Marginal Fields: Moving from License to First Oil

With the current marginal oil field awardees seemingly unable to proceed beyond license receipts due to multiplicity of challenges, experts have proffered suggestions on how the companies could surmount the bottlenecks, reports Peter Uzoho.

The federal government has been yearning to see Nigeria’s oil reserves and daily production rise to 40 billion and 3 million barrels respectively.  To some extent, the government is relying on the 57 marginal oil fields won last year by 161 companies to realise the reserves and production growth aspirations.

The government believes that the 57 marginal fields hold significant volumes that could help to improve the current low oil production, generate more revenues and add immense value to the country.  

The 2020 marginal oil field bid round started in June 2020 and by May, 2021, 161 companies were shortlisted as winners of the 57 marginal fields put on offer, which spanned onshore, swamp and shallow-water.

Some of the companies, which emerged winners from the exercise included: Matrix Energy, AA Rano, Andova Plc, Duport Midstream, Genesis Technical, Twin Summit, Bono Energy, Deep Offshore Integrated, Oodua Oil, MRS and Petrogas.

Others were: North Oils and Gas, Pierport, Metropole, Pioneer Global, Shepherd Hill, Akata, NIPCO, Aida, YY Connect, Accord Oil, Pathway Oil, Tempo Oil and Virgin Forest, among others.

The Department of Petroleum Resources (DPR) had at the time put the total value of the 57 marginal oil fields at not less than $500 million.

However, early this year, the successor Nigerian Upstream Petroleum Regulatory Commission (NUPRC) disclosed that 80 per cent of the awardees had complied in terms of payment while close to 90 per cent of the companies had complied in forming the Special Purpose Vehicles (SPVs).

The commission had also disclosed that the marginal oil fields awarded to 33 companies had been revoked following their inability to meet the 45 days deadline required to pay the signature bonus for the fields.

But since receiving their award certificates at the award presentation last year, none of the companies has been able to proceed to the site to commence drilling, let alone achieving first oil. 

Dissecting the issues around the 2020 marginal field bid round and how they have contributed in putting the process in a stalemate, the experts, who spoke at a recent marginal field conference in Lagos raised concerns on some issues. 

They identified high bid participation fees and signature bonus, inadequate data about the fields, difficulties in accessing finance from lenders, and lack of technical how-how on the side of the awardees.

Other issues pointed out as militating against taking the assets to production stage included lack of collaboration among the companies, as many of them see themselves as knowing everything and refused to partner.

The speakers equally identified insecurity in the Niger Delta, absence of an enabling environment, and government’s misguided focus on raising revenues rather than encouraging more companies to be willing to play in the country’s oil production business.

OUTRAGEOUS FEES

In his presentation at the conference, with the topic, “From License to Oil: Fundraising for Marginal Fields,” Subsurface Manager, Energy and Mineral Resources Limited (EMR), Mr. Collins Ibekwe, criticised the excessive cost of participation in the marginal field bid round and the expensive signature bonus the successful companies were asked to pay. 

He said the high cost of the exercise has eroded the commerciality of the assets, adding that that has made it difficult for companies to raise fund to proceed to drilling after one year of issuing them award certificates.

 Ibekwe therefore opined that the government should consider providing bailout funds to the companies either in form of returning the signature bonuses or through any other form of financial assistance to them. 

He explained that his call for bailout fund for the awardees was based on the fact that there had been instances where government had to intervene to help businesses that were going through financial difficulties just to help them recover and continue to contribute to the nation’s economy.

He maintained that such intervention was needed to enable the companies have fund to proceed to drilling and help achieve the nation’s aspiration of increasing oil production to 3 million barrels per day, raise the reserves to 40 million barrels and in turn boost government’s revenue and job creation.

Ibekwe said: “My opinion is this: if we have to be truthful to ourselves, then we have to look at this holistically-think outside the box. What really should be done? Because I think those who put the process together were not long-term-focused. I think they were too short-term focused. 

“But it should not be too late to say, let’s return this money. You may say, my interest is to raise money for government. But is that really the optimal expectation? Should it not be better for our expectation to be: let’s grow new businesses; let’s grow these marginal fields and have many new indigenous operators that are capable. 

“How do we achieve first oil? One of the ways I believe we can achieve it is for government to say, let’s return these funds, let’s return these signature bonuses and give these people a chance. 

“It may sound unrealistic, but thinking outside the box would be the right thing to do, because it will give them the necessary boost that they would need to kick-start to be able to gather all the data they will need, process interpretation and then have a standpoint to kick off.” 

Chief Executive Officer, Tritekk Consulting Limited, Mr. Ayodele Fasakin, shared same pessimism about the companies performing better than the previous awardees, basing his point on the current general difficulties in funding fossil fuel projects.

He advised that NUPRC should be an active partner to the point of ensuring that operators secure funding to proceed to first oil rather than being interested in raising revenue for government.

Fasakin said: “I agree that the 2020 marginal field operators will not perform better than the 2003 marginal field operators. I agree with a no answer especially if you look at the current happenings in the entire world, causing financial challenges.

