NIGERIAN MARGINAL FIELDS: Navigating through the Financing Storms

It is now certain that there would be no oil block licensing round until the third quarter of this year. By implication it means the much awaited bid round for Nigerian marginal fields would also have to wait till then.

Nigeria holds periodic licensing rounds for new blocks and has said the next will be a chance for domestic companies to gain a foothold. Officials say the next auction is likely to be for both onshore and offshore fields totalling at least 2 billion barrels, which would include both big and marginal fields.

The Minister of Petroleum Resources, Diezani Alison-Madueke, had on a number of occasions, said that the Federal Government would carry out a marginal field allocation before the end of 2010.

Alison-Madueke said the government had developed a well articulated set of guidelines that would ensure transparency, which would take into consideration lessons learnt from the past exercises. “The expectation is that successful indigenous companies will further increase participation in the industry, thus improving their technical and financial capabilities.”

In 2003, when the Federal Government handed over the operations of 24 marginal fields to 31 Nigerian companies, many had welcomed the development with the hope that the confidence of local players would be bolstered in oil exploration and production activities. The marginal field programme is an offshoot of the Federal Government’s policy to promote indigenous participation in the upstream sector of the petroleum industry. With it, the government wanted to achieve the farmout of marginal fields within the concessions of the International Oil Companies, IOCs to indigenous companies. Despite this laudable policy, the success of the indigenous players’ incursion into field development and production can be said to be very ‘marginal’. Not many have made appreciable progress with their concessions.

One is tempted to ask why. Industry observers have cited finance, fluctuating technical assistance from foreign equity partners, and delay in the passage of the Petroleum Industry Bill, PIB, as the major factors preventing all the operators from coming on-stream.

Technical assistance may come from foreign partners provided the technical partner only holds 40 per cent of equity in the business. Both sides are required to develop and produce the fields within a 5 year agreement plan while showing verifiable efforts towards meeting the minimum work programme obligations within 12 months of the granting of the fields. Upon the completion of at least 70 per cent of work programme on the field the renewal of the agreement is then assured.

Among other things the agreement also spelt it out that failure to meet up with the work programme on the field would invoke the withdrawal / termination of the approvals from the awardees. Aside technical partners who are expected to provide technical know-how, the other area of critical challenge is finance. The financial demands of oil exploration and production are extremely high and the funding capacity of the indigenous players is very low. Finance for development of the fields may come from three major sources which include, individuals who are men of substance, a consortium of banks based in the country, or foreign banks since this is basically a business denominated in dollars. Each block would require about $30 million to bring to production. Considering that the fields were discovered over 30 years ago, it is possible that the infrastructure may have even become dilapidated.

Besides, most of the $30 million will have to go for work-over flow stations, pipelines, design and survey, environmental impact assessment (EIA), office expenses and so on.

The delay in passing the PIB, which is currently being debated in the National Assembly, could also be cited as a factor hindering smooth operations. There is the need for the marginal field farm-in to be converted to outright acreage holdings. The typical farm-in agreement calls for the IOCs to receive some form of royalty from the indigenous company. But in the proposed PIB, these IOCs will have to give-up areas that are currently being operated by the marginal field operators.

According to the former Petroleum Minister, Rilwan Lukman, “This move would allow them to get their own acreage and become masters over their own fields under favourable royalty and tax provisions. The existing contracts with the oil majors were granted without implementing a modern acreage management which typically includes strong relinquishment practices. As a result, in Nigeria, petroleum companies are ’sitting on’ acreage. This in turn creates a situation where there is no access to acreage for new investors.”

Nigeria hopes to pass wider ranging legislation to reform its oil and gas industry. With the passage of the PIB, Nigeria hopes to rewrite its decades-old relationship with its foreign oil partners, altering everything from the fiscal framework for offshore oil projects, to the involvement of indigenous firms in the sector.

Exploiting these marginal fields would boost the country’s daily production of oil no doubt. There is a reported huge reservoir of marginal fields in Nigeria conservatively put at over 2.3 billion barrels of Stock Tank Oil Initially In Place, STOIP, spread over 183 marginal fields. Available statistics  from the Centre for Petroleum Information, CPI, shows that an average reserve stands at 11 million barrels, with 91 smallest fields having reserves averaging 5.4 million barrels, 20 medium fields averaging 24.7 million barrels and the largest five, 58 million barrels.

