Kachikwus marginal field bid seen unlikely as politics clouds outlook

More than 11 years after the last oil licensing rounds was held in Africa biggest oil producing country, investors’ and industry players hopes of having a marginal field bid rounds scheduled for 2018 may have being dashed as politics and regulatory challenges continues to obstruct growth in the sector.

There was a glimmer of hope and anxiety last year, when Minister of Petroleum for states, Ibe kachikwu announced that the Federal government is ready to conduct marginal fields bid round in 2018 as the regulators are only waiting for necessary government approvals before commencing the exercise.

Eight month down the line, with politics currently dominating the scene in Nigeria, investors and oil experts are sceptical if the marginal fields’ round will ever see the light of day in 2018.

Luqman Agboola head of infrastructure at Sofidam Capital Limited does not expect any successful bid happening in Nigeria until the next five years as the country needs to clear a backlog of mess that have occurred in the sector in time past.

“When you look at the market the feeling is that the money is not there so who will bid for those fields?” Agboola asked.

Agboola noted that having the main aim for having bidding rounds is to make money and allow efficiency because oil blocks have gone beyond political patronage which occurred in time past.

Marginal Field refers to an oil field that may not produce enough net income to make it worth developing at a given time. However; should technical or economic conditions change, such a field may become commercial field.

Ayodele Oni, energy partner at Bloomfield Law Practice said the government loses a huge amount of revenue daily by not conducting oil field bid rounds however this loss is not only accountable to the protraction in conducting a bid round but also because of other factors .

“Nigeria has lost more from non-producing marginal field licenses which it has estimated could cumulatively produce an average of 90,000 bpd of crude,” Oni, energy partner at Bloomfield Law Practice said.

Oni noted that some of the factors for non-producing marginal field ranges from inappropriate due diligence to technical or financial challenges therefore it’s pertinent that these challenges are addressed before conducting another bid round.

Ayodele Oni emphasised that a key indicator of having a bid round in 2018 would be the issuance of the bid round guidelines by the DPR, without which the likelihood of a bid round would only be speculative and unlikely. “As things stand, the earliest period will be 2019 in my view,” Oni said.

However, Abayomi Fawehinmi an energy analyst in a Lagos based oil firm still expect the marginal fields bid rounds to happen in 2018 irrespective of the country’s political environment now.

“Department of Petroleum Resources (DPR) are in charge of marginal fields bid rounds and largely they are remote from politics,” Fawehinmi told Businessday.

When BusinessDay contacted DPR, its head of public affairs Paul Osu said the scheduling of marginal bid rounds is not within the purview of the Department of Petroleum Resources as regulators.

“It is the responsibility of the Federal Government of Nigeria which is represented by the office of the Honourable Minister of Petroleum Resources,” Osu told BusinessDay.

Several attempts by BusinessDay through emails and phone calls to get the Ministry of Petroleum resources to comment on the marginal bid rounds proved abortive.

Now, more than three years into the administration of President Muhammadu Buhari who is also minister of petroleum resources, it remains uncertain when there will be a major licensing round or at least a marginal fields bid round in the industry, which is in desperate need of investments to snap out of doldrums.

By the provisions of the Petroleum (Amendment) Act of 1996 the president has the power to declare a field as a marginal field where a discovery has been made in such a field but it has been left unattended for 10 years.

According to the Petroleum (Amendment) Act 0f 1996, a field shall be construed as a marginal field, if; (i) a discovery has been made, (ii) the field remains unattended to for a period of up to 10 years from the date of discovery thereof, and (iii) the field is subsequently declared6 as a ‘marginal field’ by the President of the Federal Republic of Nigeria.

The last time marginal field bid round was held in Nigeria was during the administration of  former President Olusegun Obasanjo who conducted an oil licensing rounds in 2001  as 24 marginal fields  were awarded to 31 indigenous companies via a competitive bidding process.

“Past upstream licensing processes in Nigeria have fallen well short of best practices and failed to secure maximum value for the country’s assets. Discretionary decision-making and lack of openness drove down competition and returns to Nigeria, including over $2 billion in unpaid signature bonuses,” Nigerian Extractive Industries Transparency Initiative (NEITI) said in its 2016 report.

On November 28, 2013, the Federal Government announced a second marginal field bid round, inviting prospective Nigerian indigenous companies to bid for 31) marginal fields (comprising 16 onshore fields and 15 offshore fields).  Although they were marred by controversy as they suffered shortcomings.

“Past licensing rounds in Nigeria were not tied to any comprehensive asset development strategy or broader economic development plans. Objectives shifted from round to round, and some rounds had few longer-term goals at all,” NEITI said.

Data gathered from Department of Petroleum Resources (DPR) revealed only 9 marginal fields are currently producing from the 30 fields awarded during the last bid rounds.

The active fields according to DPR includes Egbaoma oil field, owned by Platform Petroleum Ltd; Ibigwe oil field  owned by Walter Smith Petroleum Ltd/Morris Petroleum Ltd; Uquo oil field owned by Frontier Oil Limited; Ajapa oil field owned by Brittania-U Ltd; Umusadege oil field owned by Midwestern Oil & Gas/ SunTrust oil & Gas Ltd; Ebendo oil field owned by Energia Limited/ Unipetrol Pet. Development company; Umusetti oil field owned by Pillar Oil Limited; Ebok oil field owned by Oriental Energy Resources Ltd, and Ogbelle oil field owned by  Niger Delta Petroleum limited.

“Perhaps owing to lack of experience and due to the fact that it was the first marginal field licensing round, some of the licensees entered into financial and technical arrangements with foreign partners without proper due diligence which, in turn, failed to bring some of the aspirations of the licensees to reality,” Bloomfield law Practice Investors Guide note on Marginal fields bid round said.

Bloomfield law Practice said  several of the agreements formalising the partnership were lopsided in favour of the foreign technical partners as many of the marginal fields owning Nigerian companies either did not engage the services of legal practitioners with expertise in negotiating such arrangements or did not engage legal practitioners at all until they found themselves in stormy waters.

“Failure to conduct proper commercial and technical due diligence exercises prior to submitting bids, together with the failure of the financiers to conduct proper due diligence on key contracts that underpin such capital intensive project(s) in order to ensure that risks are appropriately allocated and not weighted against the marginal field operator solely arguably played a role in the eventual abandonment of these marginal fields,” Bloomfield’s Investors Guide note on Marginal fields bid round said.

Despite volatility in the oil market and fluctuating pricing, operating a marginal field remains a lucrative business for major industry players.

“It is very important that the local awardee carries out extensive due diligence on its intending partner, on the level of their technical and financial ability, as this will in most cases determine the success of their venture,”  Bloomfield’s Investors Guide note said.

 

DIPO OLADEHINDE