A public address [by Dr. Edmund Daukoru, Nigeria’s Presidential Adviser on Petroleum and Energy] flagged off the 2005 bid rounds for 63 oil and gas blocks spread across Nigeria’s onshore and deep off shore. The present bid comes after the 2000 biding rounds, which left many with different stories to tell. For the prospective bidders, especially the new entrants, there is need to keenly scrutinize Dr. Daukoru’s keynote address and the bid guidelines (to be released shortly) to feel the pulse of the government which experiences in the past has shown to be crucial. We have attempted to flag some issues apparent or arising from the address that every bidder ought to bear in mind.
There is a clear intention by the Nigerian Government to streamline the bid process and increase transparency, a missing element in the 2000 process. Transparency is given weight by the involvement of the energy and petroleum departments of Norway, Brazil, United Kingdom and the USA, in quality control, and overall monitoring of the process.
A notable difference from previous bidding rounds is that winners will be announced on the day of bidding unlike the 90-day gap between bids and announcement of winners under the previous regime.
It is also envisaged that the government will keep faith with the bid schedule and if it does, signature bonus would be paid within 30days of announcing winners of the bid in July 2005. Negotiation of terms and signing of the Production Sharing Contracts ("PSC") will occur in August 2005 to bring the entire process to completion.
If the proposed timeline is kept to it would provide a dramatic change from the last bidding rounds of 2000 where negotiation of the terms of the PSC were ongoing over a year after the winners were announced.
Reduction of the Block Size
Another notable innovation is the reduction of the block size from 2500 to 1250 Sq Km ostensibly to bring the practice in Nigeria in line with practices around the world. Against the current regime of relinquishment of 50% of the area covered by a PSC after 10years, the new policy will operate to deprive potential operators from the starting blocks of half of the area that would have been available to them in the 2000 regime and they stand a chance of further losing half of the 1250 Sq Km area to be covered by the PSC ten years down the road.
Lower Revenue for the Investor
Unlike the situation in 2000, potential investors will now have to settle for lower revenue as the government is set to introduce fiscal terms favorable to the Government that will result in the increase of its share of the revenue accruable.
The fiscal regime applicable to the 2000 PSC’s is altered by the introduction of a ceiling on cost oil recovery at 80% of production as well as a proposed revenue split of 65/35% in favour of the contractor, which combined, with the introduction a production charge (Royalty) element that was not applicable to deepwater blocks under previous PSC regimes significantly increases the Governments accruable revenue stream from these new blocks.
The Nigerian Government’s local content policy push, which seeks to improve the indigenous participation in the upstream sector, is given further backing by making local content a biddable item (carrying 20% weight) which was not the case in 2000. It is worth bearing in mind that there are concerted efforts to enact a local content law that may impact on the operation of present and prospective E&P companies.
Reversing Flight from Onshore Exploration
There is a clear desire by the government to reverse the current flight of E&P companies to deepwater and abandoning onshore oil and gas exploration especially in the Delta and Inland basins due to communal difficulties experienced in these regions.
Multinationals have cited strong reasons not unrelated to perennial communal unrest for their preference of offshore blocks. It is not yet clear how the government intends to resolve this looming impasse, but it would be interesting to see how this plays out.
Allocation of Acreage for Strategic Downstream Projects
The government has indicated its desire to allocate acreage to licensees of refineries as well as operators of IPP, petrochemicals and Gas to liquid ("GtL") projects who apparently had wanted discretionary allocation or supply of oil and gas by the Nigeria National Petroleum Corporation ("NNPC") at a subsidy. It is a matter of conjecture how the E&P companies will react to this proposal.
Other issues that may affect the bidders but which may not be taken into consideration in the bid process, is the proposed amendments by the Nigerian legislature to the Petroleum Act ("PA") (which is the predominant legislation regulating the petroleum sector) and the Deep Offshore and Inland Basin Production Sharing Contracts Act ("PSCA") which would directly affect the commercial parameters of upstream activities in Nigeria.
It is proposed to increase the tax applicable currently from a flat 50% rate to 85% under the PSCA while amongst other proposed amendments under the PA there is a requirement that up to 25% of crude oil produced must be refined locally. While the proposed amendments are not likely to come into effect before the bid process is completed or perhaps not even go through at all it would be worth keeping a close tab on developments.
Another possible impact on the bidders is the proposed Gas (Fiscal incentives) Act and the proposed Downstream Gas Act, which seek to increase, through grant of incentives the utilization of associated and non-associated gas and expand opportunities for gas development for domestic and export markets.
However these events play out, the coming months are going to be very interesting times indeed for the Nigerian oil and gas industry.
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