Futility of marginal fields amid security challenges 

The award of 57 marginal oil fields to about 49 new investors in Abuja, the other day, failed to engender the appropriate enthusiasm of an upward shift in the battered sector; and this is hardly surprising considering that government has not addressed core problems of insecurity, pipeline vandalism and an uncertain business environment prevailing before now. In effect, the Federal Government appeared to have placed the cart before the horse in the new development. The good thing is that the negative can be turned into positive, if only President Muhammadu Buhari is ready and willing to do the needful.

Government last month awarded the new marginal fields during the issuance of the Petroleum Prospecting Licence to the successful awardees in the 2020 marginal field bid round. For the awardees, a major concern would be how to deal with pipeline losses and with the local communities alongside community issues. It is high time the Federal Government rose up to its responsibilities in securing lives and properties, thereby creating an environment for businesses to thrive. Awarding the licences will not solve Nigeria’s production challenges without addressing the lingering security issues.

The issue of oil theft and vandalism has clouded the celebration and enthusiasm of licensees and presents a risk for any investor partnering with the new marginal field owners. While the opportunities abound, the lingering environmental risk remains a challenge for potential operators. For previous marginal field owners like Tony Elumelu, the journey has been one best described as a roller coaster with different episodes of lamentation. This is because despite increased production from the oil wells, corresponding return on investment is at variance due to theft. For instance, the NUPRC stated that Nigeria is losing a daily average of 108,000 barrels in 2022. That is huge and unacceptable for a country borrowing for a living.

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 the way for indigenous players in the oil and gas sector.

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. After over 17 years of waiting, Nigerians are yet to see improved oil production, at least by 300,000 barrels from the abandoned fields.

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. The government revealed that 13 out of the 30 marginal fields awarded since 1999 were not producing crude oil, as only 17 of the fields were currently meeting the target of crude oil production. For several months running, Nigeria has been failing to meet its crude oil production quota approved by OPEC, a development that has further depleted the country’s revenue from oil.

The Chief Executive Officer, NUPRC, Gbenga Komolafe, confirmed the security concerns at the award ceremony. According to him, security should be improved in the Niger Delta, as this had been a challenge to not just the production of crude oil, but to the meaningful progress of the sector. He urged the new investors to hit the ground running in developing their awarded assets in line with industry best practices.

Hitting the ground running is no longer a guarantee of consistent seamless production. Production challenges in the form of rampant crude theft and sabotage of oil infrastructure, which have forced local producers to begin barging their oil, have compounded crude evacuation challenges. Between 2010 and 2020, marginal fields contributed 2.31 per cent of Nigeria’s total crude oil production, according to a report by the Nigerian National Petroleum Company.

It is worthy to note that of the over 600 companies that applied for the 57 marginal fields across land, swamp, and offshore areas, the eventual winners were a product of mergers. For marriages of convenience and circumstance, the odds are stacked against them already. Unlike previous rounds, gas was the priority rather than oil. Some have also raised concerns that the process was fraught with challenges as some bidders were unable to raise the financing to pay the signature bonus, which ranges from $5 million to $20 million. Despite the merger, some winners are already advocating that the regulator facilitates access to financing from lenders to develop the marginal fields. Finance remains a major challenge for operations in the oil and gas sector, especially for field development.

The opportunity is clear in that these marginal fields can be turned into valuable production assets – in particular for small indigenous oil and gas companies who have the requisite financial, technical and local capability. But will the government live up to its task of ensuring that these assets are profitable? Will the host communities welcome and accommodate the new investors? These are serious questions that need to be answered before any form of investment is embarked upon. No wonder many bidders developed cold feet and left. The Petroleum Industry Act largely settles key grey areas that have dragged oil majors’ investment decisions. However, insecurity among others, still threaten oil industry development.

Many oil majors are also already starting to divest legacy oil and gas assets as they target net-zero carbon emissions while hanging onto their most efficient and often largest oil projects. As the world looks to accelerate its transition away from fossil fuels, the pressures on Africa’s oil and gas producing nations are mounting. The marginal fields present another opportunity to leverage the current Russia-Ukraine crisis to ramp up production and improve Nigeria’s earnings. Achieving increased production and making the best use of the marginal fields is dependent on how intentional the government is about its ease of doing business.