Auctioning Marginal Fields amid Global Recession

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By AMOS IKE

The novel Coronavirus (COVID-19) pandemic has battered the global economic and caused a disruption in the international financial system. This article highlights the impact of the pandemic on plans by countries to undertake marginal fields’ bid rounds; the challenges and prospects of the auctions. 

Economies, the world over, have been impacted by the impact of the COVID-19, and this had been worsened by the declining prices of crude oil in the international market. Though the real impact of these twin mishaps was yet to be stated and felt, it is envisaged that economies would begin to see the impact when the dust settles and when the world gradually begins to open for business.
It has been projected that the envisaged economic gloom would affect every aspects of the economic life of a country, while the worst hit would be countries without adequate fiscal buffers. Though it appears that the oil and gas industry is the worst hit, with the dwindling prices of crude oil, low demand for crude oil and lack of facilities to store crude oil, stakeholders are unanimous in their views that the real impact of the crisis on the petroleum industry is yet to be felt.
It had been stated that a number of oil and gas projects would suffer; while most oil and gas companies are expected to cancel or cut down on their projects among others. Specifically, African Energy Chamber had few days ago, stated that while the immediate impact on the continent’s biggest oil and gas projects is already being felt, a much bigger impact would result from the deferral or cancelling of drilling plans. According to the Chamber, already, across oil and gas basins, drilling projects are being put back on the shelves or terminated, while Final Investment Decision (FID) on Shell’s Bonga South West Aparo project in Nigeria, for which the invitation to tender was released to contractors early last year, might also not see FID this year.

It also stated that delays in the execution or sanctioning of these projects were expected to severely impact African economies whose local goods and services were set to benefit from billions of dollars of subcontracting opportunities.
It said, “Similarly, the impacts of the current crisis are wide and affecting both Africa’s most promising exploration prospects, but also its multi-billion-dollar landmark projects such as BP and Kosmos Energy’s Greater Tortue Ahmeyim (GTA) LNG project in Mauritania and Senegal or ExxonMobil and Eni’s $30bn Rovuma LNG project in Mozambique. Oil projects are suffering even more.”

A major aspect of the petroleum industry that could suffer major setbacks is the planned marginal fields’ auction, as well as any attempt by African countries to conduct bid rounds for their hydrocarbon assets. It was reported that the Ministry of Petroleum Resources, had in April, gotten the approval of President Muhammadu Buhari for the fresh award of marginal field licences, however, the timeline for the auction was not stated and the number of fields to be awarded was not also stated.
 

COVID-19 and impacts on field auction
However, while the decision of the government to go ahead with the award is considered laudable, stakeholders are concerned that the current state of things in the global economy would negatively impact on the planned auction. Specifically, investors would be concerned about the state of the international crude oil and gas market, the ease of accessing funds to finance the acquisition, while the capacity of the investors to acquire and develop the fields within stipulated periods would also be a major factor.
 

Current status of existing marginal fields
The last marginal fields’ auction Nigeria conducted in 2003 had failed to achieve the desired results. The fields were awarded to indigenous investors, with majority of the awardees unable to develop them. Specifically, out of the 24 marginal fields awarded to 31 indigenous investors in 2003, according to analysts, only about 12 of the fields are operating. Going by the Department of Petroleum Resources (DPR), these producing fields are barely contributing 2.14 per cent to Nigeria’s crude oil production, as at 2018.
In 2013, the Federal Government had proposed conducting another bid rounds for 31 marginal oil fields, though the award failed to see the light of day. The then Petroleum Minister, Mrs. Diezani Alison-Madueke, stated that of the 31 fields, 16 of them were located onshore, while the remaining 15 were located in the continental shelf.
She had revealed that, of the

Mrs. Diezani Alison-Madueke

24 fields that were allocated in similar exercise a decade ago, eight were already producing

while the others were at various stages of development. Alison-Madueke had noted that the marginal field operators had also recorded huge discoveries in excess of 100 million barrels to the nation’s reserve base, adding that of the eight assets that had so far been divested by the International Oil Companies (IOC), at least four were held by active marginal field operators, who had continued to demonstrate remarkable technical ability in operating significantly larger assets.
Attractiveness of fields
Due to the fact that they are relatively small, major players are usually not attracted to marginal fields. In some cases, the fields are relinquished by the oil majors. However, the fields offer great opportunity for smaller independent African and non-African companies. In Nigeria’s 2003 marginal fields’ bid round, the 31 companies awarded the available fields, were awarded on the basis of sole operators and others as joint-ventures. It opened a number of opportunities for local and regional industry players while it contributed, though minimally, in increasing Nigeria’s oil output.

