Nigeria finds itself at a crossroads with the unprecedented crisis where a triple challenge is posed by Covid-19, low oil prices and a supply glut. In the midst of this, the Department of Petroleum Resources (DPR) has launched its marginal fields bid round as an ambitious move that expects to boost Nigeria’s E&P sector, harness investment and promote indigenous participation.
ENHANCEMENT IN-COUNTRY: The Local Content Act (2010) was designed to promote “the development and utilisation of in-country capacities for the industrialisation of Nigeria” and the bid round is poised to further this goal. At a time where activity among majors is subdued, space is opening up for juniors to make a difference.
While big offshore fields need big ventures, marginal fields require smaller indigenous companies capable of operating in an era of low prices. These assets have a lower cost of investment, ranging from USD 50 million to 100 million, and promise short-term returns. This not only suits the pockets of local E&P companies but also aligns with the government’s goal of getting the production ball rolling.
Despite having a strong domestic focus, the development of these fields will open up avenues of collaboration with IOCs and technology providers. “There are many opportunities for new players to bring in novel technology, especially in the field of cost cutting where we have not been too cost-cautious here,” Seni Edu, CEO of Eko Support Services, told The Energy Year.
Likewise, the eligibility for this round is stipulated in DPR’s guidelines with a clear Nigerianisation target. Participation is only open for full or substantial Nigerian companies following a maximum 51:49 local-to-foreign ratio. Foreign technical partners can hold up to 49% but only through a Nigerian-registered firm. Further, bidders are required to have a proven track record in E&P ventures. This not only sets a standard, but also guarantees that fields are not abandoned once awarded due to a firm’s lack of competence.
Lastly, awardees will commit to develop the indigenous workforce, support local services providers and assist local communities. This win-win value proposition hopes to achieve a Nigerian oil and gas industry aligned with the goals of the Nigerian Content Development and Monitoring Board, which aims for 70% local content by the year 2027.
CHALLENGES AND CONSIDERATIONS: This bid round also faces an array of challenges that have either emanated from or worsened during the crisis. Financially, E&P operations are capital intensive, so securing proper funding to successfully acquire and develop any field is fundamental. However, the crisis has led to a financial shock which has spurred liquidity constraints among upstream players and reduced the risk-capital appetite of local investors. For this reason, innovative financing will be vital, forcing companies to explore foreign investment avenues and seek third-party financiers. This could trigger a new wave of investment in the sector.
Due diligence is also an imperative step of this process, where prospective bidders must engage in technical, legal, environmental and financial enquiries to successfully mitigate risk. Among other things, this will assure they are not inheriting any past problems (e.g. litigation) which may hamper the development of these fields. Likewise, potential partners and financiers ought to do the same to make sure bidding companies are sound and trustworthy. DPR expects to provide abundant and credible field data which will make the bid round richer and more transparent.
Lastly, the fiscal regime under which marginal fields and their corresponding actors fall under has resulted rather a deterrent than a booster. The Petroleum Profits Tax Act establishes that new marginal field operators are subject to 65.75% income profit tax during the first five years of work, and 85% in subsequent years.
In addition, many onshore fields are liable to local taxes and fees, not to mention the obligation many operators have of paying levies to communities as an act of social responsibility for possible disruptions. As a result, indigenous companies find themselves overwhelmed with fiscal obligations which have a negative impact on their potential to take on E&P ventures.
A more favourable fiscal environment driven by lower taxes and higher allowances is needed to advance Nigeria’s hydrocarbons industry. “The silver lining in all of this is that there is no better time than now for Nigeria to review and reform its oil industry,” Hakeem Adedeji, CEO of Hydrocarbon Advisors, told The Energy Year.
LET THE BLACK GOLD FLOW: This year’s bid round is putting Nigeria’s whole petroleum industry to the test, and is bound to set a precedent in the post-Covid era. In a world where oil prices may struggle to reach past benchmarks, marginal field developments could become the “new normal.”
Grand investments are on hold, but a new way is being paved for small local oil and gas players. It is here where marginal fields have an edge: they are less vulnerable to oil price fluctuations as they are smaller in scale, cheaper to develop and quicker to monetise.
The somewhat audacious move DPR has taken is opening up new opportunities for established E&P companies but also for the so called “League B” of local players. This could pave the way for junior Nigerian low-cost producers to prove their value. Moreover, the 10-year path of local content the nation has walked is now yielding reliable added value given the strain this crisis has put on globalisation. Hence, this bid round will be an important keystone to advance localisation in Nigeria’s upstream sector.
MULTIPLIER EFFECT: The government expects to witness production from these fields between 2021 and 2026. This will have a multiplier effect on the sector, as it will invigorate the entire local value chain, encouraging business continuity and giving a virtual sense of recovery.
In this regard, Chief Timipre Marlin Sylva, minister of state and petroleum resources, told The Energy Year, “It is time for Nigeria to position itself as the strongest oil and gas investment destination in Africa. We want to continue growing our industry and increasing our lead.”
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