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‘Marginal fields should be awarded on merit’

The Federal Government is set to award 31 marginal fields, the second time since 2003. Engineer Barry Esimone, Chief Executive Officer, Crusteam, an energy and infrastructure group, in this interview with Sebastine Obasi, appraises the last bid round and the expectations of the current one. Excerpts:

SwwwTen years after the award of the first round of marginal fields’ licences, only eight of the 24 fields awarded are producing. Would you say the exercise has been successful?

To meaningfully assess performance of the awarded field, these fields need to be properly classified to understand the reason for their non-attractiveness. Again, being the first marginal field allocated, applicants might not have appreciated the true state of the fields before acquisition.

By all standards, eight out of 24 is about 33 percent success rate, which of course may be considered a failure. But if reclassification is done based on viability analysis, eight out of truly viable fields may mean good success.

Production companies’ field performance appraisal processes are usually influenced by both production capacity and operating/production cost. This is why wells drilled and developed with poor contribution factor were “marginalised.” Cost of production depends on various factors amongst which are locations of field, community activities, etc. The decision process results in the abandonment of wells not favoured.

Government in its wisdom decided that to increase production, and to encourage local participation, classified wells based on the following into marginal or non-marginal:

?          Fields owned by major international oil companies and state oil company (NNPC), which have remained non-producing for over 10 years.

?          Fields not under development due to marginal economics for major oil operators and high fiscal terms.

?          Exploration discoveries but no appraisal activities.

These may be matured and exploited fields that have been depleted and will require additional investment to improve on their yield. Again, operating cost is a function of overhead and expected return on investment by shareholders.

As you rightly noted, one of the objectives of the exercise is to promote indigenous participation in the upstream sector of the petroleum industry. Ten years down the line, has this objective been achieved?

Oil and gas exploration and production business is no kiddies’ joint. The business model required to succeed in the area is not a very familiar tuff for Nigerian businessmen who are used to short term return period based on contract business and political patronage. Exploration and production is usually a medium to long-term business investment model that is subject to international terms. To make a fair assessment of the participation success, the backgrounds of the awardees need to be known. The few that succeeded to get first oil are being operated by professionals that came out of the IOCs and established businessmen in Oil and Gas with good background.

What challenges do you think marginal operators face that made majority of the fields not producing?

The problems are a combination of technical, financial and business issues. Technically, some of the fields will require application of modern appraisal technology to improve on the economics to make them attractive to financiers, while ownership structure of the companies can also be responsible for some of the challenges. Most Nigerian businesses are built on glorified sole proprietorship masquerading as corporations. The idiosyncrasies of these men discourage professionals from working with them.

These men are not willing to partner with others, but will rather want a king and subjects kind of relationship.  This approach of course does not lend itself to financing from well-established international financial institutions used for such deals. Until lately, financing for such projects usually came from the outside, as the local banks were not liquid enough to undertake such ventures.

There are different applicable fees in the current bid round. Does this process not make it exclusive to a few?

The fees again may discourage well-meaning professionals whose financial capacity may not be robust enough even in partnership. This will require their reaching out to the moneybags, who, again, may ultimately frustrate the whole exercise for the aforementioned reason.

The selected applicants are to be sent to the Minister for approval. Would it not call to question the issue of transparency?

In principle, this should not be a problem if the evaluation is by objective rather than subjective criteria. Where overwhelming political consideration is used with little consideration on merit, we might end up in the same situation as the 2003 licensing round.

Funding appears to be a constraint for the marginal field operators. How best can local banks assist operators to bring their fields into production?

The local banks are beginning to brace up to energy projects financing, and have created relationships with foreign financial institutions after the power project financing. This time promises to be better as they have gained some experience in packaging such deals.


Inadequate technical expertise in the industry means that operators need to invite technical partners from abroad. Is it not a negation of the government’s local content initiative?

Oil and gas exploration and production projects will always require technical alliance whether in Nigeria or in the western world. However, the extent of foreign involvement will depend on the background of the team members. If the award again is skewed in favour of politicians who will only respect expatriate workers, then of course, they will need help thereby defeating one of the key objectives. When experienced Nigerian professionals are integrated into the teams, less foreign involvement will be the case. Like I said, a little expatriate injection is not bad as oil and gas exploration is a business without boarders


How best do you think the government should accommodate more indigenous participation in the oil and gas industry?

Developing a well thought out model to ameliorate the aforementioned challenges by the responsible government agencies will go a long way. Creating conditions that will encourage partnerships and joint venturesby controlling equity shareholding may help. Again, liberal fiscal regime for new entrants with performance standard as a condition for continued support can be helpful as well. Government can provide some form of time-dependent and performance-based guarantees, which should also be explored.

How often do you think the marginal field bid round should be held?

In my opinion, three yearly bid round may be more appropriate. In an emerging economy like ours, where entrepreneur and investors emerge frequently, too much gap between bid rounds might cause diversion of investible funds into other areas before the bid rounds are held. However, such gap is important to assess the success of the previous rounds before embarking on another. Awardees who are off schedule may relinquish their


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