It also promoted indigenous participation in petroleum upstream activities. For companies like Oando, Waltersmith, Shoreline Energy, Seplat, Sahara Petroleum or Brittania-U, these fields represented important opportunities to farm-out some acreage from the majors and lead their own projects. However, there are a couple of lessons to be learned from Nigeria’s first marginal fields auction. According to energy experts, marginal fields are particularly attractive for smaller indigenous or regional companies that can operate well with smaller profit margins. These companies are also much more cash-strapped than the likes of ExxonMobil, Total or other IOCs, therefore need investment capital to develop their acreage.
In addition, it also informs that seeking capital in the local financial sector can be challenging, especially as Nigerian banks have been resistant to awarding credit lines to operators in this kind of project due to their experience from previous exposures. Away from the regular bank practice of issuing loans against equity or assets, reserve based lending was the order until recently. Sequel to bank’s exposure, loans have been difficult and that has delayed field development. This means that inviting foreign partners with access to capital becomes paramount.
Secondly, experts have pointed out the issue of legal clarity, especially as the Nigerian Petroleum Industry Bill, which in its many forms had been under discussion for over two decades, continues to create disruption and uncertainty in the industry and delaying new bidding rounds.
They are of the view that

if the current form of the bill is approved, marginal field operators are expected to receive significant cuts in taxes and royalties,

but that remains unclear for the time being.
 Low profit margins
From the foregoing, it is evident that marginal fields offer smaller profit margins; investors in the fields face difficulties in accessing funding, while legal clarity is crucial. All these challenges remain in the Nigerian petroleum space as well as in some other African countries. With the decline in crude oil prices, the margins available to investors in marginal fields had been further eroded, while getting markets for crude oil and gas from the assets would be a major challenge, especially with the huge supply overhang currently witnessed in the market. With the global economy facing serious financial, especially with the projection by multilateral and multinational financial institutions that the global economy would be plunged into a recession as a result of the COVID-19 pandemic, accessing funds to finance the purchase, exploration and production from these marginal oil and gas fields would be a major challenge for investors seeking to invest in these assets.
In addition, the pandemic had disrupted governance, the world over, especially in Nigeria, and it is highly unlikely that Nigeria’s PIB would be passed before the end of this year. In the legal aspect again, most of the companies awarded marginal fields in the last exercise, were

unable to commence exploration and production from the assets due to protracted legal issues.

Most of the companies instituted legal proceedings against their partners or against owners of other assets and these helped in no small measure in ensuring that the government did not achieve the desired objectives from the assets.
Furthermore, as Nigeria considers marginal fields award, mainly to boost its revenue in the wake of the global economy downturn, a number of constraints remain which might determine the success or failure of this exercise. Apart from Nigeria, with declining production and scarce investment, Angolan had put in place a number of new policies to reboot its oil industry and propel economic development, some of which included the marginal oil fields policy.
The government targeted what it already knew existed, the country’s multiple deposits of what has been dubbed marginal oil fields, which was expected to go on sale last year. Experts claimed that in the Angolan deep offshore, several of these prospects had been found over the years and dismissed in the pursuit of more profitable opportunities, adding, however, that in the wake of the lack of investment in exploration in the country over the last four years, these marginal reserves have become more relevant for Angola’s macro-economic outlook.

In May 2018, Angola’s government published a new framework specifically designed to promote investment in these areas.

According to the official text, the law considers marginal fields those discoveries with proven oil reserves of less than 300 million barrels (exceptions are considered for bigger reserves in particularly expensive working conditions), standing at or below 800 meters of water depth, that do not give returns to the state of more than US$10.5 cents per barrel, returns for the operator of no more than US$21 per barrel and that have an average return on investment after taxes of less than 15%. For those that fit these conditions, the government offers extensive tax and fiscal benefits,

as well as, easier conditions for cost recovery, in order to make those reserves commercial and promote their development.
 Factors hindering marginal fields
In his analysis of the marginal fields awards in Nigeria and across Africa, Professor Chijioke Nwaozuzu, petroleum policy expert and petroleum economist, noted that six factors had constrained the activities of marginal field operators, adding that the main factors relate to the lack of funding and the marginality of the fields.
Other factors, according to him, are:

Professor Chijioke Nwaozuzu,

inadequate technical expertise, government policies on royalties and petroleum taxes, board / partnership wrangling in some cases, and in other cases the presence of significant anti-entrepreneurial mentality

among the operators. He said, “Funding constraints are the main reason cited by the growing number of Nigerian exploration and production companies for inability to progress on projects, as well as the necessity to invite foreign technical partners.
“The need to invite foreign partners has become inevitable given that most local banks have not co-operated with marginal field operators in putting these fields into production. However, such invitations run contrary to the core moral concept and principles of the marginal fields’ licensing exercise.
“The original principle behind this exercise whereby the government took undeveloped discoveries, which has proven oil, from the oil majors and awarded these to local companies, was

to encourage indigenous capacity building in the upstream petroleum sector.

