Maintaining an enabling environment for marginal field operators to thrive
The FG must avoid decisions that could scare away investors
On 2 September 2020, the curtains officially closed on the 2020 marginal fields bid round. In all, 57 fields located on land, swamp and shallow offshore terrains were on offer. Data available from the Department of Petroleum Resources (DPR) shows that over 600 companies applied to be prequalified for the marginal oilfields.
As a country in dire need of investment, the enthusiasm of the bidders is commendable considering the steep drop in crude oil prices, occasioned by the short-lived crude oil price war between Saudi Arabia and Russia as well as outbreak of COVID-19 and the subsequent slowdown in economic activity globally.
The strong message from the companies that participated in the bid process is that although the cost of doing business in Nigeria’s oil and gas industry remains high, investors still consider the industry attractive.
But beyond the confidence reposed in the country, the federal government must take measures to ensure stability in the oil industry and avoid decisions that could scare away investors.
Of particular concern is the fate of marginal field operators in the country. It is noted that following the decision of the Organisation of Petroleum Exporting Countries (OPEC) to enforce a production cut on all member countries in April 2020, the NNPC allocated production cutback to all exploration and production companies in Nigeria.
In terms of production volumes based on the OPEC agreement, the Honourable Minister of State for Petroleum Resources, Timipre Sylva said that Nigeria will now be producing “1.412 million barrels per day, 1.495 million barrels per day and 1.579 million barrels per day respectively for the corresponding periods in the agreement.”
While compliance is a gesture that demonstrates Nigeria’s commitment to agreements, it is noted that marginal field operators should have been spared from the production cut announced by the NNPC.
The story of marginal field operators is one of the most epic narratives that has emerged from the Nigerian oil and gas industry in the last two decades. These companies, which are often small, contribute a small fraction of Nigeria’s crude oil production but account for a sizable volume of the gas being used to power Nigeria.
The marginal field companies have contributed to job creation, youth empowerment and community development, Nigerian content development, skills transfer as well as generating revenue for the government.
The outbreak of Covid-19 severely impacted the price of crude oil and the bottom-line of marginal field companies. Therefore, the current cut in production casts another depressing shadow on the financials of the marginal field operators who are already encumbered.
The unavoidable consequence of compulsory production cuts on the operators is the corresponding cutback in the number of employees and all the benefits that host communities and government have enjoyed from these companies. Loan defaults will also increase because many of these companies are highly leveraged.
It is imperative that the NNPC rescind its decision to include marginal field operators in the production cut, so as to save them from collapse. Already, there are indicators that some of the marginal field operators are considering different options to remain afloat. Options such as layoffs, defaults on financial commitments and major cutbacks on Corporate Social Responsibility are on the table.
Surely, this is not in the best interest of the country at a time that the economy has continued to wobble while predictions of an impending recession are becoming louder. The signs are ominous. Unemployment, loss of taxes and social upheaval loom large.
We call for a reversal of the production cut imposed on marginal field operators as a demonstration of government’s goodwill towards encouraging further investment in marginal fields in the country and in furtherance of the government’s own agenda on the ease of doing business.
The government has a lot to gain by making a turnaround on this issue.