Operation of marginal fields in Nigeria – an overview
Marginal Fields
The definition of a Marginal Field can be found in Paragraph 16A of the Petroleum (Amendment) Act of 1996 (“the Petroleum Act”) and the provisions of the Guidelines on farm-out and operation of Marginal Fields 2013 (“the Guidelines”).
The Petroleum Act defines a Marginal Field as “Such Fields as the President may from time to time identify as Marginal Fields”. This definition though ambiguous, vests the President with wide powers to designate any area as a Marginal Field. This also seems to imply that Marginal Fields are created from the President’s discretion.The Guidelines further defines a Marginal Field as “any Field that has reserves reported annually to the Department of Petroleum Resources (DPR) and has remained un-produced for a period of over 10 years”.
From the above definitions, while the Guidelines stipulates characteristics of fields that can qualify as Marginal Fields, subject to the approval of the President, the Petroleum Act grants the President powers to designate any area (irrespective of the set guidelines) as a Marginal Field.
The Objective of Marginal Fields
The Nigerian government introduced the Marginal Field program in 2001 with the objective of opening up the upstream sector of the industry to wider indigenous participation, with a view to creating a robust industrythat will positively impact the capacity of indigenous exploration & production companies to contribute to Nigeria’s oil production reserves. It can be said that the Marginal Field program was borne out of the government’s initiative to promote local participation of Nigerian oil and gas companies in the upstream sector.
The Guidelines provides that only indigenous oil and gas companies (“IOCs”) are allowed to apply for or operate Marginal Fields, however, these IOCs are permitted to have foreign technical partners with equity participation of not more than 40%.
Farming out Marginal Fields
The term “farm-out” under the Petroleum Act, means “an agreement between the holder of an OML and a third party to explore, prospect, win, work and carry away any petroleum encountered in a specified area during the validity of the lease”. By virtue of section 16 (1) of the Petroleum Act, the President and the holder of an Oil Mining License (“OML”) can farm-out an area as a Marginal Field to third parties.
The right accorded to the holder of an OML to farm-out a Marginal Field is subject to the consent of the President which is predicated upon the fulfilment of certain conditions which the President must also approve.
In other words, the President stipulates the terms and conditions that must be met before he gives his consent. It is rather disturbing that the precise approved conditions and terms are not stated in the Guidelines. It is our opinion, that this should be reviewed. The Guidelines provide that a Marginal Field Operator must have an interest in the farm-out and shall cease to be Operator if such interests terminates or expires. A Marginal Field Operator is the person, company, entity or trust responsible for the management and day-to-day operation of one or more crude oil and/or natural gas wells existing in a marginal field.
The President may also cause the farm-out of a Marginal Field if such field has been left unattended for a period of not more than 10 years from the date it was first discovered.
The President shall not give his consent to a farm out or cause a farm out unless he is satisfied;
a)That it is in the public interest to do so and in the case of a non- producing Field, that the Marginal Field has been left unattended for an unreasonable time usually more than 10 years
b)That the parties to the farm out of a Marginal Field are in all respect acceptable to the Federal Government of Nigeria.
However, it is quite clear that the Petroleum Act failed to define what exactly constitutes public interest in this context. If Marginal Fields are for IOCs, then the question is what could warrant the President to withhold his consent on the basis of public interest? We believe these are questions that beg for immediate answers; in whose interest could this consent be withheld, the Public or the President?
History of Marginal Fields in Nigeria
In 2003, twenty-four Marginal Fields were allocated to thirty-one (31) indigenous companies as part of the Marginal Fields licensing around. Suffice to mention that out of the 24 fields, Seven (7) are currently producing, contributing approximately 1% of Nigeria’s daily oil production. These companies include;
Brittania-U Group- The Company is the operator of a sole risk license in the Ajapa field (OML90), which was farmed out by ChevronTexaco. The field has a proven reserve of 6.69 million barrels(“BBL”) and maintains a daily production of 2,200barrel of oil per day (“BOPD”).
Platform Petroleum and New Cross Petroleum Limited – Platform is the Operator of a 60:40% joint venture (“JV”) with New Cross Petroleum Limited in the Egbaoma field (OML 38). The field has a proven reserve of 65.78 million BBL and daily production of 1800 BOPD.
➢Waltersmith Petroman Oil Limited & Morris Petroleum – Waltersmith operates the Ibigwe field (OML 56) in a 60:30:10 JV arrangement with Petroman Oil Limited and Morris Petroleum respectively. The field has a proven reserve of 2.9million BBL and a daily production of 3,700BOPD.
➢Midwestern Oil – Midwestern is the operator of the Umusadege field (OML 56) in a 70:30% strategic partnership with Suntrust Oil Company and Mart Energy. Midwestern was awarded 70% interest in this field, while Suntrust Oil Company and Mart Energy hold the remaining 30% interest.The field has a proven reserve of 49.86 million BBL and a daily production of 15,000 BOPD.
➢Pillar Oil – The Company operates the Umusati/Igbuku Marginal Field located in OML 56 under a sole risk license. The field has a proven reserve of 8.9million BBLs and a daily production of 2,700BOPD.
➢Frontier Oil – Frontier Oil is the operator of the Uquo field under a JV with Seven Energy. The field was farmed out from Total’s OML 56. The Uquo field has a proven reserve of 177.65 million BBLS and produces 35MMcf/d (Million Cubic Feet per Day).
➢Energia – The Company is the operator of the Ebondo/Obodeti Marginal Field under a 55:45% JV with Oando. The company’s estimated proven reserve is 7.96million BBL and the total daily production is 8500 BOPD.
The remaining companies are undergoing several challenges which are germane to Marginal Field operators. This will be discussed later on.