“The critical part in the entire thing is money. NUPRC needs to define the success factors of this programme. Is the objective to raise money or to increase reserves and production? 

“I believe that NUPRC should see themselves as being involved in the licensing to oil beyond just the regulator that collects signature bonus. They have to work with the awardees to the point of accessing the funds.”

He also suggested that Nigeria should have strategic reserves considering the fact that most of Nigeria’s foreign earnings comes from the sector while about 80 per cent of the budget is funded with oil revenue.

WHETTING LENDERS’ APPETITE

To overcome the funding challenge posed to the marginal field awardees, Partner, Tax and Regulatory, Deloitte Nigeria, Mr. Olumide Esan, said lenders were always concerned about the certainty of the fiscal and regulatory environment of the operator’s country of operation before accepting to lend.

Noting that with the enactment of the Petroleum Industry Act (PIA), Nigeria has been able to solve the concerns about the certainty of the fiscal and regulatory environment, Esan contended that the PIA was not enough to satisfy the appetite of lenders.

He explained that national political instability, coupled with insecurity in the Niger Delta were part of the things investors consider while deciding to lend.

 “So we can talk about the fiscals and how positive it is but it must be seen in the light of other challenges that this marginal field operators are facing.

“Lenders will naturally be concerned on the certainty of fiscal and regulatory environment of the country where they are about to lend it. So if you look at that in terms of Nigeria, I think with the PIA enactment we’ve been able to cross that bridge about certainty and it has put us in a positive step”, he said.

Managing Partner, Olaniwun Ajayi, Dr. Tominiyi Owolabi, said Nigeria remains a very interesting proposition when it comes to investments in the oil and gas sector but that security remains a key concern.

He explained that the ability to evacuate the produced product remains a major concern for lenders.

Adding that the capacity to operate as well as governance structure were also key considerations for lenders, Owolabi pointed out that by bringing a lot of people into forced marriage, the ability to take decisions quickly and respond to issues quickly was also a major consideration for lenders.

 “The environmental consideration is also key for lenders. Especially in these days of energy transition, traditional lenders are beginning to take a back seat. It is interesting to see where they will be getting funding from,” he submitted.

Sharing insights as marginal field operators, Managing Director, Niger Delta Exploration & Production (NDEP) Plc, Mr. Gbite Falade,  observed that issues around carbon emissions and energy transition were discouraging lenders from embarking on longer lending to oil companies.

Falade therefore advised the new marginal field awardees to take a different approach in getting value from the assets.

He stated, however, that “If the regulator will allow people with the know-how to take the lead in taking licenses as in other climes, investments will be safe in their hands.”

NEED FOR STRATEGIC ALLIANCE

In his intervention, Chief Executive Officer, Dupiaza Energy, Mr. Segun Ashiru, said one of the ways the companies can overcome their current funding challenge was to “execute a strategic alliance agreement with a contractor that could provide both the technical and financial services to stream the field in exchange for crude oil produced in the field.” 

He said another option, if approved by NUPRC, was for the awardees  to farm-out part of their participating interest in the field to an investor that could carry them in the course of developing the field and recover cost from crude oil production.

Like the previous speakers, Ashiru also suggested that government should provide the enabling environment and required support to marginal field operators facing challenges in streaming their assets. 

According to him, if no progress is made by those companies after the intervention, prior to the expiration of the statutory development timeline, such marginal field licenses might be revoked.

He attributed the failure of the companies to progress to production to access to funding and the credibility and track record of the sponsors, adding that the state of the wells may also be a factor. 

“It’s easier to produce or expand production from wells that you can easily re-enter and that have high-demand sweet crudes like the Bonny Light,” Ashiru stated.

PIA AS SAFETY NET

Addressing the participants, NUPRC Chief Executive Officer, Mr. Gbenga Komolafe, said the PIA has provided a safety net for financiers to provide funds for the development of oil and gas in Nigeria, noting that the marginal field operators can leverage on this to raise funds for their operations.

He said the PIA under Section 95 (5) has also made provisions for “holders of license or lease by way of security, to assign, pledge, mortgage its interest, in whole or in part under the applicable license or lease provided the consent of the commission is obtained”. 

Represented by the commission’s Head of Basinal Assessment and Lease Administration, Mr. Edu Iyang, the CEO listed the various options opened to the marginal field operators and investors to raise funds for marginal field development as “private equity, capital market, strategic alliance and debt financing.”

The NUPRC CEO noted that the commission was improving due diligence protocols to enable investors and operators access information prior to taking investment decisions and encouraging synergies in the use of shared facilities.

He stated further that the commission was also developing regulations to enable ease of implementation of the PIA, saying concerted efforts were being made in collaboration with stakeholders to tackle security issues in oil and gas sector.

Komolafe said the commission had delineated the 57 marginal fields’ areas and engaged awardees to resolve issues arising from the 2020 marginal field award as well as concluded drafting of model license document, which is critical for issuing Petrolatum Prospecting License (PPL) to awardees.