“The indigenous marginal field operators were expected to employ Nigerian geologists and petroleum engineers, acquire workstations for their use, utilize other local skills in field development (in the office and on operational site), put local talent on site to supervise well drilling and produce the oil, and in the event, increase the pool of technically capable oilfield personnel who can replicate the same exercise elsewhere in Nigeria and abroad. Therefore, to invite technical partners would mean that the country still has not ‘indigenized’ the development of these marginal oil assets.”
 Constraints
He added that, “The second constraint is the relative marginality of the fields. Of the six companies that have brought their marginal fields to production as at 2011, only Mid-Western Resources (partnering with Mart Resources) are producing sizeable volume of crude oil (about 8,700 bpd). This is followed by Brittania-U (producing about 2,300 bpd) and Energia (producing about 2,000 bpd). Pillar Oil was producing 100 bpd before the well watered-out.

“Some of these volumes can be quite discouraging for ambitious foreign E & P companies, considering the amount of investment required

to bring some of these fields into production.  Production from swampy / deep sea fields is usually higher than production from onshore fields. This is a critical issue that investors have to consider too.
“The third constraint is availability of local technical expertise. Undoubtedly, there exists abundance of local technical expertise, which has developed over a long period of time. This is so, considering that Nigeria has produced oil in commercial quantities since 1970 to date. However, most of them may not be available to work for marginal operators if they can earn more pay with established E & P companies. “It should also be acceptable to highlight the relative differential in quality between local technical expertise and the technical expertise available in Western countries. Consequently, the government is not averse to joint-ventures between marginal field operators and foreign technical partners, provided that the Local Content Act applies to board appointments, local employees, and inclusion of local contractors in the provision of goods / services needed for field development and production. “The fourth major constraint is government policy as regards royalties and taxes. New fiscal regimes have been proposed in the Petroleum Industry Bill (PIB). If the PIB is passed in its current form, operators will observe a significant reduction in applicable royalties and taxes. A reduction of about 30% in applicable royalties and petroleum taxes has been proposed, which makes it commercially attractive for small operators to develop these marginal fields very profitably. “The Bill also introduces a modern acreage management system with strict relinquishment guidelines,

which provides for oil companies operating in this country to relinquish acreages from existing oil prospecting licenses (OPLs) and oil mining leases (OMLs), except acreages that will be developed in the near future, or those that are currently in production. This policy is meant to discourage operators from sitting on acreages that otherwise will be available to other credible investors.”
 Fields’ status
In its report on the Nigerian marginal fields, one of the leading data analytics firm, Budgit, disclosed that there are about 178 marginal oil fields in Nigeria, noting that majority of the awarded fields were yet to begin production.
It said, “The following major issues contribute to the under-utilization of the marginal fields and its consequent minimal contribution to Nigeria’s oil revenue:

Discretionary decision-making, political interference and lack of transparency are the bane of the process

of awarding marginal oil fields. The Department for Petroleum Resources (DPR), the institution in charge of managing the exploration licenses, does not publicly provide the criteria for prequalification of awardees. This makes the entire process opaque. “Reports show that in the past many of the winning companies were closely associated to government officials. This factor alone significantly affects the field performance, as most of the awardees do not have the technical skills to exploit the skills. This is also the reason why most of the marginal fields are dormant.
“More so, there is no consistency or reliability in the bid process. The sudden suspension of the 2013/2014 bid rounds is an evidence of this. This again deters investment. Again, because the marginal fields are onshore, the production growth is greatly affected by infrastructure constraints resulting from attacks on the pipelines and oil theft in the Niger Delta.”
 Revoked licences
Because of these constraints and many more, a number of the marginal fields in Nigeria had been unable to produce a single barrel of crude oil or any quantity of gas, almost two decades since there they were given the acreages. This was why in April 2020, the Department of Petroleum Resources, said it has revoked the licenses of marginal fields awarded to 11 firms.

Mr. Paul Osu, Spokesperson for the DPR

According to the DPR, the revocation stems from their inability to meet the requirements stipulated by the Federal Government.