2013 Marginal FieldBid Round
Exactly a decade after the award of the first Marginal Field program, another licensing round was announced in 2013 with 31 fields on offer. Sixteen (16) of these fields are located onshore, while the remaining are located in the continental shelf.
Why Should Foreign Investors Invest In Marginal Field Assets?
1. Price Of Asset
African assets are on the average up to 5% cheaper than global assets. Nigerian assets are, however, offered at a significant discount to global assets. On average, assets are sold at up to 45% discount compared to global prices which make Nigerian assets among the most attractive investment options considering the huge upside potential on the reserve profile of each of the asset. The average valuation ranges of global oil and gas assets using the US$/2p reserve valuation are shown in the below table;
From the above table, the Former Soviet Union, the Middle East and Nigeria offer the cheapest oil and gas asset in the world.
For Marginal Field assets, the offer price is almost a giveaway. The license fee is flat across board for all participants. The asset is priced at $300,000 per asset while each field is valued at US$39.3million when estimated by 2p reserve of US$1.31.For example, Brittania-U was reported to have made a bid of US$ 1.6 Billion for Chevron’s OML 52,53 and 55 which are valued at around US$ 900 Million, according to average $/2p valuation.
2 Proximity To Already Existing Production Facilities
Some Marginal Fields are located close to existing infrastructures already built by the Original Farmors (IOCs). This relieves operators of the cost and burden of constructing production and processing facilities, laying pipelines and flow stations and putting in place other infrastructures necessary for production operation. The Table below shows the Marginal Field operators that are producing, the field of production and farmors:
3. Sole Ownership Of Asset
The Guidelines and the Petroleum Act creating Marginal Fields empowers operators to own assets at sole risk independent of the host government. This is not usually the practice in the industry going by way of OPEC’s membership policy, where the host government must have participatory interest in all mineral licenses either by way of a JV Agreement or Production Sharing Contract Agreement.
Note that Marginal Field operators are at liberty to enter into aJV with local companies or foreign companies to develop their respective assets. Where a local company enters a JV with a foreign company, the law requires the local company to retain a minimum of 51% ownership interest in the JV. It is important to note that this asset may be lost if value is not created from the asset within 24 months of the issuance of the license.
To further buttress this point, the passage of the Petroleum Industry Bill will ensure Marginal Field operators are issued separate licenses for each field of production. The aim of this provision is to the effect that the original farmors will be forced to relinquish their interest and proprietary rights in the field as farmors and hence will stop receiving rent from the operators.
The table below shows the JV of some Marginal Field operators:
4.Foreign Participation
The upstream sector is extremely capital intensive and requires sound technical expertise which most marginal operators lack. The law allows Marginal Field owners partner with foreign companies with the requisite technology, technical expertise and buoyant balance sheet to farm into their operations to develop their respective assets. The impact of foreign technical partnership in developing assets with Marginal Field owners has greatly contributed to the success stories of Marginal Fields that are producing.
Below is a list of Marginal Field operators and their foreign technical partners:
From the above table, it appears Canadian Independent oil and gas companies have found Marginal Field investment in Nigeria to be lucrative enough to attract their involvement and participation as JV partners or technical partners with local companies. Research has also revealed that out of the seven Marginal Fields that are currently producing, three have a farm-in contract with Canadian companies.Farm-in contracts are usually signed between two companies, the Farmor and the Farmee, where the Farmor is the owner of the acreage and the Farmee is willing to perform drilling and exploration in the acreage of the Farmor. While the rest are yet to produce, the most promising companies close to production are those with technical partners.
5 Tax Incentives
Whilst evaluation of the fiscal compliance and incentive arrangements in Nigeria is a critical pre-investment consideration, foreign investors in Marginal Field assets should equally be concerned with whether or not it is maximizing the available tax reliefs in this sector. The Nigerian Government has provided certain fiscal incentives to the benefit of foreign investors thereby securing avenues for the Government to further develop its Marginal Fields.
Marginal Field operations are to enjoy a 55% Petroleum Profits Tax rate on chargeable profit. The current rate of petroleum profits tax is 50% for operations in in the deep offshore and inland basin. While the rate is 85% for operations in the onshore and shallow waters) the law enabling the application of this rate is however yet to be promulgated. However, this uncertainty, as to the applicable tax regime to the Marginal Field operators, has somewhat necessitated the grant of pioneer status to some of the successful indigenous concession holders that participated in the first licensing round and who are producing. This could presumably be to provide some fiscal relief in the first 5 years of production.
Depending on the types of contract arrangement and water level of the acreage, the royalty rates for crude oil production range from 0% to 20%. Marginal Field operators enjoy reduced royalty rates of between 2.5% – 18.5%.
Conclusion
At the time of this report, the Federal Government’s plan to sell 31 Marginal Fields to indigenous operators may have stalled due to delays in the take-off of the process. The industry regulator, the Department of Petroleum Resources (“DPR”)has been forth coming in its willingness to update Nigerians on developments with the bid round. However, the financial challenges and technical capacity hindrances faced by the indigenous operators have, over the years,made some operators to act as fronts or proxies for foreign investors, who end up buying some stake in these assets. The amount of risks involved in developing these types of fields require certain investment layouts that are best taken on by foreign investors assuming the roles of technical partners via JVs. Such partnerships will put the foreign investors in a good position to handle such issues as insecurity, community relationships, and the foggy state of fiscal and non-fiscal provisions of the impending PIB, to name a few.
TOKUNBO ORIMOBI LP is a full-fledged commercial law firm with offices in Lagos, Ibadan and Abuja.
Tokunbo Orimobi LP