Delay, funding may hamper marginal fields sale DPR stalling, yet to commence bid process

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1 Patrick O. Okigbo III, Principal Partner of Nextier is quoted extensively in Sweetcrude - a publication of Vanguard Newspapers - on the proposed sale of Marginal Oil Field. He posits that without a transparent sales process, the marginal fields will not deliver any of the objectives of the sale. There is nothing in the process that indicates that it will be transparent. Delay, funding may hamper marginal fields sale DPR stalling, yet to commence bid process BY MICHAEL EBOH & SEBASTINE OBASI Federal Government s plan to sell 31 marginal fields to indigenous operators may be threatened by the delay in the takeoff of the process. This has thrown up a number of questions and uncertainties, especially with regard to the ability of the sales to lead to meaningful improvement in the fortunes of the marginal fields segment of the Nigerian petroleum sector. Furthermore, as at the time of this report, industry regulator, the Department of Petroleum Resources, DPR, seems rather unwilling to update Nigerians on developments with the bid round, thus, giving rise to speculations as to its commitment to ensuring transparent sale. Earlier timeline provided by DPR indicated that the bid rounds would commence in December and be concluded by March 2014, while the winners are to be announced April. However, with less than a few days to the end of March, nothing has been heard from the regulator about the process, apart from the series of road shows that were held December Several attempts by Sweetcrude through several s and reminders to get the Department to comment on the subject proved abortive, even as sources within insist that the process is progressing as scheduled, without further details. But DPR s silence is being misinterpreted in some circles, particularly among those who believe that the delay is an attempt to manipulate the process. Contending issues Other outstanding issues such as the viability of the fields and the financial capability of indigenous operators seem not to be helping matters. Page 1 of 1 March 04, 2014

2 True to character, one of the industry s workers unions, the Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN, suspects the process is being influenced by the powers that be. PENGASSAN General Secretary, Mr. Bayo Olowoshile told Sweetcrude, The fact that only eight out of the 27 marginal fields allocated since 2003 to indigenous investors are operating and barely contributing about 27,700 barrels of oil per day. This is about 2.5 per cent of Nigeria s crude oil production and about 35 million standard cubic feet per day of gas, make the 31 oil fields at stake to be less attractive, He also noted that a number of the indigenous investors are financially handicapped and may not be able to pool the necessary resources to fund the acquisition. According to him, the financial challenges faced by the indigenous operators have, over the years, made operators to act as fronts or proxy for foreign investors, who end up buying the assets. He said, In reality, the indigenous investors are still far from pooling that resources for the oil and gas business, and as such, most of them act as fronts or proxy for the real foreign owners, who truly buy the asset and pay commissions to indigenous owners. Even though bidding is believed to be influenced by the powers that be, the current challenge is funding the bids, paying the signature bonuses and financing the exploration and production processes. Continuing, Olowoshile said, Oil production is highly technical and capital intensive. And it goes with a lot of risks, especially as it affects the investment layout. More so, access to the colossal amount of funds required for oil and gas business is becoming a big challenge going by the difficult environment that Nigeria poses to investors and financiers from the outside world, who want to partner with the indigenous owners and operators of marginal field. This status is compounded by the ongoing actions by the International Oil Companies, IOCs, who are now abandoning and/or divesting with wild excuses of supporting government s efforts at relinquishing more oil fields to indigenous investors. Some IOCs frankly insist that pipeline sabotage, oil thefts, foggy state of fiscal and non-fiscal provisions of the impending PIB, and security challenges, are deterring them in mobilising needed investment for Nigeria s oil & gas sector. Delay is dangerous Also speaking, Mr. Patrick Okigbo, Principal Partner at Nextier Capital Limited, an investment and multi-competency advisory firm, focused primarily on agriculture, power and petroleum, expressed concern over the current delay. He said, The ad-hoc nature of these rounds could be discouraging to serious investors. Without serious investors, these assets will still be sold but they will probably not produce and will not increase Nigeria s production base. It is no surprise that 10 years after the sale of 24 marginal fields, only eight of them are operational. He further maintained that judging from previous licensing rounds and sale of marginal fields, there is much to be desired. Previous processes were marred by seeming lack of due process, transparency and credibility. There are allegations that some companies that did not bid and were not pre-qualified ended up as co-winners of assets. There are also allegations of companies that were in the lower half of the Page 2 of 2 March 04, 2014

