Oil Blocks Under the Hammer

Oil Blocks Under the Hammer

By

Bello Salihu, PhD

Recently it was hinted by no less a person than The Honourable Minister of Petroleum that Nigeria will be engaging in another open licensing round for hydrocarbon exploration. This is in tandem with the nation’s desire to further increase its oil and gas reserves and deepen the participation of indigenous operators in the industry. Both worthy and laudable ambitions.  This is the first licensing bid run to be conducted by Nigeria’s current government headed by President Goodluck Jonathan, it is also a golden chance for the government to showcase its attempt at transparency in view of the perceived opacity that has all these years characterised the Nigerian oil and gas industry in both the downstream and upstream sectors.

Already, some aspects of the current government’s approach to the situation are a welcome departure from the past. For one, so far no one is talking about the unnecessary and expensive roadshows undertaken to ‘showcase’ what is ‘on offer’ in Nigeria. Whoever is remotely interested in bidding for an oil prospecting license in Nigeria is bound to have done his homework and is more likely to have pencilled down the least risky investment for his or her money. A fancy roadshow in a glitzy London or New York hotel will do little to get anyone interested in Nigeria if their minds have not been made up already. Besides, if history is anything to go by, serious investors will be too busy cutting back room deals with the Nigerian authorities to have anytime left to attend roadshows. So it is good to see that such wastage is out this time around.

However, since it is generally believed in the industry that the hiatus since the last bidding round was to await the passage the of the Petroleum Industry bill, it is interesting to note that, save for the unlikely scenario of a record-breaking expedited deliberation and assent that sees the the PIB passing through both the legislature and executive approval before the end of the year, then this might as well be the last licensing round before the PIB becomes law. I am sure the implication of this, vis-a-vis the provisions of the PIB is not lost on the Nigerian authorities. Section 190 (sub-sections 1 to 6) in Part III of the PIB details the award process. This section, and others that link to it, will eventually provide the legal framework based on which the process shall be conducted in future and of resolving disputes and grievances that may arise. To foreclose any future abuse, especially since the Petroleum Inspectorate, or DPR if pre-PIB, will not be autonomous, one hopes that the bill takes it a little further by amending Section 191 which still retains the power of the President to grant licenses by fiat.

When they were introduced by the Obasanjo administration, licensing bid rounds brought globally recognised best practice to the process and were seen to be a more transparent change from the days of yore when autocratic governments dish out such unfathomably kind gestures to their friends and clients. Days when heads of government can allocate, with a single stroke of the pen, something as pivotal to the country’s economic interest as an oilfield in a prolific and proven basin such as the Niger Delta, to whomsoever they wish. The way, manner and aim of these discretionary awards are often times not kosher.

So bidding for an oil exploration license ranks up there with GSM as one of the so-called dividends of democracy.

All over the world, governments that conduct licensing rounds have to thread a fine line between attracting investments and being corruptly compromised by of the value of the assets they are auctioning off. The pendulum swings from countries who hold no such auctions such as Nigeria before the fourth republic and countries where it takes place almost every year on the average such as the United Kingdom. A licensing round is often used as a barometer to measure both a country’s acceptance by investors as a good place to sink their investments and also the robustness and fairness of the country’s bidding and regulatory processes. It also measures the level of optimism the investors have on the prospects under auction. But that is only half the story. What happens before and what follows after the auction sometimes become bigger news than the process.

Take the case of the South American nation of Ecuador for example, the news coming out of Quito, the nation’s capital, this week is that the country’s Confederation of Indigenous Nationalities is planning a demonstration against the latest licensing round taking place at the end of November this year. The confederation, which represents Amazonian tribes, is protesting against the destruction of their environment and way of life by oil exploration. Now, companies coming into the process in Ecuador will have to steel themselves for popular discontent before after the auction. The aftermath of the process in the UK Continental Shelf (UKCS), on the other hand, saw a record number of applications that according to the UK government confirms that the North Sea remains a “fertile landscape for investors”. A statement that is designed to fly against the general perception that oil production in the North Sea has peaked along time ago and it is no longer a viable oil region.

