Leveraging optimisation clause to revamp dormant oil assets
With rising debts, the low-hanging fruit for the government is to sell its marginal fields and transfer assets of inactive fields to serious investors. FEMI ADEKOYA writes.
With a maximum crude oil production capacity of 2.5 million barrels per day, Nigeria ranks as Africa’s largest producer of oil and the sixth-largest oil-producing country in the world. But the country barely produces 75 per cent of the capacity even when there is no cap on its production by the cartel.
According to the Department of Petroleum Resources (DPR), out of 7,000 reservoirs in the country, operators in the oil and gas industry are currently utilising only 1,300 reservoirs.
“We cannot have 7000 reservoirs and we are only producing from 1,300. We cannot afford to stay with a 40 per cent recovery factor. We are also optimising the production to ensure that investors get a return on their investments while also reducing the cost of production,” DPR Director, Sarki Auawalu said.
To address the production gap, the DPR began the revocation of licenses of fields that have been left dormant in a bid to ensure that new operators optimise the facilities.
“We have to increase our production capacity so that we remain the net exporters because we believe this would guarantee and fortify the future,” Auwalu added.
He said the future is bright for the nation’s oil and gas industry, maintaining that only stronger political will, transparency, and accountability would guarantee a virile oil and gas sector.
“When we issue a license to create investments, we want that license to make investors profitable and with the new law, this is what we are set to achieve which is getting a good investment climate. If the oil and gas business is private sector-driven, you already know the future is assured. All the uncertainties that would come would be addressed by the bill,” he said.
The DPR boss stated that the passage of the bill would bring about clarity in the legal framework and would also attract investment both local and foreign into the sector.
With the Federal Government exploring all measures to fund its fiscal obligations, especially for new projects like the $2.8 billion Abuja-Kaduna-Kano (AKK) gasline project, regulators are beginning to explore extant rules and activating clauses to ensure that assets are productive.
To the DPR, inactive fields could be made productive and earn the country money in terms of royalty and taxes, when they are revoked and re-awarded to a more competent company.
This, when done, will help Nigeria out of the economic quagmire the country is facing which is affecting the implementation of some key projects.
Earlier in the year, the DPR revoked Chinese-owned Addax’s OML 123, 124, 126 and 137 noting that the company failed to develop the fields.
The agency said the move was in fulfilment of the Federal Government’s commitment to reactivating all moribund oil and gas support facilities across the country.
It then set up a committee to evaluate the revoked four oil mining licenses from Addax Petroleum Exploration Nigeria Limited to a new operator – Kaztech/Slavic Consortium.
The DPR also revoked the licences of 11 marginal field operators for non-performance, including Dawes island marginal field located in OPL2006, Okrika, Rivers State.
DPR justified the revocation of the field licence on the ground that nothing was done on the field from award of the licence till its revocation, adding that no field development plan was submitted for Dawes Island.
According to the DPR Director, the decision was taken in the best interest of the nation.
While other decisions remained, that of Addax was reversed as President Muhammadu Buhari restored ownership of the OMLs to the Nigerian National Petroleum Corporation (NNPC) and Addax Petroleum.
The NNPC operates the licences with Addax Petroleum via a production sharing contract.
According to a statement by Garba Mohammad, special adviser to the minister of State for Petroleum Resources, Timipre Sylva, the Minister, and Cui Jianchun, Chinese ambassador to Nigeria discussed avenues to maintain the alliance between Nigeria and China.
“The two top officials agreed on excellent relations that exist between their two countries and expressed the need to deepen partnership,” the statement read.
“Among other issues, they both agreed that the recent revocation of some OMLs held by Addax was purely a commercial decision and will not have any impact on the excellent relationship between the two countries.”
Sylva noted that Nigeria has a commercial partnership with China, adding that “we will open up more frontiers for a beneficial Sino-Nigerian trade alliance.”
Activating Drill or Drop clause in new PIB
To some operators, the unilateral revocation of oil licenses on the part of the Federal Government, before the expiration period and without any merit, is to all intents and purposes a breach of contract.
Such revocation further entails a confiscation of value, depriving the licensed operators their rights and benefits accruable to them in the course of their undertaking.
The government’s action in this regard, according to them, has increased licensees’ investment risk exposure in the sector. This is coupled with the fact that such infringes the statutory guaranteed and exclusive rights allocated to licensees under the requisite laws and regulations governing such matters.
The Federal Government will usually be inclined to annul subsisting oil licences as part of ongoing efforts to combat corruption in the oil and gas sector. It centres on expediency for the adoption of such an option, especially where beneficiary companies have failed or neglected to pay statutory application fees.
