Allocation, relinquishing oil blocks still a mess
Bukola Odufade is Businessamlive Reporter.
You can contact her on bukola.odufade@businessamlive.com with stories and commentary.
Nigeria’s marginal business
In Nigeria, Oil and gas industry is big business. For the country, it is a cash cow, literally; and for investors, especially international oil companies, who have been around since the 1930s when prospecting started, returns are so good that they keep headquarters’ executives in London, Amsterdam, Irvin (Texas), San Ramon (California), Houston, Paris, Rome, very happy, indeed. Many look to sink their teeth into it and have a bite. Those who already have a bite are regarded as big players in the economy. But many analysts will tell you that the discovery of oil is the reason behind the uncertain turn of events in the country that has not been good for the Nigerian people. A country once agrarian, relying on agricultural produce and commodities and working hard at it, suddenly lost its focus as the easy money of oil happened on it.
As the country’s main source of foreign exchange earnings and funding of its budgets over the decades, as well as turning out to be easy money for the country because it does nothing besides waiting for petrol dollars to flow into its vaults, oil is blamed for Nigeria’s lack of innovation and inventiveness. And worse still, it is one of the reasons why Nigeria is regarded as one of the corruption capitals of the world.
The country’s corruption appellation that feeds off its dependence on oil to get its economy going for the past several years, in what economic, development and financial analysts also link to its lazy approach to economic management, is often seen as being evidenced in the management of its oil and gas assets. For instance, it has become clear over the decades that the industry is very opaque and that transparency is a serious concern.
This opaqueness and transparency concern comes alive when examining the process of allocating oil blocks and the relinquishing of undeveloped fields. The growth of the Nigerian oil and gas industry has been hindered by the lack of a well structured acreage management system, as allocations to investors have been known in many cases not to follow due process, even without due diligence.
Nigeria currently has a total of 393 oil blocks that have been discovered in the country, and only 185 of them have been awarded to individuals and corporations, while 208 blocks are yet to be awarded, according to the Department of Petroleum Resources. Out of the 173 oil blocks awarded, 90 belong to Nigerians, while the remaining blocks are owned by foreigners.
The country, however, notoriously has one of the sloppiest acreage management regimes, as acreage sizes are too large and the provisions of the law for relinquishment and revocation are not complied with, says Israel Bamidele, an energy lawyer. Oil and gas exploration in Nigeria has been ongoing for over six decades and it currently has 34 pieces of legislation guiding activities in the industry.
An important piece of legislation which outlines exploration activities is the Petroleum Act 1969, which provides the framework for the licensing of exploration rights to oil and gas companies engaging in exploration, production and transportation of crude oil.
Most oil licenses granted were large acres and this affected the oil and gas industry because the multinational companies were not willing to develop the smaller fields within the large acres. Ishaya Amaza, a senior associate with Aelex, a leading Nigerian law firm in an emailed response to business a.m. said the “major oil companies with a license over such acreages would only produce from the ones that seem economically viable for them.”
Under the act, the licensing framework provides three types of licenses, namely: The oil exploration licence (OEL), a non-exclusive licence that permits a licensee (oil and gas company) to explore for oil in the licence area.
The second license issued is the oil prospecting licence (OPL), which grants the licensee the exclusive right to explore and prospect for petroleum and allows the licensee to carry away and dispose of petroleum won during prospecting operations, subject to fulfilment of obligations imposed under the Act.
And the third is the oil min- ing lease (OML). This is granted only to the holder of an OPL upon satisfaction of all conditions of the licence or the Act and having discovered oil in commercial quantity (currently defined as a flow rate of 10,000 barrels per day). The lease confers on the holder the exclusive right to search for, win, work, carry away and dispose of petroleum within the specified acreage for a period of 20 years.
Another important part of the act is the power vested upon the petroleum minister. According to the act, the petroleum minister is able to grant licenses for the exploration and prospecting of oil as well as is- suing of leases for the mining of petroleum, only to companies incorporated in Nigeria. The minister of petroleum resources is also empowered to grant licenses for the construction or operation of any refinery in Nigeria.
However, the act is limited and largely inadequate as legal experts have said that the penalties imposed for non-compliance with the provisions of the act are not enough deterrent. This means offenders find it more economical, cheaper and cost effective to violate the provisions of the regulations and pay the paltry fine than to comply with the regulations.
Another problem responsible for the messy oil acreage management system is the improper implementation and non-enforcement of existing legislation even if limited. The federal government has been lacking in enforcing the penalties on oil and gas companies, especially in the case of marginal fields operators.
Amaza explained that in the earlier versions of PIB, a petroleum lease may be revoked if commercial production ceases for a period of 180 days and then re-awarded to another interested party. However, the federal government has been lacking in enforcing the penalties on erring oil and gas companies.
Also, the minister of petroleum resources has wide powers vested on him with no corresponding measures created to check the abuse of these powers.
On the issue of compulsory relinquishment of licenses, the current legal regime and the proposed Petroleum Industry Bill (PIB) 2012 both contain provisions which require the licensee to relinquish half of an OML area after ten years of the grant, or voluntary farm-ins/ compulsory farm-ins under the existing marginal field regime or surrender of the leased area or revocation of the OML, in order to make the fields available for other interested parties to work on.
However, Amaza noted that the PIB has more elaborate provisions on relinquishment of acreages which will make it difficult for operators to sit on these fields without developing them.
Presently, only twelve out of 30 marginal oil fields awarded to indigenous companies have been developed and are producing in over 12 years of their award, DPR said.
Bamidele, told business a.m. that if the intention is for greater local participation, it must be in the interest of the country to enforce the philosophy of drill or drop by relinquishing the non- producing fields and making them available to other interested parties. DPR reports that indigenous producers account for less than 10 percent of the total crude production.
Even Funsho Kupoloku, a former group managing director of the Nigerian National Petroleum Corporation (NNPC) described the process of awarding oil blocs as faulty.
On the other hand, the proposed petroleum industry bill contains a number of provisions that clearly spells out the management of the petroleum prospecting licenses as well as the mining leases crafted in a way consistent with best international practice.
The current legislation and proposed PIB allow for relinquishment of exploitation area if not producing within the given time frame or the possibility for termination if development is not carried out within the stated time allotted. However, it is the failure to carry out these provisions that creates a messy situation in the management of the system.
“In the petroleum industry administration bill (PIAB), an operator may retain more than 50 percent, of its licence area if it has an approved development plan, otherwise 50 percent of the area shall be relinquished upon the expiration of the exploration period,” Amaza stated.
The 2018 PIB also restructures the sizing of oil acreage, it limits the size of a license to 500 square metres for onshore fields and 1000 square metres for offshore fields, he added.
Recommendations
Experts have stressed the need to pass the Petroleum Industry Bill into law because updating the legislations on acquisition of oil rights to meet international best practices will encourage development.
There also say that there is need to address the provisions on penalties by any defaulting companies to make it stiff thereby deter rather than encourage defaulters.
“It is recommended that a monitoring committee be set up with the agency responsible for regulating oil acquisition rights in Nigeria for the reason that even where the laws are adequate, they are not implemented or adequately enforced due to lack of monitoring and compliance,” energy lawyer Bamidele, advised.