Nseobong Okon-Ekong examines the seeming uncertainty surrounding the revocation, restoration of Addax/Sinopec OML License, and the report of the Committee set up by President Muhammadu Buhari on the issue
President Muhammadu Buhari had in March approved a decision to revoke the Oil Mining Licences of Addax Petroleum being managed by Sinopec and domicile same with the Nigerian National Petroleum Corporation (NNPC) for allocation to new operators.
The industry regulator, the Department of Petroleum Resources (DPR) announced the revocation of the Production Sharing Contract (PSC) of four Oil Mining Licences (OMLs) previously managed by the Chinese oil company Sinopec, and assigned the rights to an indigenous consortium.
Analysts stated euphorically that it was not just a well thought-out decision based on the economics of the Production Sharing Contract but a pragmatic one that is necessary in view of the dire state of our national assets.
However, few weeks later President Buhari, again ordered the Department of Petroleum Resources to restore the four Oil Mining Licenses revoked from Addax Petroleum.
In a statement by Garba Shehu, Senior Special Assistant to President Buhari on Media and Publicity, it said: “President Muhammadu Buhari has approved the restoration of the leases on OMLs 123, 124, 126 and 137 to the Nigeria National Petroleum Corporation, NNPC which is in production sharing contract with Addax Petroleum, a company wholly owned by Government of the People’s Republic of China on the blocks.”
Interestingly, before the reversal of the OMLs license revocation, President Muhammadu Buhari had also set up a committee to investigate alleged “breach” of agreement by Addax Petroleum.
The committee headed by a former senator, Magnus Abe, while submitting its report to the Minister for State for Petroleum Resources, Timipre Sylva, in Abuja, accused the company of causing the country a huge economic loss.
But in the face of the seeming uncertainty surrounding the revocation, restoration of Addax OML License, and the report of the Committee set up by President Muhammadu Buhari on the issue, which indicted Addax for wasting millions of dollars, there has now emerged an ongoing debate as to what action serves the best interest of Nigeria, politically and economically.
The Directorate of Petroleum Resources (DPR) was commended for taking concrete steps to boost the revenue accruing to the government in underperforming assets.
However, another school of thought acknowledges that Nigeria and China continue to enjoy cordial economic, political and social ties, and support the mutual development of both countries and hence actions that may be seen to impinge the relationship should be avoided, given that Addax/Sinopec is wholly owned by the Government of the Peoples’ Republic of China.
However, the Magnus Abe Committee set up by President Buhari noted that the actions of Addax/Sinopec put over 3000 Nigerians out of work. It wasted millions of dollars of the hard-earned currency that this country earned. What government did in revoking Sinopec’s OMLs License was in the best interest of the nation and cannot hurt the cordial bilateral relationship between Nigeria and China.
The report of the Committee headed by Senator Magnus Abe stated that “Over one billion dollars have been invested in this. Addax Petroleum called off the project over an issue that was totally unrelated to this project. That action put over 3000 Nigerians out of work. It wasted millions of dollars of the hard-earned currency that this country earned.”
Government should consider the concluding comments of the Magnus Abe Committee which investigated the breach of agreement by Addax that “We felt that the public should be aware of the extent of damage that was done to waste indigenous resources, the economic waste, not only were the workers affected but other projects.”
Moreover, the choice of consortium is also in accordance with the Nigerian Oil and Gas Industry Content Development (Local Content) Act which was enacted in 2020 to promote indigenous operation of Nigeria’s oil and gas assets. Under the Act, seasoned Nigerian independent operators are to be given first consideration in the award of oil blocks and oil field licenses.
Under the new PSC entered into by the DPR with the new consortium, the consortium will pay a Good and Valuable Consideration (GVC) of US$ 340 million at the commencement of the PSC; Re-develop the significant oil resources which have been lying fallow, and ramp up production; Develop the large gas resources within 24 months both for the domestic market and for export, in line with the government’s aspirations for the gas industry; and Ramp up investment in the OMLs so that production revenues, royalties and taxes to the Government are exponentially increased, in addition to the upfront payment of GVC.
