to 80 successful bidders by the DPR.

DPR’s CEO, Sarki, explained that the 57 marginal fields were located on land, swamp, and offshore terrains in various parts of the country. These onshore and near-shore fields contain an estimated one billion barrels of oil and near 5tcf of gas.

Understanding marginal fields
A marginal field is an oil field that has been discovered and left unattended for not less than 10 years from the date of its first discovery.

A major area of attraction to the bidders is the commercial viability of the marginal fields and where the best opportunities lie, which, in addition to the fiscal terms, will be a function of reservoir characteristics, proximity to infrastructure, capital and operating expenditure requirements, and production profile.

Without the Petroleum Industry Bill (PIB), the 1969 Petroleum Act, which the government depends upon, gives the petroleum minister what has been described as broad and subjective authority to award oil mining and prospecting licences. In past bid rounds, the use of discretionary power in the allocation of oil fields led to serious distortions and sub-optimal outcomes.

By the extant Petroleum laws, the President of the Federal Republic of Nigeria is empowered to designate any discovered oil fields abandoned or unattended by existing licence holders for a period of 10 years or more as a marginal field.

Once the asset is designated a marginal field, the delineated area is farmed out from the wider oil mining lease (OML), which effectively means the existing leaseholders cede these designated fields to the awardee of the marginal field.

Although the initial pre-qualification and subsequent submission of technical and commercial bids under the round were the exclusive preserve of indigenous companies, upon award of the fields, windows for foreign participation, up to a ceiling of 49 per cent ownership, are provided.

How fields were awarded
Auwalu explained that the awardee companies met all the conditions for the award out of the 161 that were shortlisted. When the bid round started last year, a total of 591 expressions of interest (EoIs) were submitted, out of which, 540 were successfully prequalified during phase one of the exercise.

According to the DPR boss, 2,482 bids were submitted by 405 applicants at the end of the phase. Following the evaluation of the bids, 161 companies were shortlisted as potential awardees, out of which 50 per cent met all conditions and therefore eligible for the award ceremony that was organised last Monday.

Auwalu explained that the award marked the end of the bid round process, which started on June 1, 2020, saying: “It also marks the beginning of the post-award phase, which is important.”

Commending the DPR for its handling of the process, former President of the Petroleum Technology Association of Nigeria (PETAN), and spokesman for the body of new marginal fields’ awardees, Bank Anthony Okoroafor, said: “Since 2003, this is the most transparent exercise carried out by the DPR. It was made open to everybody.

“Communication with all bidders was consistent, credible and sincere. And they did their homework very well. For the first time, you made a call to the DPR and they responded responsibly.

“I called several times and they were on hand to respond. That for me was the first thing that convinced me that this time, the agency truly meant to be fair and thorough. At the end of the exercise, that was what happened.” He added that if you called to play the usual ‘Nigerian factor card’ to influence the process, you were politely turned down.

“That was when I knew this was serious business. But they will call you to clarify issues where necessary. It was strictly formal and in line with laid down rules and processes. I was really impressed,” said Okoroafor.

But the journey, he stated further, is not yet complete. For him, the DPR has to reach out to the International Oil Companies (IOCs) to allow operators to produce with their facilities, since it is the most cost-effective option.

Furthermore, there is a need for the DPR to assist the awardees in farm-out agreement and ensure they are not suffocated with rules that will disrupt the awardees’ ability to run the assets within their limited capacity.

For any of the consortium to raise money for the administration of their assets, there is a need for a harmonised approach that will require that all are aligned with set rules and objectives.

For the former PETAN President, any erring or deviant consortium should be called to the table and concerns thrashed out. Responding to the prayers of the awardees, Auwalu said: “Let me assure you, we are not leaving you alone. We have reached an advanced stage on the farm-out agreement.” He added that the agency has been meeting with the leaseholders through the entire process to get it right this time, and “It’s taking time because each lease has its own peculiarities.”

