Experts point landmines for new awardees, financiers of Nigeria’s marginal fields

…Say fields portend great liability for investors

…Getting equity capital to make 2C bankable a long, hard road

…57 fields never had production tests done on them

…Said assets over-priced; were given free alongside gas in last bid round

Ben Eguzozie, in Port Harcourt

Experts versed in bidding and licencing rounds in the oil industry say there exist landmines inherent in the recent awards of Nigeria’s marginal fields by the regulator, the Department of Petroleum Resources (DPR).

They said the awards “pose a host of major problems for both the ‘potential awardees’, and would be financiers.

A total of 57 fields located on land, swamp and shallow offshore waters are included in the new bid round, which could give the government $500 million.

According to the oil industry experts, whereas in previous licencing rounds, winners were given an ‘Award Letter,’ which served almost as a “financial instrument,” where a winner has a fixed defined route to securing eventual title that was only subject to a payment of a signature bonus, the latest DPR’s ‘potential awardee’ approach makes these security arrangements not easily implementable.

Under the initial licencing rounds, a winner could go to a financier and discuss terms for leveraging his award. The financier, in turn, will know that he can enter into an arrangement with the company based on the award letter alone. The financer could take a charge over the shares in the winning company, and through that gain some level of security before paying the signature bonus to the government.

But in the new potential awardee method, the DPR argument of only granting potential rights is that “if you grant them the award before they pay, and then if they don’t pay, it’s hard to revoke.

Many industry watchers say this argument does not take full account of the funding protocols.

“So, investors are faced with a conundrum: what security arrangements can I make with a ‘potential awardee’ that for all intents and purposes really has nothing until payment is paid,” one energy expert queried.

“What is worse, even if an investor takes the risk and pays, he still has to go through the risky process of having several ‘potential awardees’ trying to form an SPV (special purpose vehicle) before title is awarded. A process full of all sorts of counter-party risk as the investor will not know which of the other ‘potential awardees’ will pay; and thus, will not know who his eventual partner will be,” a bid round expert told our newspaper, while expressing deep shock.

According to him, “This itself is a KYC nightmare – investor is asked to pay a bonus long before he knows if his would-be partners are credible both financially and from a KYC point of view.”

Meanwhile, DPR’s requested payment within 45 days in order to secure the awards, would constitute another sore-thumb for potential operators, the experts adduced.

But Sarki Auwalu, head of DPR, had said Nigeria was awarding the marginal oilfield licenses by the end of March, and will allow companies to pay signature bonuses in naira denominated currency.

He said he expects Nigeria to take home $500 million from the signature bonuses on the marginal fields.

Marginal fields are smaller oil blocks that are typically developed by indigenous companies. The latest licensing round was launched in June 2020. It is the first marginal field round by Nigeria in 20 years. The last bid round by the African top oil producer was in 2002.

Meanwhile, of the 24 fields awarded then, only 13 are producing, raising disapproval that some companies that won the bid round were not equipped with the expertise to develop them. The federal government had revoked 11 non-producing licenses, of which the owners are now in court challenging their licences revocation.

Auwalu said DPR had narrowed the list of bidders to 161, and aimed to conclude the process by the end of the first quarter.

He said, once signature bonuses are paid, DPR would “bring the companies together” and enable them to enter the fields.

Nigeria is looking to production from the marginal fields to boost government finances and increase local participation in the country’s oil sector, which provides over 80 per cent of state income.

While indigenous companies have become increasingly important to the oil industry, the sector remains dominated by global oil majors.

Asset pricing and financing 

The pricing of the assets poses two main problems, some experts told our correspondent. “The average price for the assets is about $1 – $1.25 per 2C (that is, per barrel of Contingent Resources. They are called thus because a great majority of the 57 fields, exception of two or three, have never had production tests done on them. Hence, they can’t be said to have reserves,” one bid round expert posited.

He said, this poses two main problems: firstly, they are over-priced. That in the last material sale of assets in the country, most 2C were actually given away for free (alongside gas).

“Investors paid for 2P and the 2C –and the gas – was just the ‘sweetener,’ the free upside. No one really pays for 2C. At worse, with assets with no production, 2C can easily be purchased for $0.20c to $0.30c. Not anything like $1,” the expert knowledgeable in international bid round, told Business A.M.

The second problem, he said, is that “no bank or trading company will fund the process of converting 2C to 2P. This means that every single marginal field winner must use equity capital to drill the next set of wells.

“In fact, most traders and banks will require two tested and producing wells before they invest in the development. This means that if you are fortunate (or unfortunate) enough to win a marginal field, you will need equity capital for signature bonus and two wells.

“So, for onshore assets, aside from signature bonus, you will need at least $20 – 30 million for two wells; and for offshore $40 million – $60 million for two wells. All this with equity capital. Not debt.”

He summed up things thus: “The award of a marginal field, whilst full of hope and promises, starts as a great liability. ‘Consultants’ are making money telling a simple tale that once bonuses are paid investors will be chasing marginal field owners. This is plainly false. It’s a long hard road, and one should not be mortgaging one’s house and assets to buy a liability until one has a clear sense of where one will get all the equity capital needed to make these ‘contingent resources’ bankable. It’s not a mean task. Buyer beware!”