Seventeen years after the last bid round, Department of Petroleum Resources, the oil and gas industry regulator, was so determined to get it right, it followed through with all the processes, transparently, fairly and equitably. Applauding the process, the former President of the Petroleum Technology Association of Nigeria, Sir. Bank-Anthony Okoroafor, on behalf of a grateful local content community, said, “This is the most transparent Marginal Field bid round ever conducted.” But there is much to a successfully concluded bid round. The real work begins after the award party is over, as there are issues that face awardees after the ceremony. Chris Paul examines
Exactly one year after, the marginal fields bid round which began on June 1, 2020 culminated in the handing over of 57 marginal fields to 80 successful bidders, in Abuja, last Monday, by the Department of Petroleum Resources (DPR).
Presented to the operators by DPR’s Director/Chief Operating Officer, Auwalu Sarki, were the 57 marginal fields located on land, swamp, and offshore terrains in various parts of the country.
A marginal field is an oil field that has been discovered and left unattended for not less than 10 years from the date of its first discovery.
Sarki explained that the awarded companies met all the conditions for the award out of the 161 that were shortlisted.
When the bid round started last year, a total of 591 expressions of interest (EoIs) were submitted, out of which, 540 were successfully prequalified during phase one of the exercise.
According to the DPR boss, 2,482 bids were submitted by 405 applicants at the end of the phase.
Following the evaluation of the bids, 161 companies were shortlisted as potential awardees, out of which 50 per cent met all conditions and therefore eligible for the award ceremony that was organised last Monday.
Sarki explained that the award marked the end of the bid round process, which started on June 1, 2020, saying: “It also marks the beginning of the post-award phase, which is important.”
Commending the DPR for its handling of the process, former President of the Petroleum Technology Association of Nigeria (PETAN) and spokesman for the body of new marginal fields Awardees, Sir Bank Anthony Okoroafor, said: “Since 2003, this is the first most transparent exercise carried out by the DPR. It was made open to everybody.
“Communication with all bidders was consistent, credible and sincere. And they did their home-work very well. For the first time, you made a call to the DPR and they responded responsibly.
I called several times and they were on hand to respond. That for me was the first thing that convinced me that this time, the agency truly meant to be fair and thorough. At the end of the exercise, that was what happened.” This, he pointed out, was not the case in the past.
According to him, if you called to play the usual ‘Nigerian factor card’ to influence the process, you were politely turned down.
“That was when I knew this was serious business. But they will call you to clarify issues where necessary. It was strictly formal and in line with laid down rules and processes. I was really impressed,” said Okoroafor.
But the journey, he stated further, is not yet complete. For him, the DPR has to reach out to the IOCs to allow operators produce with their facilities, since it’s the most cost-effective option.
Furthermore, there is a need for the DPR to assist the awardees in farm-out agreement and ensure they are not suffocated with rules that will disrupt the awardees’ ability to run the assets within their limited capacity.
For any of the consortium to raise money for the administration of their assets, there is a need for a harmonised approach that will require that all aligned with set rules and objectives.
For the former PETAN President, any erring or deviant consortium should be called to the table and concerns thrashed out.
Responding to the prayers of the awardees as enunciated on their behalf by Okoroafor, DPR boss said: “Let me assure you, we are not leaving you alone. We have reached advanced stage on the farm-out agreement.”
As a matter of fact, the agency has been meeting with the leaseholders, but he said, “It’s taking time because each lease has its own peculiarities.”
Confirming Okoroafor’s statement, DPR Director said the agency kept engaging the lease through the entire process in order to get it right this time. Allaying the awardees’ concerns, Auwalu said: “As for the unitisation, we know the fields that straddle and we have worked that already. Part of the reason why the signing of the farm-out agreement took time is the issue of politically exposed personalities (PEP), which the IOCs needed to do their checks. But you are all aware that we have done a thorough due diligence.”
He gave his word that the agency would not allow the original multinational owners of the leases to suffocate the indigenous awardees on the altar of the strangulating process.
This bid round has come over 17 years since the last one. The 57 on-shore and near-shore fields contain an estimated one billion barrels of oil and near 5 TCF of gas.
A major area of attraction to the bidders is the commercial viability of the marginal fields and where the best opportunities lie, which, in addition to the fiscal terms, will be a function of reservoir characteristics, proximity to infrastructure, capital and operating expenditure requirements, and production profile.
By the Nigeria’s Petroleum laws, the President of the Federal Republic of Nigeria is empowered to designate any discovered oil fields abandoned or unattended by existing licence holders for a period of 10 years or more as a marginal field.
Once the asset is designated a marginal field, the delineated area is farmed out from the wider oil mining lease (OML), which effectively means the existing leaseholders cede these designated fields to the awardee of the marginal field.
Even though the initial pre-qualification and subsequent submission of technical and commercial bids under the bid round were the exclusive preserve of indigenous companies, upon award of the fields, windows for foreign participation, up to a ceiling of 49per cent ownership, are provided.
As stated in their commercial bids, notified preferred bidder for the marginal fields must pay the assigned signature bonus within 90 days from the date of the award, failing which the awardee will be issued with a 30 days’ notice of revocation.
In the guidelines for the bid round, failure to pay the signature bonus upon the expiration of the extended 30-day period by the awardee, the award will be revoked without further notice.
This means prospective bidders will have to seek explore every means possible to access finance to beat this stiff timeline.
On the other hand, it presents opportunities for foreign players with deep pockets; who want to increase their acreage portfolios.
