Engr. Sarki Auwalu, DPR Director
…Aspiration of reserves is 40million barrels while gas will be 220 trillion cubic feet by 2030
…Objectives to grow reserves by investors, increase production, technical capability
…Key principle is for indigenous participation, enhancement of capital and revenue base
…57 fields involved
…NAMSTRA strategy to open predictability, accessibility of the industry
-By Felix Douglas
The announcement of marginal field bid round in June 1st compelled the operators and stakeholders in the industry longing for explanation on how the process will be carried out by the country’s regulator.
Foremost petroleum industry association, Nigeria Association of Petroleum Explorationist (NAPE) whose members operate mostly at the upstream, invited DPR Director, Engineer Sarki Auwalu to give more insights on the bid round that is ongoing. The regulator of Nigeria’s petroleum industry across the value chain, gave a vivid picture of the bid round.
REGULATORY FRAMEWORK OF THE MARGINAL FIELD
Engr. Auwalu spoke further disclosing that the national aspiration of oil and gas sector is the driver of marginal field development. The country aspires to have 40million barrels and grows its reserve of gas to about 220 trillion cubic feet (tcf) by 2030. The target for 200 tcf by 2020 was achieved in 2019. The capacity is to produce up to 300million barrels. The thought of government in midstream is to monitise gas, eliminate gas flaring and domestic sufficiency. This will be done through power generation, commercial activities in terms of gas-based industries and increase crude refining capacity.
For the downstream, the government intention is to achieve price freedom, optimum product and supplies sufficiency. There will be alternative period in terms of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG), including other related fuels. These are mainly drivers for marginal field development.
The Chief Regulator said, technically, a marginal field is any field with reserves that is reported annually to the DPR and has remained unproduced for a period of over 10 years. These fields are not considered by license holder for development. Also, fields that have had exploratory well drilled and are known as oil or gas for more than 10 years. Fields that present lease holders considered for farm out due to portfolio rationalization.
He made clarification that such fields which the “president may from time to time identify as marginal based on constitutional right and provision of Petroleum Act.” In the fiscal regime regulation of 2005, the president reserves the right to give or withhold concept of farm out of marginal field. The federal government also reserves the right to withdraw award should any awardee fails to comply with applicable terms.
OBJECTIVES OF MARGINAL FIELD PROGRAMME
The entire objective of marginal field programme is a win-win value proposition for government, Nigerians and foreign investors. It is multifarious range of objectives to achieve development of marginal field. Principally, the indigenous participation is being promoted for revenue generation. Production increases, technical capacity built and oil and gas reserves growth. Capital inflow encouraged while synergy and partnership promoted.
ROADMAP OF MARGINAL FIELD AWARD
Engr. Auwalu ran down the memory lane, he said that in 1999, there were two marginal fields identified in Nigeria. Progressively, in 2003-2004, there were 24 marginal fields, in 2006 1 field, 2007 1 field, 2010 2 fields. The climax was in 2020 with 57 fields. This roadmap shows that the fields are increasing as exploration and production unfold.
Currently, 16 fields are producing and they contribute 2% to national oil and gas reserves. There is an increase of 75% to 100% in oil and gas reserves, production potential is 800 to 16000 barrels per day. The gas production processing capacity is 400 million scuff, domestic refining capacity exceeded 6000 barrels. Nigeria has had experience in marginal field programme.
ACHIEVEMENT
Nigeria has achieved reserve and production growth with positive impact in Local Content. Energy security with increase in domestic refining and enhancement of power production. Increase inflow from government through taxes and employment.
This has led to improvement in economy, corporate social responsibility and community engagement. Marginal field operators have also made significant difference in the industry.
SYNOPSIS OF 2020 MARGINAL FIELD BID ROUND
The DPR Director emphasised that the purpose of the bid round is to create opportunity for technical and financial partnership for investors. The key principle is indigenous participation. “We want to grow reserves and optimize potentials for this asset, create wealth and generate revenue for all interested stakeholders. The investors will want to grow their wealth, government will want to guarantee citizen of employment, the DPR Director added.”
