MARGINAL FIELDS IN NIGERIA'S OIL AND GAS INDUSTRY.

MARGINAL FIELDS. 

Considering the just-concluded 2020 marginal field bid rounds, I did a short write-up on marginal fields in the oil and gas industry. I tried my best to be as simple as possible, considering that my audience will most likely be general.

PS: I own all punctuation and grammatical errors (if any) with my full chest.  

PPS: The facts in this write-up are correct as of the date of posting.  

There are three sectors in the oil and gas industry, namely upstream (exploration and production), midstream (processing, storing, and transporting) and downstream (distribution, marketing, and retailing). 

There are four ways of acquiring interests in the upstream legal regime via an oil exploration license (“OEL”), oil prospecting license (“OPL”), oil mining lease (“OML”): namely, concessions, unincorporated joint ventures, production sharing contracts and marginal fields. The focus of this write-up is marginal fields (“MFs”).

Paragraph 17 (4) of the First Schedule to the Petroleum Act defines MF as “such fields the President may identify from time to time identify as marginal fields”. For a field to be a MF, it must have been left unattended and unproduced for not less than ten years from the date of its first discovery by the licensee (holder of an OML) and has been reported annually to the Department of Petroleum Resources(“DPR”). The licensee considers the field(s) as not viable for operational/ commercial reasons. Logically, a MF lies within a particular OML. The purpose of MFs is to promote local participation and operation in the oil and gas industry, and it was established in 1996. 

Upon identifying a MF by the President, the MF is farmed out from the wider OML area to a third party. The effect is to cede the unattended fields in the licensed areas from the original OML holders to indigenous companies. 

This arrangement is a farm-out arrangement, and it does not designate a new OML for the identified MF. The farm-out arrangement is a contractual relationship akin to a sub-lease (sub-lessor (the OML holder) and sub-lessee (the MF operator)). The MF operator thereby can explore, produce, and take any petroleum discovered in the MF area. A farm-out agreement(“FOA”) is drafted, binding the parties, and regulating the arrangement. The designated parties are the Farmor (the license holder) and the Farmee (the third party). For example, the Farmors could be NNPC, Shell, Total and Agip, while the Farmee is an indigenous oil company in Nigeria. These Farmees are required to pay royalties to the Farmors. Other commercial agreements drafted during the arrangement include Deed of Assignment (“DOA”) Joint Operating Agreement (“JOA”), etc.

MFs are operated on a sole-risk basis; thus, prospective bidders for the MFs may find it challenging to finance their operations. The prospective bidders opt for financing options such as equity financing, debt financing, reserve-based lending, contractor financing, etc.

Usually, the DPR announces the commencement of MF bid round exercise. The DPR announced the 2020 MF bid round exercise in June 2020 with 57 fields located on land, swamp and shallow offshore terrains open for offers. The participation was limited to Nigerian companies with 100% indigenous shareholding. 

Out of 600 companies that applied for pre-qualification, 161 emerged as preferred bidders (“potential awardees”). Most of the 2020 preferred bidders were randomly paired by DPR, resulting in forced alliances that could adversely affect the Bid round’s objectives if not adequately managed. After the award, the bidders can choose to form a special purpose vehicle (SPV) to operate the field. The SPV can raise financing on its own, thereby helps the financial obligations of the awardees. It is reasonably presumed that the awardees in the SPV will hold shares proportionate to the interest awarded. There is also a compulsory signature bonus ranging from $5 million to $20 million per field. It is to be paid within 45 days of notification with an option to pay in Naira. Any dispute that may arise from the transactions is referred to the National Oil and Gas Alternative Dispute Resolution Centre in the first instance. Some of the 2020 MF Bid round awardees are A.A. Rano, Shafa Exploration, Matrix Energy, and Vhelblerg. https://www.vanguardngr.com/2021/05/shafa-a-a-rano-matrix-others-get-marginal-oil-field-licence/

On the recommendation of the DPR, the minister can withdraw consent and void the farm-out agreement if within 60 months of consent to the FOA, a farmee fails to show verifiable evidence of efforts made to the development on the MF(s) according to the approved plan. However, suppose at the end of 60 months of consent to FOA, a farmee shows evidence of efforts made to the MF(s) development, the FOA shall be renewed by the DPR per the law.

The DPR has issued Guidelines for the Award and Operations of Marginal Fields in Nigeria 2020. Explanatory Notes to the Guidelines for the Award and Operations of Marginal Fields in Nigeria, 2020, which provides clarifications, explanations, and directives for implementations of the Guidelines. The links are; https://www.dpr.gov.ng/wp-content/uploads/2020/08/Guidelines-for-the-Award-and-Operations-of-Marginal-Fields-in-Nigeria.pdf, https://marginal.dpr.gov.ng/Content/assets/pdf/ExplanatoryNotes.pdf

I hope you find this helpful. Kindly share for others to learn. Thank you.