The aforementioned figures should ideally constitute the needed impetus for this resource-rich country to assume commanding heights in the exploration and production business, and harness the potentials of the nation’s most strategic industry to generate more value added activities for the domestic economy. But so far, the records have being appalling, a dismal 6 out of the 24 marginal field operators have come on stream.

The Federal government’s plan to improve Nigeria’s fortune in this capital intensive and technology based hydrocarbon business is not moving in tandem with the desired pace for local content development. Anxiety exists in the offices of those companies that have not made significant progress in bringing their fields on stream, as interested parties are putting pressure on the Department of Petroleum Resources to revoke licenses from non performing companies and announce a bid round programme.

Only six companies are producing. They include Brittania-U’s Ajapa field, Energia’s Obodeti/Obudugwa field, Midwestern’s Umusadege field, Pillar Oil’s Umusati/Igboku field, Platform’s Asuokpu/Umutu field, Walter smith’s Ibigwe field, which are all on stream. The remaining 18 operators are not producing.

The Ajapa marginal field operated by Brittania-U, began production in January, 2010. It is the first offshore field operation with a purpose built Floating, Production, Offloading Unit, FPOU, with capacity to handle 10,000 barrels of crude oil per day. It also has a 780,000 barrels capacity ocean going tanker and a 4,200 horse power tug boat that lifts its crude to Chevron’s export facility and the tanker is available to handle crude oil movement services for interested third party companies. The company recently completed a $30 million buy-out of its foreign partners, Syntroleum Nigeria Limited, a member of the Pan-Petroleum (Holding) Cyprus Limited.

Announcing this at a press conference in Lagos, Uju Ifejika, Chairman/CEO Brittania-U, explained that with the buy-out, her company has become the only indigenous marginal field operator to buy out its foreign partner, a process that deepens the Federal Government marginal field programme initiative.

Midwestern Oil and Gas Company Limited and its technical partner Mart Resources, have unveiled plans to upgrade their permanent central production facility located at the Umusadege, UMU field to process up to 30,000 barrels per day, bpd.

Since being placed on production, the UMU-6 well has averaged 2,175 bpd on a 20 / 64 inch choke. Aggregate production from the UMU-6 well since December, 2010 and for the first few production days of January 2011 is approximately 52,000 barrels.

Umusadege is located in the former Oil Mining Lease, OML 56, in the central Niger Delta, some 100Km northeast of Warri. The field was discovered by Elf with the Umusadege-1 well in 1974.

After 2 years of production from Umutu-2, and Umutu-4 in the Asuokpu / Umutu field, the operator, Platform Petroleum which has merged with Shebah Petroleum Development Company to form Seplat Petroleum embarked on full field re-evaluation study with a view to understanding the field better, identifying drillable prospects to increase the reserve and ensure optimum recovery from the asset. The company showed enormous zeal and character in ensuring that the field turns out maximum output. Its partnership with Newcross has yielded much gain as exploitation activities which commenced full throttle at inception had reached a climax. The Chief Operating Officer, COO, of the company, Osariemen Owieadolor, confirmed that the partnership has actually provided a major boost. He said that the company had put in all efforts with the support of the partner to ensure that it fulfils all the requirement of the farm out agreement.

“As a result of the agreement we entered into, we left no stone unturned in making sure we get our field into stream. We felt with such achievement it would place us in a vantage position to secure other fields that we might want to bid for. Now we are more confident of acquiring more fields for production.” He said

Seplat Petroleum, executed a Sales and Purchase Agreement, SPA, with Shell, Total, and Eni for the acquisition of their combined 45 percent interest in Oil Mining Lease, OML 04, 38, and 41, three blocks in onshore western Niger Delta covering about 2,650 sq. Km, with 30 wells and a production capacity of approximately 50,000 bpd. The existing Asuokpu / Umutu field is at the eastern end of OML 38.

No doubt, these are some of the success stories of the indigenous operators, who have shown resilience despite the challenging environment in which they have found themselves. They have also shown that they possess the capacity to handle bigger responsibilities and increase their global competitiveness.

As most companies have struggled to get their fields into production, the Nigerian government has been asked to incentives such companies which have been more industrious in bringing their fields on stream, by allowing them choice of new fields without competitive bidding in the forthcoming licensing round. While this is unlikely to happen, the participation in the exercise may benefit some of the more enthusiastic companies that have come on-stream in other ways.

Source: http://www.nigerianoilgas.com/?p=509