• Saturday, April 13, 2024
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Marginal fields, major headaches

Marginal fields, major headaches

Since 2003, Nigeria has awarded 30 marginal fields to local operators but production figures were recorded from only 13 fields by the regulator. ISAAC ANYAOGU highlights the intrigues behind the failed attempts to bring these fields to production and why operating in Nigeria’s upstream space presents a peculiar challenge for local investors.

The lush greenery stretches miles away before giving way to what looks like water hydrants in the middle of a patch of black earth. On coming closer, it assumes the character of an abandoned industrial yard with gutted pipes, aluminum sheets, iron rods and cans of black liquids.

Measuring roughly 20 square kilometers, the Oza marginal field is located onshore OML 11 in present day Abia State, in Southeastern Nigeria. Marginal fields are those that may not produce enough net income to make it worth developing at a given time and therefore abandoned the by International Oil Companies (IOCs).

In February 2003, Oza field was awarded to Millennium Oil & Gas Company Limited after a licensing round as the designated operator with 100% participating interest. The Department of Petroleum Resources (DPR), Nigeria’s oil sector regulator handed the asset to the company in 2004. The field had four wells drilled between 1959 and 1964 and a rudimentary production facility to evacuate oil through Shell’s trunk lines to Bonny export facility.

At the time, the company said in its field development plan it will take the field to production in three stages. In the first phase, it will re-enter wells 2, and 4, lay a pipeline, install an Early Production Facility (EPF) and hook up the EPF to a neighbouring flow station through a pipeline to enable crude oil production.

The second phase, will involve the work over of well 1 and data gathering and studies to optimize selection of up to six additional well locations to fully appraise the Oza concession. Phase III will involve the drilling of additional wells and the installation of additional pipelines.

Fifteen years later, the promoters of Oza field have secured licenses and permits, tested the well, acquired seismic reading, ran civil works including building some pipelines and drilled 400 barrels each day in 2016. By the end of 2017, they had run out of steam, suggests the 2016 DPR report. According to the report, no production from the field was recorded in 2018.

This is a far cry from an early ambitious plan to drill over 18,000 barrels per day from all four wells including an additional two. But however bad it looks, Oza marginal field is one of the fortunate ones that reached production, no matter how insignificant.  Of the 30 fields awarded so far since 2001 when Nigeria began a licensing programme for abandoned fields, just over half has managed to reach first oil.

“The government in awarding these marginal fields to indigenous operators hoped to increase oil production by about 1 billion barrels,” Chuks Nwani, an energy lawyer said.

One of these 18 fields is the Atala-1 well. First dug in 1982 and lying in OML 46, Atala-1 Well is leased to the SPDC/Agip/Elf/NNPC partnership. The field is located on the Dodo River; northwestern Bayelsa State covering 34 km2.

It was awarded in 2003 to the Bayelsa Oil & Gas Company Ltd, owned by the Bayelsa state government with Hardy Oil and Gas and Century Energy, two local oil companies as technical partners.

Hydrocarbons were encountered and the well was cased, that is set a tube inside the drilled well to protect and support the well stream, but it was not tested or completed.

The agreement sets an initial five-year period from 27 April 2004, subject to an extension. Two years later, Bayelsa Oil & Gas Company entered into a farm-in agreement with Century Energy and Hardy Oil giving them 35 percent and 20 percent participating interest respectively.

Things went downhill when the governor, Diepreye Alamieyeseigha who acquired the field in 2003 left office without significant work done as the project was not funded. It took over 14 months of engagement with the government, first with Goodluck Jonathan and Timipre Sylva before Century Energy returned.

In 2014, the company pumped 2,500 bpd in the Atala-1 well and was considering drilling another field but could not proceed due to funding challenges.

“There are moves to revive the field but due to lack of funds, this could not happen,” said one company official leading site preparatory work, who requested not to be named since he has no authorization to speak on the matter. “For now, nothing is being done but I know it will come back to production.”