Now that the successful bidders have emerged, the next stage is the execution of farm-out agreements between existing OML holders and the designated recipients of the marginal fields.
This phase of the process, which involves negotiation of the farm-out agreements and any the Joint Operating Agreement (where more than one party is awarded the same field), has a maximum of 90 days for completion; failing which, the DPR could undo the award.
A unitisation agreement is a condition precedent for approval of the farm-out for straddling fields.
While successful bidders can toast to the privilege of owning a marginal field, certain challenges lie ahead of the business.
Fiscally, attracting foreign capital may be difficult; because of prevailing market conditions in the global oil market; talking about low prices and oil glut.
The Petroleum Industry Bill (PIB) currently before the National Assembly constitutes another hurdle. The document contains a number of provisions, which will impact the fiscal terms for the development of the fields, if or when enacted into law.
The PIB provides for payment of 30per cent corporate income tax on upstream operations and replaces petroleum profit tax with a hydrocarbon tax at a rate of 50per cent for onshore and shallow-water operations and 25per cent for deep-water and frontier acreages.
It also provides for the requirement of payment of 2.5per cent of the audited operating expenses by all operators into an endowment fund for the benefit of the host communities.
Another itchy area to consider is the global craze for renewable energy, which is fast fading attention away from fossil fuels.
In other words, bidders may not have it easy accessing the finance required to develop the assets once assigned; as international lenders continue to move their focus away from financing fossil fuels to renewables.
However, for asset owners with existing assets of good quality, sound financial track record and strong management team, there are international lenders willing to finance fossil fuel developments.
Also, the financial exposure of domestic lenders to local independents may inhibits their capacity to fund the marginal field acquisitions and subsequent development.
Unfortunately, new entrants, without cash flow and a tested management team may encounter some issues finding local lenders, because the low debt capacity of such newcomers, due to a lack of proven reserves and cash flow, means equity issuance or technical and financing arrangements with service companies may be the available funding options until such fields have been appraised for development to attract debt funding.
Procrastination in the passage of the PIB for the comprehensive reform of Nigeria’s oil and gas sector continues to diminish investor confidence in the sector.
Were the bill to be passed into law, it will improve governance of the sector by strengthening institutions and providing clarity of structures, roles, accountability, transparency, and overall efficiency.
It is important that bidders should be mindful of the various issues that may likely arise during farm-out agreements negotiations; given the short timeframe within which investors are required to make such negotiations.
They include negotiations that concern access to infrastructure necessary for evacuation of production.
For purposes of separation, treatment, storage, transportation of crude oil and gas to be produced from the fields, issues such as capacity, tariff and the possibility of review of same must be considered by bidders.
Given the constant vandalisation of evacuation pipelines, issues such as pipeline losses and the risk allocation of same must be taken into consideration.
There may be need to negotiate the requirement for security payment by leaseholder to cover environmental concerns from the marginal field operator and unitisation.
Where the fields of the leaseholder of the OML and the designated marginal field operator straddle or the area of the marginal field operator straddles the land space in another licence area, there will be need for the negotiation of a unitisation agreement in conjunction with the farm-out agreement.
This is meant to determine and re-determine the petroleum from the straddling fields.
So, what then, are the options opened to successful bidder to source for money to fund the development of his asset?
Considering prevailing global financial crisis, and the capital-intensive nature of the industry, prospective bidders will find it difficult to access financial capital.
One of the traditional modes of raising finance and the most suitable means of sourcing financing for newcomers that don’t have assets with reserves or cash flow is equity investment.
For the successful bidder, it involves finding the right equity partners to inject the necessary capital into the awardee entity or a special purpose vehicle (SPV).
This form of funding can be generated through private placement or capital market. Private equity investment is another avenue to source for equity.
Debt financing works simultaneously with equity investment, as majority of lenders would require some evidence that the promoters have committed or will commit some equity to the project (usually 30per cent) before providing the debt.
The usual reservations expressed by the development finance institutions (DFI) in financing oil development projects, makes it difficult for awardees to attract this form of financing.
In the light of existing indebtedness of oil and gas exploration companies, local banks will strain to provide the necessary capital to develop these fields; given the DFIs reluctance.
Usually secured against developed, undeveloped and producing assets are the reserve based lending (RBL).
Reserves of the awarded marginal field and the facility is repaid from crude oil proceeds from the field determined loan to be secured.
The reserves of the particular field, anticipated price of oil and gas, expected capital expenditure and operating costs of the awardee must be ascertainable to make a bankable RBL transaction.
The contractor financing option involves oil field service (OFS) contractors, who, in exchange for either cash or with the products (either oil and gas or both) provide required services for the development of the field.
However, oil field service contractors’ dislike for production risks, is the challenge with this type of financing.
As it turns out in most cases, it is the larger OFS contractors that provide this form of financing given the strength of their balance sheets. But then, this category of financing may be limited by the impact of COVID 19 pandemic and the effect on the oil and gas service industry.
A situation, whereby the international oil companies (IOCs) are using their trading companies or oil trading companies to execute off-take agreements with indigenous independents which allows local companies to source financing from financial institutions for the development of the fields or in some instances advance the finance for the development of the fields, is a developing trading practice.
The IOCs often execute these agreements with awardees that are awarded fields sliced from blocks originally owned by them (IOC) the reservoir characteristics of which are known to the multinational oil giant.
Going by Auwalu’s promise to protect the awardees from the vagaries of the deeper and more complicated end of the post award phase, it is hoped that this set of marginal fields owners will receive the necessary support needed to midwife their assets to a sustainably prosperous lease life.