Spokesperson for the DPR, Mr. Paul Osu, who confirmed that the licences for the marginal oil fields had been revoked by the Federal Government, said: “These fields were allocated to the licensees since 2003 and the agreement the licensees had with the government on award of the fields to them was that the fields, after five years from the period of allocation, would be put into production. The licensees had always pleaded for extension of time and the government in its magnanimity continued to give them more time. “This is 15 years down the line. Has government not given them enough grace? None of the fields is producing as we speak. Remember that the marginal fields’ policy was government’s economic decision and action to stimulate the economy, increase reserves and most of all enable indigenous oil companies to participate in oil exploration and production. The government may put the fields on offer when carrying out another bid round.”
 The marginal fields’ licences that were revoked included: Ekeh field, Oil Mining Lease (OML) 88, operated by Movido Exploration and Production Limited; Ofa field in OML 30 and operated by Independent Energy Limited (IEL) with 67. 5 per cent equity, First Hydrocarbon Limited FHN 16.25 per cent and  Xenoil  16.25 per cent; and Tom Shot Bank (TSB) in OML 14, owned  by Associated Oil and Gas Services Limited. Another is Atala, located in OML 83. The Bayelsa State Government has 40 per cent equity in it while First Exploration and Production (40 per cent). Another one is Akepo in OML 90, owned by Sogenal Limited and Oando Energy Resources; Oriri field in OML 88, operated by Goland Petroleum Development Company and Ke, an onshore field located in OML 55 owned by Del Sigma Petroleum Limited.
The rest are: Ogedeh field in OML 90, operated by Bicta Energy; Ororo field in OML 95, owned by Guarantee Petroleum Limited and Owena Oil and Gas Limited; Dawes Island field, located in OML 54, operated by Eurafric Energy Limited; and Tsekelewu field in OML 40, owned by Sahara Energy and African Oil and Gas Limited in ratio of 70 per cent and 30 per cent equity holdings.

Success stories
However, in spite of the many woeful stories of majority of the marginal fields’ operators, Lekoil’s story had been positive and remained a beacon of hope for the industry. Since acquiring the Otakikpo field in 2003, the company has raised production to 6,000 barrels per day and is now planning to take production to 20,000 bpd. Speaking on the successes of the company, Chief Executive Officer of Lekoil, Mr. Lekan Akinyanmi, said, “We built the infrastructure from scratch, so a lot of companies who bought assets from an IOC already have the infrastructure there but this place was just swamp; we first started doing civil works, we had to sand fill the entire place, we worked with the communities, sorted everybody out and then we re-entered those wells and built everything from scratch.
“For evacuation, we built a six-kilometer pipeline that went underwater, so that there is a point where you connect and the shuttle tanker takes it to floating production storage and offloading (FPSO).” To achieve this feat, Lekoil said it collaborated with other partners,

Mr. Lekan Akinyanmi, Chief Executive Officer of Lekoil

took the company public, and installed corporate governance structure thereby increasing its chances of securing funding.

“But collaboration has also been difficult with some local operators. For many folks that have been awarded these fields, you see a mismatch between expectation and reality,” Akinyanmi said. However, speaking on the challenges faced, Akinyanmi said, “Some of the fields are truly marginal; they are quite small; it may not be as easy to develop them on their own unless they are part of a cluster. It means people have to collaborate more but in Nigeria we haven’t proven to be so good at working together.”
Another success story is Waltersmith Petroman Oil Limited. The company was incorporated in 1996 as a Joint Venture between Waltersmith & Associates Limited, a Nigerian company and Petroman Oil Limited of Calgary, Canada to operate as an petroleum exploration and production company. In 2001, Waltersmith Petroman Oil Limited became a wholly owned Nigerian company with the divestment of Petroman Oil Limited.
In 2003, the company participated in the Nigerian marginal oil field licensing round for indigenous companies and was awarded the Ibigwe field located in Oil Mining Lease (OML) 16 by the Federal Government of Nigeria. The award was secured on a joint interest basis, with Waltersmith holding 70% and Morris Petroleum Limited, 30%. In 2004, the Company executed a farm-out agreement with Shell Petroleum Development Company and its Joint Venture Partners including the Nigerian National Petroleum Corporation (NNPC) and effectively took over operatorship of the asset.
Over the years, the

company had made significant investments in the business and had set a target of achieving by 2026, 100,000 barrels per day (bpd)

crude oil plus condensate production; processing 50 million barrels per day crude oil plus condensate refinery; processing 500 million standard cubic feet per day (MMscf/d) gas primarily as fuel for power and the installation and supply of 1000 megawatts of electricity, including renewable.
In October 2018, Waltersmith performed the ground-breaking ceremony of its 5,000 barrels of oil per day (bopd) modular refinery and have already commenced work on the development of an additional 25,000 bopd.
Also, by January 2020, during his visit to the company, Minister of State for Petroleum Resources, Chief Timipre Sylva commended Waltersmith Petroman for its plans at promoting Nigerian content while driving fuel sufficiency in the country, with its 30 000 barrels per day modular refinery, being constructed at Ohaji/Egbema Local Government Area, Imo State.

