Nigeria: Marginal Field Bid Round 2013

Last Updated: 21 February 2014
Article by Fola Olusanya, Koye Edu and Niyi Duale

Introduction

The oil and gas industry is buzzing with excitement following the recent announcement by the Federal Government of the 2nd Marginal Field Licensing Round. This is understandable given the various delays and postponements that have characterised the commencement of a subsequent marginal field licensing round.

This Marginal Field Licensing Round which comes 12 years after the 2001 Marginal Field Licensing Round is consistent in the objective to boost indigenous exploration and production activities.

The announcement is coming at a time when new investments in the oil and gas industry have been stalled due to the non-passage of the Petroleum Industry Bill (PIB). The non-passage has essentially restricted the Federal Government from increasing itS revenue base and has stifled activities in the upstream sector.

The Guidelines for Farm-out and Operation of Marginal Fields 2013 (the 2013 Guidelines) issued by the Department of Petroleum Resources (DPR) sets out the procedure to be followed in the bidding for 31 (thirty-one) marginal fields in the 2nd Marginal Field Licensing Round.

Key items contained in the 2013 Guidelines are set out below.

What constitutes a Marginal Field?

The 2013 Guidelines retained the definition of a Marginal Field contained in the Petroleum Act 1969 (as amended) as well as the (2001 Guidelines). Some of the features of a Marginal Field include (i) fields not considered for development based on fiscal and market conditions (ii) fields in which only one exploratory well has been drilled for having high gas and low oil reserves (iii) fields that have been abandoned by leaseholders for more than 3 years for economic or operational reasons etc.

What's on Offer?

31 Marginal Fields consisting of 16 onshore and 15 offshore fields are available under the 2013 Marginal Field Licensing Round.

Who can Apply?

An Applicant Company must be indigenous and must be substantially Nigerian.1Each Applicant Company is required to demonstrate capabilities, both technical and managerial to operate any Marginal Field awarded. The constitution of an Applicant Company must clearly state that its object would be oil and gas exploration and production. Each shareholder of an Applicant Company can only hold a maximum equity stake of 25%. Companies with little or no track record or experience must show their capability to attract a credible technical partner. One of the shareholders/member of the Applicant Company must be the Operator of the field.

Pre-qualification Requirement

Each prospective pre-qualification applicant can only bid for a maximum of 3 Marginal Fields. The DPR is to ensure that each field does not have more than 5 (five) pre-qualified bidders.

Financial Implication

Prospective applicants are required to remit the following:

I. Application Fees N200,000.00 per field

II. Processing Fees N300,000,00 per field

Upon pre-qualification, a pre-qualified applicant can undertake data prying upon payment of the sum of USD3,000.00 per field. The sum of USD15,000.00 would also be payable per field for leasing of data by prequalified bidders. The 2013 Guideline also introduces the option for pre-qualified bidders requiring technical assistance with leased data to obtain such services from a Technical Adviser.2

Evaluation of the Bids

The evaluation criterion includes information on shareholding of Applicant Company, Technical and Managerial Skill, ability to pay the Signature Bonus3, Nigerian Content Compliance, local corporate social responsibility and experience in holding and operating fields.

Award of Field

A Marginal Field Awardee (MF Awardee) is to be announced following the recommendation of a Selection Committee4 to the Minister of Petroleum Resources and the President. Upon the award to an Applicant Company, a Farmout Agreement is expected to be entered into between the Farmor and the Applicant (Farmee). A Joint Operating Agreement would be negotiated prior to the signing of a Farm-Out Agreement with the Farmor where 2 or more Applicants are jointly awarded a MF.

A Signature Bonus of USD300,000.00 is to be paid per field. Payment of the Signature Bonus expected is to be effected within 90 days from the date of award of the field to a MF Awardee.

