The Federal Government of Nigeria is holding a bid round for marginal fields in a few weeks which is expected to help raise capital and shore up fallen oil income but it could not have chosen a worse time.
TImipre Sylva, Nigeria’s minister of state for petroleum resources has received the approval of the president to hold the marginal field bid round. Officials of the ministry of petroleum resources have now confirmed that this would happen soon.
The current fall in oil prices which has crimped oil earnings is unarguable the major driver behind this decision. Federal allocation looks set to fall below N600billion next month unless oil prices recover, pushing the Federal Government to forage for other ideas to raise revenue besides depending on monthly crude oil sales.
The current APC-led Federal Government has not been shy about bold reforms in the oil and gas sector. But it has excelled at prioritizing the inconsequential. For example, in the past five years, oil-producing countries have been enacting progressive fiscal terms for their energy sector, Nigeria has been doubling down on regressive regulations.
Last year, Algeria passed a new hydrocarbon law aimed at attracting foreign investment into its oil and gas sector even collaborating with five major international oil companies operating in the country and cut the total tax burden on international oil companies (IOCs) from 85 percent to around 60 – 65 percent.
Nigeria, on the other hand, announced plans to recover $62 billion from International Oil Companies (IOCs) whom it accused of underpaying royalty rates. Never mind, it was the government’s decision not to review the rates when expired two decades ago.
In November, Nigeria reviewed the Deep Offshore and Inland Basin Production Sharing Contract (Amendment) Act, 2019 which requires an adjustment of the revenue due to the Federal Government from production sharing contracts (PSCs) whenever the price of crude oil exceeds $20 per barrel in real terms.
While these are fine reforms, they are unsuited for an environment where rivals are offering juicy terms for investments. The impact of these poorly-timed reforms is that the country is yet to see a significant investment in over a decade.
Nigeria is doing the same thing with the decision to hold a marginal field bid round now when oil prices are unstable and when it has yet drafted competitive fiscal terms for its oil. The danger for prospective investors is that pricing models used to acquire fields could become unrealistic in a short time. Many will then be forced to abandon the fields.
Nigeria’s marginal fields’ accounts for less than five percent of total output. An investor’s guide to Marginal Oil field acquisition prepared by the government says Nigeria has an estimated 2.3 billion barrels of crude oil reserves in over 183 fields classified as marginal however despite this potentials, marginal field still contribute poorly to Nigeria’s total production.
According to a report by the Department of Petroleum Resources (DPR), only 9 marginal fields are currently producing from the 30 fields awarded during the last bid rounds. There is no telling if the new ones that would be awarded will succeed.
“Perhaps owing to lack of experience and due to the fact that it was the first marginal field licensing round, some of the licensees entered into financial and technical arrangements with foreign partners without proper due diligence which, in turn, failed to bring some of the aspirations of the licensees to reality,” Bloomfield law Practice Investors Guide note on Marginal fields bid round said.
Since marginal fields are oil fields that IOCs abandon because of limited commercial potential, it provides opportunities for local players to gain oil exploration experience. But in a low oil price environment and with huge exposure to Nigerian banks by local oil and gas companies, few would have the financial resources to participate in a bid round.
When this happens, incompetent money bags snap the fields but lack the resilience required to shepherd a field from exploration to first oil, and navigate the murky waters of uncertain oil prices, they grow and itch and abandon the fields.
There are forty-five fields in the basket at the DPR. 11 fields were revoked by the DPR making a total of 56 fields available for this bid round, located on land, swamp and shallow water terrains.
Marginal fields in Nigeria have an average economic life of between 8 and 15 years and can produce between 4,000 boepd to 30000 boepd per field, it begs the question why the Federal Government has refused to conduct bid rounds in over a decade.
But operators have not always been prolific producers. A total of 30 marginal field licenses have been awarded since the policy was introduced and only around 30percent of the fields have reached commercial production. Marginal field production only makes up 3.05percentof crude oil output between 2015 and 2016, says analysts at Bloomfield law firm.
While government officials have often expressed an ambition to raise oil production by 4million barrels, it has stopped short of conducting bid rounds for larger acreages, that would help it meet the target. Marginal field bid rounds will do little to achieve this target.