Beyond the government’s inability re-starting the field, it is not clear if there are even substantial finds in the field. A survey done in 2014 by oil sector experts found that the Gas Oil Ratio (GOR) in some of the marginal fields including Atala field were very low.

“Some of the fields are truly marginal; they are quite small it may not be as easy to develop them on their own unless they are part of a cluster. It means people have to collaborate more but in Nigeria we haven’t proven to be so good at working together,” said Lekan Akinyanmi, the CEO of Lekoil, who has ramped production of his Otakikpo marginal field to 6,000 barrels per day.

The challenge for these fields now is that many are up for renewal when those who acquired them have not even cut overgrown grasses from the fields. Several attempts to speak to the owners of these fields were unsuccessful.  Officials who would not speak on record cite, lack of finance and difficult operating environment as key challenges.

High hopes

According to the DPR guidelines, the core objectives of Nigeria’s marginal field programme is to grow production and capacity of local producers, diversify resources and investment flow. It was also meant to promote technology transfer, common usage of assets to ensure optimum use of available capacities.

Marginal fields contributes little to Nigeria’s national production. Source DPR

As lofty as these objectives were, analysts say the DPR did little to drive compliance from those it granted marginal field licenses.

“There are obligations for these companies to fulfill their work programme, there are obligations on how much they should spend, there are even obligations they have to the owners of these fields, but they fail to carry them out and the DPR did nothing about it,” said Ayodele Oni, a Lagos-based partner at Bloomfield Law firm. “The DPR can revoke these licenses but it has failed to do so.”

Paul Osu, spokesman for DPR did not respond to a request for the organization’s reaction.

However, in a sea of failed marginal field projects, Lekoil is an outlier. Since acquiring the Otakikpo field in 2003, the company has raised production to 6,000 barrels per day and is now planning to take production to 20,000 bpd.

“We built the infrastructure from scratch, so a lot of companies who bought assets from an IOC already have the infrastructure there but this place was just swamp, we first started doing civil works, we had to sand fill the entire place, we worked with the communities, sorted everybody out and then we re-entered those wells and built everything from scratch. For evacuation, we built a 6-kilometer pipeline that went underwater so that there is a point where you connect and the shuttle tanker takes it to floating production storage, (FPSO),” said Akinyanmi.

To achieve this feat, Lekoil said it collaborated, took the company public, and installed corporate governance structure thereby increasing its chances of securing funding.

But collaboration has also been difficult with some local operators. “For many folks that have been awarded these fields, you see a mismatch between expectation and reality,” Akinyanmi said.

This has negatively impacted the sector. Bank Anthony Okoroafor, chairman of Petroleum Technology Association of Nigeria (PETAN) at a marginal field conference in Lagos last year said local content in the oil and gas sector is around 28 percent, almost 19 years after the first marginal field was awarded.

Okoroafor said that for the oil and gas industry which spends $30billion annually, only $5billion is retained in-country while the rest is used to acquire talent and resources from outside Nigeria means much work needs to be done.

Lenders too are wary of lending local producers as debts to oil and gas companies constitute the highest Non-Performing Loans (NPLs) of Nigerian banks.

Oil and Gas sector constitutes biggest NPLs of United Bank for Africa (UBA). Source UBA

The policy environment has not also been favourable. The Federal Government proposed new royalties and taxes in the fiscal aspect of the Petroleum Industry Bill which could cut royalties local producers pay by 30% but the bill is yet to be passed.

Many operators are now playing a waiting game. “At the time they got the fields, oil price was high and they relied on it to bid for the fields, but since then the numbers have dropped significantly. Some who were circumspect, discounted it heavily and even when not breaking even, they are not making losses and they are able to service their loans,” said Nwani.

Marginal field operators like Oza are getting bullish about restarting their fields. The company is searching for partners and willing to offer stakes as oil prices recover. Nwani said other operators are partnering with service companies, “one way or the other it is starting to work out.”

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