Marginal Field Farm-Out Agreement

Key provisions/clauses to be contained in the Marginal Field Farm-out Agreement are as follows:

i.Straddle Fields Reservoirs: Any Marginal Field which straddles anotherblock shall be operated as a unit with the first leaseholder. A Unitizatio Agreement will be required to be executed prior to the approval of a Farm-Out Agreement for straddled Marginal Fields.

ii. Abandonment: An agreed percentage of the MF Awardee's budgetmust be set aside to provide security for abandonment costs.

iii. Community Development Relationship: An MF Awardee will beresponsible for community development activities in the Farm-out Area.

iv. Insolvency of Farmee: Where an MF Awardee becomes insolvent, theMarginal Field shall be returned to the Farmor with all obligations andliabilities remaining with the MF Awardee.

v. Encumbrance: The MF cannot be encumbered by Marginal FieldHolder.

vi. Assignment and Termination: Any assignment of a Marginal Field must be with the prior written consent of the Minister of Petroleum Resources5 in accordance with the Petroleum Act and the Nigerian Oiland Gas Industry Content Development Act.

Variation on the 2001 Guidelines

i. Timeline: The 2013 Guidelines stipulates a timeline of 6 months for the bid process. (i.e from bidding to announcement and execution of the Farm-Out Agreement). The 2001 Guidelines did not provide a timeline for completion of the transaction and in actual fact took approximately 24 months. The indicated timeline appears aggressive and may not be feasible in practical terms.6

ii. Selection Committee: Under the 2013 Guidelines, External FinancialAdvisers have been co-opted into the Selection Committee, which wasnot contained in the 2001 edition. The exact membership drawn fromother Agencies such as DPR, NNPC and the operators of the lease hasnot been made public. It would appear that the Financial Advisers wereincluded in the Selection Committee in order to assess the financialstrength of applicants.

iii. Signature Bonus: The required Signature Bonus represents a 100%increase from the last licensing round (which was USD150,000.00).

iv. Transparency: The method of selection and evaluation of proposedawardees on the 2013 Guidelines is stated to be based on the highestscores. This position appears to run contrary to another provision in the2013 Guidelines which stipulates that following the completion of bidevaluation process, a recommendation will be made to the Honorable Minister, and subsequently to the President. This recommendation tothe Honourable Minister is a new development (2001 Guidelines did notinclude the Minister's recommendation). There appears to be no nexusbetween the highest scores and her recommendations to be made - this may likely affect the perception of transparency.

v. 25% Maximum Equity: This provision was revealed at the Lagos RoadShow organized by the DPR. It provides specifically that a shareholder in an Applicant Company should not own more than 25% equity in the bidding entity. It appears that the DPR must have adopted this approach based on past experience with some holders of Marginal Fields who failed to carry out the development of the fields and have been reluctant to introduce new investors in the companies.7Essentially, based on DPR's announcement, each Applicant Company must have at least 4 shareholders/members. The 25% stipulation may also have been meant to address the issues (e.g. dispute on ownership and non alignment of interest) which arose as a result of the regulator induced partnership arrangements that pervaded the 2001 Awards.

Conclusion

The announcement of the 2013 Marginal Field Licensing Round is indeed welcome at this time going by the stalemate generated in the passage of the PIB. The Rounds would also provide opportunities for indigenous companies who do not have the capacity to purchase any of the blocks divested by the International Oil Companies to come together to form a consortium to bid for any of the marginal fields.

Without doubt, these are indeed interesting times.

Footnotes

1 There is no definition of an indigenous company in the 2013 Guidelines or in any extant Legislation. However based on a Road Show organised by the DPR in Lagos, Nigeria, for the 2nd Marginal Field Licensing Round, Applicant Companies be required to have 51% beneficial interest held by Nigerians

2 Schlumberger is the Technical Adviser with Data Services on offer at USD2,000

3 Signature Bonus to be paid for each field is USD300,000 (Three Hundred Thousand Dollars)

4 The Selection Committee is comprised of members from DPR, leaseholders, NNPC, External Financial Advisers and operators of the lease

5 This position has also been affirmed in the case of Moni Pulo v.Brass and 7 others FHC/L/CS/835/2011. The case is presently on appeal at the Court of Appeal.

6 The timeline going by the 6 months calculation would mean that the Farm Out Agreement would be signed in 2014. However, as at the end of December, the details of fields to be bided for had not been made public by the DPR

7 Promoters of the bidding entity must demonstrate technical capacity

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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