TE Editorial: New Business Models Critical to Success in Nigeria’s Marginal Oil Fields

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SWITZERLAND, JULY 17 – As the oil and gas industry experiences a downturn due to falling oil prices, experts have continued to debate whether this is the right time for the Nigerian government to open up bidding for the country’s Marginal Oil Fields. It is now evident that a new way of thinking and developing innovative business models will be critical to the success of companies acquiring these assets.

Recently, the Department of Petroleum Resources (DPR) invited interested companies to bid for the marginal fields, according to a document seen by Today’s Echo.

A total of fifty-seven (57) fields located on Land, Swamp and Shallow offshore terrains are on offer in a Bid Round exercise that is open to indigenous companies and investors interested in participating in Exploration and Production (E&P) business in Nigeria.

Also, in compliance with the realities of the Covid-19 pandemic, the DPR is conducting the exercise electronically, with Expression of Interest/Registration, Pre-qualification, Technical and Commercial bid submission and bid evaluation to be submitted online.

Usually, news of bid rounds is greeted with a surge of elation. But this time, it is with cautious optimism, laced with a critical evaluation of the situation. The global oil and gas industry is currently suffering from low demand, glut in supply and low prices. Several countries had imposed lockdowns to stop the spread of the COVID-19 pandemic this led to an unprecedented drop in economic activity between March and May. This means that many industries that used to consume fuel in large quantities became dormant. These include aviation, transportation, and manufacturing of non-essential goods. There is also the price war going on between Saudi Arabia and Russia.

 However, we are currently seeing some resurgence in the sector with the relaxation of lockdowns and resumption of economic activities in several countries. Prices are coming up a bit after plunging dangerously to historic depths. The global benchmark, Brent Crude, fell to below $20 per barrel in April but has now rebounded to around $43 in July. We are not out of the woods yet, but the situation seems less precarious than it was one month ago.

As an oil producing economy, Nigeria has been severely hit with the economic fallout of the COVID-19 pandemic. Today’s Echo reported in May that Nigeria had over 84 million barrels of crude stranded on the sea without buyers and with dwindling storage options. Government revenue has also been severely impacted as the 2020 budget had to be reviewed twice. Nigeria has been advised over the years to diversify its economy away from the reliance on oil. Yet some experts have argued that despite the impact of COVID-19, petroleum is still going to dominate the energy space for a long time. For Nigeria, the marginal oil fields provide an opportunity for indigenous players to key in.

The Nigerian Association of Petroleum Explorationists (NAPE) defines marginal fields as, “fields whose economics is not considered robust enough using conventional development methods under the prevailing fiscal regime.”

The term evolved from the Petroleum Amendment Act 1996, which introduced paragraph 16A into the First Schedule to the Petroleum Act, empowering the president to declare a field as  marginal where a discovery has been made in such a field but it has been left unattended for 10 years.

In Nigeria, the marginal fields are located onshore and in the shallow waters. There are currently about 178 of them. Most of them were discovered by major International Oil Companies (IOCs) in Nigeria in the course of exploring larger acreages. 

Today’s Echo gathers that the Marginal Fields programme was introduced to encourage indigenous participation in the oil industry and also to increase government’s take on undeveloped acreages. The programme discourages continuous holding of undeveloped fields by International Oil Companies (IOCs). Thus, the creation of marginal fields was to reduce the rates of abandonment of depleting fields and assure the Government’s take in acreages that would otherwise have become unproductive.

The last bid round on such fields was held in 2002 under President Olusegun Obasanjo, when 24 fields were sold to 32 companies in 2003. There was an announcement for another bidding round under President Jonathan in 2014, but the process was not completed. Today’s Echo gathers that 19 out of the awarded marginal fields are currently operating while 11 are producing. The production lifespan of a typical marginal field is 10 to 12 years.

With the uncertainties in the industry, some analysts are of the opinion that nothing good will come out of this bidding round. However, some others suggest that with new strategies and business models to adapt to the situations, some of the bidding companies can become successful with their acquisitions.

According to renowned petroleum expert, Osten Olorunshola, only the bold and truly professional will be able to succeed this time in view of what is currently happening in the industry. During a special online forum, he remarked that marginal fields are low hanging fruits because they are not conventional and conventional productions are unlikely to be yield maximum growth and profitability.

He highlighted some of the strategies that will be critical to the success of the new marginal fields such as competence, low cost entry, and early production.

He also advised companies interested to carry out technical due diligence, ranking priorities based on critical factors such as reserve, terrain, nearness to existing oil facilities and evacuation.

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