Nigeria’s federal government launched its long-awaited marginal field bid round on June 1, a welcome development but one that faces serious challenges, writes Mariah Lucciano-Gabriel, the head of commercial and business development at Asharami Energy.
The concept of marginal fields was introduced in 1996. It was intended to encourage indigenous participation in the upstream and foster knowledge transfer from IOCs to indigenous companies.
According to the Department of Petroleum Resources (DPR), a field is classified as “marginal” if it has been discovered and left unattended for over 10 years from the date of first discovery.
Discoveries may not be exploited for a variety of reasons. These include being uneconomical to produce due to unfavourable fiscal terms, a lack of access to production infrastructure, high technological requirement, low portfolio ranking or even community issues.
This bid round is the second marginal field offering. The first came in 2003.
Hard times
While companies have been keen to engage with the offering, there are some concerns over timing. It was only in April that oil prices turned negative. Globally, demand is down and there are also worries about the passage of the Petroleum Industry Bill (PIB). A looming global recession would no doubt make fundraising an arduous task.
On the other hand, if successful, the bid round would raise much needed revenue for the country. Nigeria may lose as much as $9 billion from lower crude prices, according to Goldman Sachs.
Furthermore, the round may guarantee that only low-cost producers with strong financial backing will come out successful. In the words of the DPR’s director during a recent keynote address, “only eagles fly during a storm”.
Going rate
Only those companies that manage low cost operations with access to cheap funding stand a chance. Given the financial sector’s current scepticism about energy, this is in short supply.
The cost of participating in the round will be higher than the 2003 offering. Given that this exercise is aimed at fostering indigenous participation and reviving abandoned projects, the fiscal terms cannot be considered attractive.
Other than a lower royalty rate, which could eventually get subsumed by the overriding royalty to be paid to the original block owner, JV terms and marginal field terms are essentially the same.
These fields have been left unproduced for over 10 years for a reason. This is not because the IOCs did not want to benefit from them. If the government is serious about aiming to bolster indigenous participation, it must reconsider the fiscal terms for marginal fields.
Keeping a balance
Another area the government can look into is the eligibility metric. The bid guidelines have attempted to address the sensitive issues of ethnic inequality by including federal representation as a criterion for prequalification. In short, there must be equitable representation of different ethnic zones at the sponsor and board level.
Local content is flourishing in the industry today. This is not an accident. There was a decision to make this a priority and protect local service providers. This bid round aims to give that same protection to federal character and the balance of geopolitical zones.
If we can do this to tackle local content and the ethnic balance, why can’t we do the same for gender balance?
There has been talk about closing the gender gap in the energy industry and promoting a balanced gender perspective at the decision and policy making levels. If the government is serious about this, it must take active steps to make it happen at a policy level, as it did with local content.
Start to finish
Investors participating in the bid round should carefully consider the challenges of production, rather than just field reserves. There is a five-year target for production from marginal fields, or companies risk losing their licences, and this will also have an impact on the bankability of a project.
Furthermore, given the current low price environment and not so favourable fiscal terms, investors must have a clear plan on how best to maximise the asset. This would involve ensuring lowest cost operations, putting in place price hedges, employing gas monetisation strategies and considering the development of modular refineries.
These all go some way to seeing a field holistically, in order to get the best out of an investment. This is as opposed to focusing simply on winning a bid.
I believe the marginal field bid round is a welcome development in the industry, despite the difficult times. The round has the potential to spark a new wave of investments in the sector.
This opportunity forces companies to become creative and collaborative in a bid to achieve low-cost operations. This is a problem with which we seem to be struggling as a nation.
Out of this opportunity, lean and efficient indigenous companies should emerge. These would be able to operate successfully in an era of low prices.
The government must also play its part in supporting the industry. Better fiscal terms, such as lower petroleum profit tax (PPT) rates and higher investment tax allowance (ITA) for marginal fields, are needed. This should come while also fostering inclusive gender policies to increase female participation.