The process will attract credible investor, technical and financial capability which have been demonstrated before especially in the first bid round which was a success.
Engr. Auwalu stated further that the structure of the bid round is electronic based bidding process, and this becomes easy owing to current situation across the globe.
THE BID ROUND PROCESS
The bid round is to ensure sustainability of marginal field programme, it will be a robust and credible process such that production will be within time frame. There is consequence for not meeting up with terms of condition. If a bid round winner leaves the field redundant without production, it will be taken away by the government.
There are conditions for post award, these include; transfer of interest, post awardee cannot sign more than 49% interest to another party for award. In case of joint award, the minister reserves the right to cancel or withdraw the interest of party or parties whose failure to meet their obligations result in the awardee being able to progress or working on the field.
Engr. Auwalu explained that the minister reserves the right to void an award if activities of the party in post award are frustrating. Dispute resolution is a condition in post award, all operations and commercial disagreement arising from awardees , their partners,and post awards shall first be referred to federal government.
THE AWARD PROCESS
There are nine steps in the award process. Step one is registration and pre-qualification, evidence of company’s existence and capability to pay applicable premium and strength to attain good content plan for Nigeria. Participation of host community by the state with ability to integrate people where the resource exists. It must be an Exploration and Production (E&P) company with federal character representation in shareholding of the management, evidence of technical managerial capability and eligibility. A company bidding must have record of indebtedness to government and friendliness to financial institution due to insolvency. These processes will be put in place during evaluation.
IMPLICATIONS OF MARGINAL FIELD DEVELOPMENT
The government cogitates discovered fields with significantly reduced risk of development so that early time to production within one and half to two years time frame will be possible including low investment cost.
The DPR Director posited further that marginal fields are owned by operators as sole risk independent of cost of host government. This provides for maximal returns to investors with robust fiscal term of 2.5% to 18.5% royalty depending on the production volume. There is capital tax allowance compared to 5% of normal field.
DPR will provide regulatory support which is to enforce general rules and ensure marginal field compliance to create value. Common facility optimization will be encouraged. In the last 18 years of marginal field development in Nigeria, some operators started as a small E&P company, but have now witnessed tremendous growth.
CHALLENGES
Engr. Auwalu admitted that there are challenges confronting the industry, chief of it all is funding as a lot of marginal fields struggle to raise capital. Financial institutions consider marginal field as risk for investment. They see it as risky for their portfolio. Hence, there are challenges for marginal field operators to access fund.
More disturbing is the aspect of partnership, companies find it difficult to come together to have common ground and plan. Marginal field is also challenged with security, lack of synergy with national oil company and major operators. Operators are seriously challenged by majors in the industry, the government is making assiduous efforts to alleviate and address the issue.
However, challenges come with opportunities. Operators should see challenges as opportunity that can be leveraged on to forge ahead.
THE WINNING STRATEGY
Vertical integration and diversification through midstream, downstream, power generation and gas industrial hub are enormous with significant impact for the industry. This is a winning strategy for marginal field operators and some companies are taking advantage of the opportunities. Collaboration, synergy among operators is one of the winning strategies. Research and field studies which most marginal operators seldom do should be adhered to create better model and strategy. Thorough community relationship through corporate social responsibility is a strategy that must be imbibed by marginal indigenous operators for value creation to succeed.
COMPLIANCE
Engr. Auwalu cautioned that DPR will not handle regulatory compliance and operational excellence with kid glove, “if you say compliance is expensive, try noncompliance and see which is more expensive.” On the aspect of financial stewardship, cost control, optimization funding strategy and benchmark are the greatest undoing for most marginal field operators.
Repugnantly, DPR has observed that some marginal fields are being managed like one-man business with owners providing self-services, this will not be encouraged.
