Incentivising indigenous producers in oil, gas industry

The landscape of onshore exploration and production has shifted considerably in recent years. As IOCs move further towards deep-water developments, a new generation of Nigerian producers is taking over the onshore assets. The new operators have been greeted with eagerness by local and foreign investors, who appear keen to support emerging indigenous firms. The awarding of some 50 marginal blocks through discretionary allocations in the 1990s, another 24 through the sole marginal fields bidding round in 2003, and 60 more blocks through conventional bidding rounds in 2005 and 2007, have together handed control of over 100 blocks to Nigerian operators.

According to the Federal Ministry of Petroleum Resources, total local production was forecast to reach 300,000 bpd by 2015. However, the oil price environment has dealt a blow to the rising profile of some indigenous oil producers. Exploration drilling in Nigeria is close to the lowest in more than a decade because of shelved investment plans, according to the Petroleum Ministry.

“People are under-estimating the size of the hemorrhage going on” said Victor Eromosele, Board Secretary, Centre for Petroleum Information (CPI), at a forum organized by CPI during the last quarter of 2015. “The slide in crude oil prices since June 2014 means that Nigeria loses about N10 billion per day”, he added.

Now is the time for government to pay attention to independents and indigenous oil firms whose backward integration has the capability to lift the economy even on a nominal level. However, they cannot adequately contribute to the economy with a number of challenges they face which include security, inadequate funding, low reserves/crude characteristics, regulatory bottlenecks, dearth of indigenous expertise, non-partnership, old infrastructure, isolated and difficult field terrains/locations.

“Small oil companies, independents and indigenous, are gradually steering towards bankruptcy because of the spiral effects of low oil price, especially in meeting obligations for banking facilities accessed for funding exploration and production purposes”, according to an oil and gas expert.

In the midst of the difficult operating environment, Lekoil, an Africa focused oil and gas exploration and production company with interests in Nigeria and Namibia is raising the bar for the indigenous players. In less than 6 years since its emergence, Lekoil has made a lot of giant strides in the industry. On September 7, 2015, Lekoil announced first oil from the Otakikpo Marginal Field (“Otakikpo”) in oil mining lease (OML) 11 which is located on the shore line in the south-eastern part of the Niger Delta. Lekoil also acquired an indirect controlling interest in OPL 325, (located to the south of OPL 310 in the Dahomey Basin) offshore Nigeria in October 2015. In December 2015, Lekoil announced the acquisition of Afren plc’s entire 22.86 percent participating interest in OPL 310, which contains the Ogo discovery, for a total cash consideration of $13 million.

Two years ago, Newcross Petroleum Limited announced new oil discovery in its Efe oil field located in OPL 283 block. OPL 283 is in the Northern aspect of the Niger Delta. Formerly known as OML56, the block has a total size of 1272 sq. km, with a number of marginal fields within the boundary of the acreage. The Production Sharing Contract is assigned to Newcross Petroleum and Rayflosh Petroleum. The OPL 283 is under a Production Sharing Contract (PSC) with Nigeria National Petroleum Corporation (NNPC) (as the concessionaire), with the support of the corporation and the Department of Petroleum Resources (DPR).

“The success of Efe First is a confirmation of the support NNPC and DPR have expressed in newly emerging companies willing to significantly add to the national hydrocarbon reserves”, said Bashiru Idowu, Strategic Team Lead of New Cross Petroleum, adding that “the discovery represents an important step towards unlocking the deep potentials in OPL 283”.

In addition, Newcross acquired Shell Petroleum Development Company of Nigeria Limited’s (SPDC) 30 per cent stake in Oil Mining Lease (OML) 24 and other related facilities for $600 million. Total Exploration & Production Nigeria Limited and Nigerian Agip Oil Company Limited also assigned their 10 per cent and five per cent interest in the lease respectively to Newcross bringing their stake in the oil asset to 45 per cent.

“OML 24 produced on average around 40,000 barrels of oil equivalent per day (100%) during the first half of 2014,” a source from SPDC said at the time of divestment from the field adding that the divestment was part of the strategic review of SPDC’s onshore portfolio which is in line with the Federal Government of Nigeria’s aim of developing Nigerian companies in the country’s upstream oil and gas business.

Till date, Shell has divested from a couple of Oil Mining Leases (OMLs) in Nigeria which the Nigerian independents are currently pushing on. The divested assets include OML 4, 38 and 41. Others are OML 26, 42, 40, 34 and 30. The OMLs they divested from in the Eastern Niger Delta region are 26, 30, 34, 40, 42, 4, 41and 38.

There is no doubt that Nigeria’s oil and gas sector is witnessing dwindling fortunes and incentivizing the independents and indigenous oil producers can ameliorate the situation by leading to increase in national production and reserve volumes, commercialization of fallow/small sized assets, employment opportunities and indigenous capacity building.

The indigenous oil companies do have their own challenges which include security issues, inadequate funding, low reserves/crude characteristics, dearth of indigenous expertise, non-partnership, old infrastructure, isolated and difficult field terrains/locations.

The government should, however, ensure that regulatory bodies like the Department of Petroleum Resources (DPR) adopt measures that will address some of the challenges facing indigenous operator in the oil and gas sector so that they can contribute to providing long term domestic energy security to the country.

The government has a big role to play in tackling these challenges as a demonstration of its support for indigenous operators. Government needs to do more with regard to the safety of oil and gas infrastructure especially in the Niger Delta. In addition to this, tax waivers should be considered for the indigenous producers considering their huge capital outlay to bring in equipment from outside country, hiring of experienced manpower and other forms of payments which impede their growth. The difficulty with securing regulatory approvals from the Department of Petroleum Resources (DPR) for licenses, and from other regulatory agencies within the Ministry of Petroleum Resources should also be tackled by the government.

FRANK UZUEGBUNAM