The new operating consortium has been carefully chosen by government for their familiarity with the assets. The essence therefore is to ensure a seamless transition of operations with no disruptions in production or loss of revenue to the government. It is good to know that the consortium and Sinopec are engaged in negotiations to ensure a smooth handover of the assets, including amicable settlement to the former operator. It is also delightful that the consortium has spoken of its determination to maximise the potential of the assets to ensure that the government and people of Nigeria reap the full benefits in addition to deepening relationships with local communities, boost local content in all its ramifications and increase the employment and training of Nigerians, directly and indirectly.
The DPR should be commended for taking concrete steps to boost the revenue accruing to the government in underperforming assets. One thing that has helped this transaction is the very cordial relationship which the Buhari administration has cultivated with the Government of the Peoples Republic of China, which has ensured that the transaction has been well received all around and the processes for transfer of the assets have laid out pretty fast such that all parties to the transaction are working on the same page.
It is important to understand the history of the four oil blocks (OMLs 123, 124, 126 and 137) and why the Federal Government took the decision to reallocate the assets. In 1998, the NNPC entered into a 20-year PSC (Production Sharing Contract) in respect of certain oil mining leases (OMLs) with Addax Petroleum, a company listed on the Toronto Stock Exchange (TSX), which was to expire in 2018. The PSC was subsequently extended for a further four years, until 2022. By 2009, Addax had increased production in these OMLs to about 130,000 bpd (barrels of oil per day). In 2009, Sinopec (a Chinese state-owned company) purchased Addax Petroleum. As a result, Sinopec obtained the rights to these assets. No payments were made to the Federal Government during the purchase by either party.
From a high of about 130,000 bpd in 2009, daily production dropped to 25,000 bpd in 2021, more than 80 percent decline. In addition, large gas resources in the assets remain undeveloped, and no effort had been made to recover associated gas, which is flared in contravention of the Federal Government’s policy and international best-practice. Also, since 2017, Sinopec has attempted, by a private sales process, to divest its rights in the PSCs (which are due to expire in July 2022) to a third party of Sinopec’s choice. I guess the Government must have reasoned that it needs to seize control of the process else it could be stuck with new players without the enthusiasm to mine the fields and make requisite returns.
As a result of Sinopec’s failure to adequately manage the assets the revenue accruing to Government significantly reduced. It was even more hurtful that Sinopec was thinking of passing the asset around to a new owner, and probably take a hefty paycheck while the country suffers. This informed the decision of the federal government to take back the assets and hand it over to the NNPC for better management.
At a time when the country is in need of resources and in the throes of increasing national debt to bridge its infrastructure deficit, no serious government will be reckless and carefree as to ignore the management of its national assets. This is what President Buhari has done in this case, acting on the principled advice of the Department of Petroleum Resources.
In choosing the new operators over the inactive Sinopec, the Federal Government is walking the talk on supporting local operators in the oil Industry using the Local Content law. This is commendable, especially given that Nigerian firms in oil Exploration and Production (E&P) have shown tremendous capacity in the industry, with many of them as top and rising operators in crude oil and gas production.
Under the Nigerian Oil and Gas Industry Content Development (Local Content) Act, which was enacted to promote indigenous operation of Nigeria’s oil and gas assets, seasoned Nigerian independent operators are to be given first consideration in the award of oil blocks and oil field licenses.
Indeed, this is a win-win transaction for Nigeria, the Buhari administration, the Department of Petroleum Resources, the operators and the host communities.
QUOTE
The choice of consortium is also in accordance with the Nigerian Oil and Gas Industry Content Development (Local Content) Act which was enacted in 2020 to promote indigenous operation of Nigeria’s oil and gas assets. Under the Act, seasoned Nigerian independent operators are to be given first consideration in the award of oil blocks and oil field licenses.
Under the new PSC entered into by the DPR with the new consortium, the consortium will pay a Good and Valuable Consideration (GVC) of US$ 340 million at the commencement of the PSC; Re-develop the significant oil resources which have been lying fallow, and ramp up production; Develop the large gas resources within 24 months both for the domestic market and for export, in line with the government’s aspirations for the gas industry; and Ramp up investment in the OMLs so that production revenues, royalties and taxes to the Government are exponentially increased, in addition to the upfront payment of GVC
