Regulatory approval remains an issue in Nigeria’s oil, gas operations

New investments in oil and gas operations have declined in recent times due to several factors ranging from high cost of production to falling oil prices. The feeble rise in oil prices in the last couple of weeks has not been convincing enough. In addition, insecurity in the Niger Delta and other uncertainties have equally discouraged fresh investments in the sector.

Despite all these encumbrances, getting regulatory approvals in the country has remained a tough call, especially considering the many layers of bureaucracy prospective investors must pass through.

The contracting cycle – from the period the contract is advertised to the period the contract is actually awarded, is about 12 to 18 months or even more. This long cycle, experts say, could affect the project economics.

Oil majors often begin contract award process well in advance of commencement of project, to ensure that all regulatory and contractual approvals are obtained before actual project execution.

In response to this challenge, and as part of the ongoing reform of the oil and gas industry, Ibe Kachikwu, Minister of State for Petroleum Resources, disclosed recently that the Federal Government plans to cut the contracting cycle in Nigeria’s oil and gas industry from its current stretch of two to four years to just six months.

“Long contracting cycle in the industry was responsible for the high cost per barrel of the crude oil produced by Nigeria compared to other OPEC countries”, said Kachikwu.

Delayed approval process

Multiplicity of agencies and bureaucracy are some of the challenges operators in Nigeria face in getting licences and contract approvals. They jostle from seeking ministerial consent to dealing with public servants at the regulatory agencies. This eventually delays approval process and impacts projects scheduled to kick off within a particular time frame.

A classic illustration is the $16 billion Egina project operated by Total E&P Nigeria Limited. The French oil major which controls 24 per cent stake in the concession located 150 kilometres off Nigeria’s coast, had complained at the early stages of the project that NNPC’s management was deliberately stalling on execution of the oil field development project.

To demonstrate how the NNPC dragged its feet over the project which is expected to add 200,000 barrels of oil per day to Nigeria’s production output, bid documents already issued to shortlisted companies for the construction of a new floating production, storage and offloading (FPSO) vessel, subsea umblicals, risers and flowlines and subsea production system were not approved several months after they were due.

Following the delay in securing approvals for several aspects of Egina project, the proposed commencement of oil production scheduled for 2015 could not be met. Till date, the project is yet to be completed. The delay has resulted in upward review of the project cost at various times as well as loss of revenue to Nigeria and Total E&P Nigeria Limited had the project been completed as planned. 

Another instance is the ongoing delay of “Ministerial Consent” of Lekoil’s participating interest of 17.14 percent and 22.86 percent in OPL 310 which it acquired from Afren Investments Oil and Gas Nigeria Limited (AIOGNL) through its subsidiary, Mayfair Assets and Trust (Mayfair). The deal was consented to with a written approval by Optimum Petroleum as required under the Joint Operating Agreement (JOA). Ministerial Consent was applied for the 17.14 percent interest in 2013. The Department of Petroleum Resources completed the customary due diligence process in 2014 and in 2016, Lekoil met with the Honorable Minister of Petroleum Resources to follow up on the 17.14 percent participating interest consent. The Minister agreed to review and approve all outstanding requests following a presentation by the Department of Petroleum Resources (DPR), which was scheduled for early March 2016. Sadly, the DPR presentation is still pending till date.

The application for Ministerial Consent on the 22.86 percent participating interest in OPL 310 has been submitted to the DPR since 2015. It was in 2016 that DPR began the due process of considering the application of the 22.86 percent participating interest for Ministerial Consent. As part of this process, a due diligence exercise on Lekoil by the DPR is yet to be scheduled.

“Delays in approval process could portend a huge loss to a company like Lekoil that has spent over $120 million to date on OPL 310 and funded the first $50 million towards drilling exploration well and side-track that resulted in the significant “Ogo” discovery – one of the largest in the world”, an industry experts said.

It is argued that with significantly large gas resource, OPL 310 is one of the most important discoveries in Nigeria, which could contribute to bridging Nigeria’s gas demand.

Encouraging local capacity rather than stifle their operations

Historically, upstream oil and gas activities were dominated by international oil companies (IOCs) in Nigeria. It was until recently that Nigeria began to witness upswing in indigenous involvement in upstream oil and gas activities. This was as a result of aggressive drive towards indigenous ownership in both the upstream and services segments through enactment of the Nigerian Content Act.

Despite the plethora of challenges facing Nigeria’s oil and gas sector, indigenous companies have recorded significant achievements in the areas of building local capacity and strengthening capability.

With the recent awakening of local content consciousness, encouraging growth of indigenous capacity in the oil sector will guarantee active participation of Nigerians in the sector’s activities without compromising standard. A nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. The economy benefits from having strong domestic competitors, aggressive home-based suppliers, and demanding local patrons.

As part of the strategy to develop the Nigerian oil and gas industry and empower indigenous operators, it is necessary for the Federal Government to take drastic measures to address the issue of delay in securing regulatory approvals. The government needs to demonstrate its commitment to reforming the industry by not only removing all bureaucratic encumbrances, but ensuring that the regulatory agencies are awake to their responsibilities going forward.     

FRANK UZUEGBUNAM