3 score sheet ultimately emerging as winners, he noted. Continuing, he said, Haven t the timeline slipped already? The Honorable Minister of Petroleum Resources announced the start of the process in December 2013, and promised that a timetable would be communicated in two weeks. The lists of fields, maps and application forms which ought to have been available on the website of the DPR since December 14th are not yet there. Also, submission of applications that should have ended on January 3, 2014, is yet to commence even at February ending. We understand that the release of the timetable is anticipated for February; we are already in March, and there is no likelihood that it will be announced anytime soon. He, however, expressed optimism in government s ability to overcome these challenges, based on the recent conclusion of the sale of power companies to private investors. The recent sale of the power companies increased investor confidence that the sale of public assets can be objective and transparent. This provides hope that the proposed sale of the marginal oil fields may be transparent and fair, he added. Okigbo further advocated a change in strategy in the sale of the marginal fields, saying that, The oil licensing rounds and sale of marginal fields should not be on ad-hoc basis, they should be tied to a comprehensive, long-term, economic development strategy. There should be an overarching strategy for managing Nigeria s natural resource base for current and future generations. The Nigerian government should tie every licensing round or sale of marginal fields to this development plan. Increased awareness On his own part, Mr. Debo Fagbami, Chief Operating Officer, Xenergi Limited, an oil and gas company, argued that the fact that the Federal Government is warming up for another bid round is an encouraging development. This is because in the 10 years since the last bid round, a lot more awareness on the importance of marginal field asset development as a key contributor to indigenous participation in Nigeria s energy landscape had been created. According to him, In as much as only eight out of 24 fields (33 percent) that were awarded in 2003 have attained commercial production, we all need to recognise that those that haven t attained production have equally tried amidst a variety of challenges to achieve first oil. When you put all this into perspective, the impact of indigenous entrepreneurial endeavor in the marginal field space is highly commendable, and thus lends credence to the underlying objectives of the marginal field programme. Regarding the bidding process, the recent DPR guidelines provide for level playing field and also demonstrate transparency on the part of the regulator. On the part of the bidders, it encourages synergy from the point of view of establishing consortia and leveraging on individual strength and value that consortium members bring to the table in tendering formidable bids. As regards the ability of government to meet the deadline for the award of the licences, Fagbami said it is difficult to determine, especially as the nation is approaching election period. He however argued that given the pedigree of the current DPR under the leadership of Mr. George Osahon, the deadline could be met and if not, it would be due to other factors beyond his control. On what should be done to increase productivity of marginal field operators, Fagbami explained that funding is paramount. Funding is a key factor, as well as closer monitoring by the regulators Page 3 of 3 March 04, 2014

4 NAPIMS, DPR etc. It is sad that some multinational service companies demand upfront payment from marginal field operators before they can render services that would enhance their oil recovery and productivity. Some of these services run into millions of dollars that marginal field operators can only afford upon sale of their crude. But if these services have to be paid for prior to rendering them, it leaves the operator in a dilemma much like being caught between a rock and a hard place. This is one aspect that the regulators and industry watchdogs can step in to help the marginal field operators achieve their production potential, he said. Misinterpretation of delay In November 2013, the Minster of Petroleum Resources, Mrs. Diezani Alison-Madueke, announced the planned sale of new marginal fields. She said there were 31 fields in all, with 16 located onshore, while the remaining 15 are in the continental shelf. But since the road shows following the announcement, nothing has been heard about the process from the DPR three months after. Africa Oil and Gas Report, an energy journal, wrote that the delay has given rise to speculations about the actual list of fields on offer. According to the journal, the DPR s failure to release any information regarding the process has created room for speculation, with several lists making the rounds, none of which is official. While announcing the commencement of the bid process, Alison-Madueke, reassured of Federal Government s commitment to transparency in the bid process, in line with its commitment to openness and transparency in the conduct of business activities in the country. She said the process is designed to boost the participation of Nigerian indigenous companies in the upstream, and to generally increase exploration and production activities in the oil and gas sector to the benefit of Nigerians and the Nigerian economy. She, however, stated that of the 24 fields that were allocated to 31 indigenous oil companies in the first bid round in 2003, only eight were already producing while the others are at various stages of development. The Federal Government also awarded five marginal fields on a discretionary basis to four companies, while three additional oil fields were awarded to the Nigerian Petroleum Development Company, NPDC. Non-producing fields As at December last year, 12 companies out of all the companies awarded the fields since 2003 are yet to commence production. The companies, according to Africa Oil and Gas Report, are: Guarantee Petroleum/Owena, owners of the Ororo field; Bicta Energy, owner of the Ogedeh field; Sogenal Limited, operator of the Akepo field; Bayelsa Oil, operator of the Atala field; Movido, operator of the Ekeh field; Goland Petroleum, operator of Oriri field; Eurafric, operator of the Dawes Island field; Page 4 of 4 March 04, 2014

5 Network Exploration and Production Company, operator of the Qua Iboe field; Universal Energy, operator of the Stubb Creek field; Associated/ Dansaki, operator of the Tom Shot Bank field; Green Energy, operator of the Otakikpo field; and, All Grace, operator of the Ubima field. The journal attributed the inability of the operators to commence production to a number of factors, ranging from fraud allegations, and funding challenges to distractions. Producing fields DPR s Osahon declared mid-last year that marginal fields accounted for 2.1 per cent of the country s total crude production, with a daily production of about 60,000 barrels of oil per day. He noted that within a period of 10 years, marginal fields operators have grown their reserves from 141 million barrels in 2004 to million barrels in Osahon further noted that of the 24 marginal fields awarded in 2003 and the five fields awarded on a discretionary basis, only nine are producing. He listed the active and productive marginal fields as: Platform Petroleum, owner of Asuokpu/Umutu field; Walter Smith and Morris Petroleum owners of the Ibigwe field Frontier Oil, owner of the Uquo field; Britania-U, owners of Ajapa field; Midwestern Oil and Gas and Suntrust, owners of Umusadege field Pillar Oil, owner of Obodogwa/Obodeti field. He further stated that of the five marginal fields that were awarded on a discretionary basis, only Oriental Energy, owner of two fields Okwok and Ebok fields; and Niger Delta Petroleum Development Company, owner of Ogbelle field are involved in active production. But in third quarter 2013, the Nigerian National Petroleum Corporation, NNPC, said marginal fields operators accounted for only 2.54 per cent of the country s total crude production, with a total of 5.27 million barrels out of the period s total crude oil production of million barrels. Also speaking, Mr. Victor Briggs, Managing Director, NPDC, noted that the current production capacity of marginal fields operators is not adequate, declaring that a lot still needed to be done to change the rules of engagement in the Nigerian oil industry. According to him, if indigenous oil companies are able to produce about one million barrels of crude daily or half of Nigeria s crude oil, the international oil companies will no longer be able to hold the country to ransom. He said, There is absolute Page 5 of 5 March 04, 2014