Notwithstanding, the DPR Director gave a positive insight of marginal field development which is evolving with significant accretion. It has yielded proliferation of reserve growth, increase production, local participation, enhanced capital capability and revenues. It has improved local content capacity and positive impact on the economy.
Engr. Auwalu said the government will remain focused on marginal field development and continuously encourage major oil companies to sustain the initiative. The challenges are being addressed to ensure sustainable development. The country invites investors to participate in the 2020 marginal bound round and take advantage of the opportunities therein. DPR has recorded appreciable interest in the ongoing exercise and not less than 10 existing companies have shown interest in 57 marginal fields.
Reacting to questions that some of the 57 marginal fields that are on bid for prospective operators are under litigation. Engr. Auwalu said, the 57 fields do not include those 11 fields that are revoked and facing litigation. The 57 fields remain 57 and 11 fields that are in court are not part of the exercise.
On the issue of attaining first oil within two years time frame, he said DPR is in the know of how marginal fields were developed in the last 18 years of its existence. The marginal fields that were put on offer in 2003,16 are producing, DPR has the records of how the operators did it. It will learn from the successes of those fields to assist new entrants and give them regulatory support, “every activity that happened in the industry, DPR has record of such activity and we shall build on it.”
Engr. Auwalu debunked insinuations that government brought up the idea of bid round because it wanted to boost revenue to fund its budget, “the objectives of government is a win-win value proposition.”
Marginal field cannot fund Nigerian budget. The purpose is to encourage Nigerian and foreign investors to promote indigenous participation. There is a clear difference between Nigeria’s oil and gas industry in post 2000. Many Nigerian professionals have been created with jobs opportunities, increase in production, reserve and capital inflow. It is an opportunity for government to use its abandoned resources. Government is looking elsewhere to fund the budget.
He explained further that the process commenced for companies to indicate their interests. Companies that are qualified will be allowed to bid for a field while DPR disclosed to them what will be next step.
The bid round process is not a government business but it provides opportunity for investors and only serious ones are expected to be involved in the bid. This is why it is an electronic based bidding.
There has been argument that some fields and Oil Mining Lease (OML) owned by politicians were revoked by the government, DPR Director made it known that the process is opened to Nigerians to participate and not about politicization of the process.
On the aspect of Crude Oil Handling Charges (CHC), the government is regulating crude oil transportation and handling charges. CHC is a challenge in the industry.
Therefore, government has created National Acreages Management Strategy (NAMSTRA), the strategy is for predictability of bid rounds. It will give an overall view of the country’s potentials including prolific nature of its fields in order to attract investors to the basins. The strategy will open up predictability, accessibility, investment ability, openness and transparency. These are embedded in NAMSTRA.
The Nigeria oil and gas industry has for some years enmeshed with issues around ownership between the government and host communities in the Niger Delta. While the latter believes it has the constitutional right to own resources of the country, the former is of the view that natural resources endowed in the land belongs to it.
To this end, the Niger Delta communities have made its intention known to the federal government that the region should be given preference in the bid round or else it would stop the process through litigation.
Responding to the issue, Engr. Auwalu said, Nigeria is a country of national unity and Niger Delta is part of the history contributing immensely to development of the country. The Deltans should not allow anything that will destabilize the unity of the country. Government is enjoying unprecedent support in the region which has been demonstrated in the stability, cooperation of various communities and stakeholder.
The Nigeria’s oil industry regulator opined that Niger Delta has the right to express its feelings but the law remains. “Development and cooperation of everyone in Nigeria is the key because the country wants peace.” Meanwhile, oil and gas export, import activities including pipeline works are done in the region.
The country is already challenged with all manner of crisis including Covid-19 pandemic; hence people should come together and cooperate with government. Engr. Auwalu revealed that most state governments in Niger Delta have submitted their bid. It is advisable everyone plays by the rules.
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