Allaying the awardees’ concerns, Auwalu said: “As for the unitisation, we know the fields that straddle and we have worked on that already. Part of the reason why the signing of the farm-out agreement took time is the issue of politically exposed personalities (PEP), which the IOCs needed to do their checks. But you are all aware that we have done a thorough due diligence.”

He assured that DPR would not allow the original multinational owners of the leases to suffocate the indigenous awardees on the altar of the strangulating process.

Making the fields productive
Indeed, oil producers consider the PIB as the one piece of legislation that could overhaul Nigeria’s oil sector and spur much needed investment in Africa’s biggest oil industry. While oil majors were not a part of the marginal fields bid round, indigenous participants need collaborations from investors to finance field development and production.

In Nigeria, where fiscal and regulatory uncertainties remain a challenge, as game-challenging regulations like the PIB never made any progress for decades, funding challenges have been projected to compound prevailing problems, thereby limiting the capacity of investors to turn around fields.

A former President of Nigeria Association of Petroleum Explorationists (NAPE), Abiodun Adesanya, had linked challenges faced by marginal field developers to funding, stressing that government counterpart funding for some of the projects could also be a problem.

With the completion of the bids, the next stage is the execution of farm-out agreements between existing OML holders and designated recipients of the marginal fields.

This phase of the process, which involves negotiation of the farm-out agreements and the Joint Operating Agreement (where more than one party is awarded the same field), has a maximum of 90 days for completion; failing which, the DPR could undo the award.
A unitisation agreement is a condition precedent for approval of the farm-out for straddling fields.

Development challenges
While successful bidders can toast to the privilege of owning a marginal field, certain challenges lie ahead of the business.
Fiscally, attracting foreign capital may be difficult; because of prevailing market conditions in the global oil market; talking about low prices and oil glut.

The PIB currently before the National Assembly constitutes another hurdle. The document contains a number of provisions, which will impact the fiscal terms for the development of the fields, if or when enacted into law.

The PIB provides for payment of 30 per cent corporate income tax on upstream operations and replaces petroleum profit tax with a hydrocarbon tax at a rate of 50 per cent for onshore and shallow-water operations and 25 per cent for deep-water and frontier acreages.

It also provides for the requirement of payment of 2.5 per cent of the audited operating expenses by all operators into an endowment fund for the benefit of the host communities. Another itchy area to consider is the global agitation for renewable energy, which is fast taking attention away from fossil fuels.

In other words, bidders may not have it easy accessing the finance required to develop the assets once assigned; as international lenders continue to move their focus away from financing fossil fuels to renewables.

However, for asset owners with existing assets of good quality, sound financial track record and strong management team, there are international lenders willing to finance fossil fuel developments.

Also, the financial exposure of domestic lenders to local independents may inhibit their capacity to fund the marginal field acquisitions and subsequent development.

Unfortunately, new entrants without cash flow and a tested management team may encounter some issues finding local lenders. This is because the low debt capacity of such newcomers, due to a lack of proven reserves and cash flow, means equity issuance or technical and financing arrangements with service companies may be the available funding options until such fields have been appraised for development to attract debt funding.

As a result, the Chief Executive Officer of Platform Petroleum, Osa Owieadolor, argues that field development activity should take the primacy of place. “For marginal fields, you need to look beyond the signature bonuses… You want to come up with a low figure that is an incentive to encourage people to focus on the development costs. The awardee should not feel much pressure when it comes to the signing into the asset, that s/he loses clear line of sight to first oil. I think the signature bonus was overpriced.”

Despite these issues, Auwalu reiterated that DPR will continue to provide opportunities and enable the businesses of promoters and investors in the oil and gas industry for Nigeria’s economic growth, stability and sustainability, and for the mutual benefit of all investors and industry participants.

“Our licences, permits and approvals will continue to serve as stimulants for value addition and enablers of development,” he added. On the recently concluded marginal fields bid round, he said the Department is expecting an additional 100,000 barrels to be produced by 2024, even as more modular refineries spring up across the country.