Chief Timipre Sylva

The Minister had confirmed during his inspection tour that the refinery construction is currently at an advanced completion status of over 90 per cent. Another success story in the marginal fields programme is the Niger Delta Exploration and Production Plc, which have successfully

explored and commenced production on its oil fields and had successfully built and operated a modular refinery. However, despite the unimpressive performance of majority of the marginal fields and the successes recorded by a few, especially in Nigeria and a few African countries, as well as the global economic challenges,

experts are unanimous in their views that the marginal fields’ awards should proceed.

According to some of the analysts,

the marginal fields’ bid rounds would afford many African countries the opportunity to easily mobilize revenue that would not be easy to come by due to the downturn;

while some others are of the view that the award of the blocks would help the affected countries shore up their crude oil and gas production and mobilize much-needed foreign exchange revenue.

Going on with marginal fields auctions
Specifically, Program Coordinator of the Nigerian Natural Resource Charter (NNRC), Ms. Tengi George-Ikoli, stated that going ahead with its proposed marginal fields’ sale would make a significant contribution in helping Nigeria curtail the impact of the envisaged global economic downturn. She said, “As the COVID-19 health crisis persists, attempts to curb the spread of the disease continue to significantly affect global revenues and resources. The universal measures of social distancing, movement restrictions, lockdowns, though necessary to stem the spread and impact of the pandemic have on the other hand, contributed to slowing down the global economy. “Sustained low oil prices and price volatility has and is expected to continue to reflect negatively on the Nigerian economy, thus the need to adopt policies that sustain its revenues in the short to medium term while exploring long term options to drastically reduce over dependence on oil post-covid-19.

“The effects of the pandemic on the oil sector underscore the imperative to revisit the much advertised policy of economic diversification.

“While commending the Nigerian government on the steps taken to sustain the Nigerian economy through oil sector reforms; to deregulate the downstream sector, re-open bid rounds of marginal fields, cut the 2020 budget, contemplate privatization of the refineries and others, there are some additional interventions required to crystallize those policies and further support the Nigerian economy.
“Moving forward, all strategies must be sustainable, if Nigeria is to minimize the effects of the inevitable recession due to the falling oil prices, depreciating revenues, rising debt ratio and diminishing reserves. The recent OPEC + production cuts may be too little too late and so Nigeria must look internally for solutions and adopt interventions that take a longer term view.”

 Essence of PIB
On his part, Professor Nwaozuzu, maintained that despite the challenges encountered in the past, the future of marginal fields’ development looked promising. According to him, going forward, there are a number of financial, technical initiatives and government policies that would aid the process of marginal fields’ development, adding that the most important of these was the passage of the PIB. On the technical side, Nwaozuzu noted that operators would have to develop more effective reservoir management systems and synergistic facilities utilization in order to boost mutual profitability. In addition, he said, “Energy and petroleum academic centres in the country should be strengthened through funding by local industry players. This should enhance human capacity development needed in the industry and reduce the strong dependence on expensive expatriate personnel and skills. Presently, investment in marginal fields comes from JV, Debt and Equity financing, or a combination of these.

“There should be more effective mutual integration between operators and the local financial sector. Operators can form Special Purpose Vehicles (SPV) and tap into the international investment market as well.

They can also attract more capital expenditure (CAPEX) investment by aggregating or co-mingling proximal fields’ reserves in order to achieve critical volumes.” On the other hand, Nwaozuzu said, “Government has a crucial role to play in enhancing the profitability of these ventures. Government can revise the fiscal terms and make them more investor-friendly; suspend royalty payment for at least three years from commencement of production to eliminate front-loading of royalty payments and thereafter apply the sliding- scale method to royalty payments based on producibility; and provide tax holiday of 3 years by suspending VAT, import fees, education tax, among others. “The CBN can support the local banks in reviewing monetary terms for energy projects, and government can also establish Energy Bank, as separate from Bank of Industry, to enable local energy companies gain access to funds at globally competitive rates.”
From the foregoing, it is obvious that conducting bid rounds within the next couple of months for the award of marginal oil and gas fields would be negatively impacted by the envisaged global economic downturn brought about by the COVID-19 pandemic and to a large extent, the low price of crude oil in the international market. However, it has become expedient that the auction of the fields must be conducted irrespective of the unfavourable economic condition, especially going by the numerous advantages presented by the award to economies.

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