While the government’s revocation argument appears tenable, stakeholders have charged the Federal Government to enforce the drill or drop clause in the Petroleum Industry Bill (PIB) to avoid situations where oil assets are left idle without necessary contributions to the federation account.
According to them, this would help the country realise the accruable benefits from oil assets leased to operators, rather than such assets being left idle and dormant.
While speaking on the diminishing status of oil and gas in the global energy requirements in the next 20 years, industry professionals and advocacy groups are, in separate interviews, charging the Federal Government, federal lawmakers, interest groups, operators and other industry stakeholders to wrap-up the Petroleum Industry Bill (PIB) for presidential assent so that the country can have a new governing law that will improve investment, increase production, efficiency and transparency in Oil and Gas industry.
On the current controversy trailing the revocation of some marginal oil fields’ licenses by the Department of Petroleum Resources (DPR) and the petition to the House of Representatives Committee on Public Petition by Eurafric Energy Limited, one of the affected lease operators, Mr. Ademola Adigun, an oil sector governance reform expert, said that the issue has become a test case for the PIB, because the ‘Drill or Drop’ provision in the law will prevent process abuse and usurpation of regulatory responsibilities or powers.
Adigun decried a situation where oil companies sit on mining leases for years without getting them into production capacity as ‘wasteful and unproductive’ for a country that is facing severe revenue challenges.
“The country is under heavy borrowing to meet its developmental needs. So, the Nigerian government must do all it can to use the country’s oil and gas assets to build an economy of the future”, he added.
He said: “One of the greatest things that has happened, which is in the PIB, is the idea of ‘Drill or Drop’. We have had a history. I think the first attempt to Nigerianise the oil and gas sector was in 1990 when the Babangida government awarded oil blocks to some Nigerians who were thought to have financial capabilities to make the necessary investments. Of the award, only about three or four have been mined, that is Famfa, Conoil and some other two.
“Now, a lot of people get these licenses or win these bids then go sell it off. They sell it to those who lack capacity and the whole thing stalls and we suffer as a country. We have two problems in the sector right now; we have a declining take from the barrel and declining returns from crude. Now, we are limited to 1.45 million barrels a day by OPEC quota and unable to ramp up 2.1 million barrels per day.
“If the oil blocs lie fallow and people are not producing from them, we are losing revenue from the field, we are losing job creation opportunities, we are losing what should be the contribution to the GDP as well as field development fee. It is a whole basket of having something you cannot use. It is therefore better if you drop it for other companies with capacity to explore.
On what DPR must do to the new marginal fields awardees, who fail to get the blocs into production with a timeframe specified by the regulator, Adigun noted that the PIB has addressed that, adding that it is one of the reasons politicians and individuals with vested interests must put national interests above personal and sectional interests and allow the PIB to function after almost 20 years of the country’s struggle to get a more progressive law that addresses the problems facing the oil and gas industry.
The Immediate past Chairman, Society of Petroleum Engineers, Joe Nwakwe, said that there is a clear distinction between regulation and governance, calling for caution in a bid not to send a wrong signal to investors because of interference with regulation.
“I have not seen the comment by the House of Reps, what I suspect is that they may be pointing the DPR’s attention to the court case over the matter. But, it is clear that the Petroleum Act gives the power to award and revoke oil blocks to the Minister of Petroleum Resources and that power has been delegated to the DPR in this matter,” he said.
His view was corroborated by Adebayo Alamutu who maintained that the House of Representatives Committee on Petition may be doing more harm to the nation’s economy and reputation before the investors with its usurpation of power that does not belong to it.
“First, there is no controversy in this matter. The minister has delegated the power to award and revoke oil blocks to the DPR, which is the regulator. The DPR on the other hand has said that it revoked the Dawes oilfields from Eurafric, Tako and Petralon 54 JV over lack of competence and needless rendering of national assets unproductive for many years.
“Now it has, in the best interest of the country, awarded the oilfield to a company it considered competent to make the field viable by generating revenues for Nigeria, and the House of Representatives will now reverse this? It is not only against the dictates of the Petroleum Act, it is against development. It is so dangerous to what we preach as a country on division of power. It will be so scary for the investors,” he said.
Eurafric Energy Limited has however debunked claims regarding the revocation of the Dawes Island marginal field and the decision to award the same to Petralon 54.
Eurafric disclosed that there is no pending court case on this matter, nor is the delegation of authority an issue, adding it had produced over 62,000 barrels of crude at the time of the revocation.
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