So far Nigeria has conducted three auctions with varying levels of success. All, seemingly, have three things in common. The first is a lukewarm embrace of the process by the established international oil companies operating in Nigeria. Few if any western oil companies have participated actively in any of the past bid rounds. Which makes one think that it is either they know something others don’t or they have figured out their own way of skipping the process all together. They definitely cannot turn their back to an established and rewarding oil region such as the Nigerian Niger Delta. It will be interesting to see if they will be more enthusiastic this time around. The last bidding round in Nigeria’s Gulf of Guinea neighbour, Angola, which was held in 2011 BP, ENI, ConocoPhillips, Total, Statoil and Repsol all participated and got themselves a chunk of that country’s deepwater concessions.

The second thing the past Nigerian auctions have in common is the entry of the lesser known and wanna-be operators from Asia such as Essar Exploration and Production, Sterling Global Resources and ONGC-Mittal all of India, the Korean National Oil Company and the China Offshore Oil Corporation, to mention a few.

Almost all of them got their concessions, some with a controversial preferred right of first refusal  clause, on the back of promises to undertake infrastructural projects. This, if such projects were ever executed, is laudable. But history has shown that such promises are hardly kept if ever. Since then nothing has come of China’s CNPC’s promise to invest 2 billion into the Kaduna refinery on the back of winning four blocks in the 2006 bidding round; it is unlikely that ONGC-Mittal’s promise to invest six billion dollars in building a refinery, a power plant and a rail line on the back of its own controversial winning bid in 2006 wold have been kept even if their bid was not revoked. Oil operating companies are normally not interested in taking up peripheral obligations tied to the the award of an exploration prospect. They will play along, win the bid and bury such obligations in bureaucracy and technicalities. These obligations that are unwelcome to them include commitment of the winners to invest in the country’s infrastructure or to go into partnership with local Nigerian companies for the exploitation of the blocks and to strictly abide by the Nigerian content policy by using local service companies and subcontractors. Nigeria will have to think of something more concrete or an enforceable contract when these type of promises are to be broached in the bidding process.

The third was the active encouragement of indigenous, smaller Nigerian operators to participate in the country’s upstream industry through measures ranging from preference to them in the bidding process to encouraging foreign bid winners to work with a selection of them as local content vehicles. While both moves are antithesis to the principle of the open bidding process, they are understandable in as much as they actually achieve their stated objective of encouraging Nigerian companies to participate in the industry and not to act as briefcase-holding proxies to foreign interests and, also, that all of the Nigerian companies considered for such privilege are made to play by the same rule.

However, unlike Ecuador or the United Kingdom mentioned earlier, in Nigeria the news mostly happens after, and not before, the bidding process. The prominent snafu that received most of the media attention in the aftermath of the last biding round was the case of ONGC-Mittal and Transcorp. In the case of ONGC-Mittal the company was not able to show that it has the capacity to undertake the exploration and development of the prospect they were licensed because their strength was found to be in the downstream end of the business. Transcorp on the other had no technical background in oil and gas. The hand of executive arm of government was seen to have played a role in how both companies were able to scale the technical pre-qualification in the process. Eventually, as a measure to inject sanity into the system and after due investigations by the legislature, both Transcorp and ONGC-Mittal lost their prospects. 

Essar Exploration and Production Company and Sterling Global Resources, both of India, on the other hand, couldn not come up with the cash to redeem the concession they won.

Feelers in the industry suggest that this time around things will be a little different. Let us all hope ‘a little different’ here means for the better and not for the worse. A thorough due diligence check on all companies to be involved in the process, both indigenous and international, will go along way to sanitising the process and saving the everybody’s time.

This was earlier published in my column 'Oil and Gas Weekly' in Government, 

a publication of Leadership Newspapers, Nigeria - 2012.