About 600 bidders have emerged for the 57 marginal oil fields put up by Nigeria but a Niger Delta-based oil management expert, Leesi Gborogbosi, has placed caution at their disposal and explained the cost profile of a bid. The last time Nigeria carried out such a bid was about 20 years ago, according to insiders.
The CEO of Gabriel Domale Consulting, a management consulting firm, warned bidders to endeavour to understand the concept of the marginal field from the perspective of government; the petroleum (amendment) decree number 23 of 1996; marginal field operations (fiscal regime) regulations of 2005; and the guidelines for the award and operation of marginal fields in Nigeria before deciding to invest.
The consultant who worked in one of the foremost oil multinationals in Nigeria for many years and was responsible for all aspects of the IOC’s strategy, business development, leadership, governance, competitiveness, teams, and operations across all network of client offices gave the definition and explanation of marginal fields. He said they have some investment implications which he said a marginal field investor should factor into the investment decision.
On want he called ‘assured marginal economics’, Gborogbosi warned that because the economics of the oil mining license (OML) is considered marginal, the investor needs to re-evaluate the historical risks and costs of the proposed marginal field. “The key question is – what has changed over the years and what will be the costs of mitigations?”
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He said for over 10 years, the existing infrastructure may likely have decayed and requires an urgent upgrade. This was the sad experience of the buyers of Nigeria’s power sector. The Ogoni-born expert warned further; “Additionally, because the marginal field existed in the host community for over 10 years, there may be a heightened expectation on the part of the host community for immediate corporate social responsibility initiatives.”
He warned bidders to understand the rationale behind the decision of the portfolio owners to stay away by understanding the underlying drivers for the portfolio rationalisation which he said the investor should consider as an investment variable and be risked in the decision model.
On this, he warned against the oil field being returned to the government. “The expectation is that marginal field will be efficiently operated to deliver competitive returns to the investor and contribute towards the national oil and gas aspiration. Full risk management will ensure that the marginal field does not hibernate beyond 10 years to avoid being reclassified as marginal field and re-awarded.”
In explaining what the government classifies as a marginal field, Gborogbosi defined them as “Marginal field definition is further highlighted by the Department of Petroleum Resources in the 2020 marginal field bid guidelines.
A marginal field is any field that has reserves booked and reported annually to the Department of Petroleum Resources (DPR) and has remained un-produced for a period of over 10 years.”
Costs:
The expert gave cost ideas, advising investors who would be successful at the pre-qualification stage to treat the costs up to the point of winning the bid as search costs. “In the 2020 marginal field bid round, the total search cost is N47m (approx. US$130,235) excluding signature bonus.
This cost include costs for registration, application and bidding per field: N5,500,000 (approx. US$15,235) as registration fee – N500,000; application fee – N2,000,000 and bid processing fee – N3,000,000) and [B] – costs for data prying, data leasing, Competent Person’s Report and Filed Specific Report : US$115,000 (approx. N41,515,000) as data prying – US$15,000; data leasing – US$25,000; Competent Person’s Report – US$50,000 and Filed Specific Report – US$25,000.
“Signature bonuses will be paid as per the applicant’s winning bid. The signature bonus should be estimated to be included in the investment proposal. The US Dollars to Naira equivalent is derived using the Central Bank of Nigeria (CBN) current exchange rate of the US Dollars to Naira of N361/$1.”
Investment approach:
Leesi who has a long and successful record of helping diverse functions to develop collaborative relationships with key stakeholders in order to execute strategy effectively reminded bidders that successful pre-qualified companies were expected to prepare and submit field-specific technical and commercial bids based on the field data as provided by the leaseholder and/or DPR. “The documentation of the technical and commercial bids should include a detailed proposed work programme, development plan, and commercial proposals.”
He warned that experts consultants should be on hand to advise marginal field investors to treat all bid search costs, field ownership costs (signature bonus), and field lifecycle costs as an investment package. “This commercial perspective will enable the investor’s advisory team to develop a robust investment proposal.
“Investing in the oil and gas industry, especially the marginal fields, is usually complex, challenging, and rewarding though there are a lot of blind spots. It is always advisable that the services of ex-managers with decades of actual working experience in the oil and gas industry should be sought. This is to avoid mistakes made by earlier marginal field investors.
“A well prepared and reviewed investment proposal will form a strong basis for deciding the threshold to be used for the commercial bid. Intuitively, the threshold for the commercial bid should be positively influenced by the positive net present value (NPV) and value investment ratio (VIR) arising from the investment proposal.”
Best templates
On the best templates to be used, Gborogbosi advised winners to consider what he called front-end planning right from the onset; plus the right financials and dataset that could sustain the operation of the marginal field lifecycle. “I will recommend that the investment plan for the marginal field should contain 10 key sections namely: an executive summary that should provide summary information on the content of the investment proposal. “This section is key as it enables decision-makers to have an overview of the investment decision points.”
This section additionally, highlights the source and forms of funding, the full scope of cashflow, and summary economics. There is a description of the proposal that provides concise details of the investment scope and objectives, he said. “Also, discuss the key technical and commercial variables impacting the investment. Some of the key variables will include existing agreements if any, government policies, expenditure, and production profiles.
“The marginal field investor should have clear statements on the winning strategy and models for vertical integration and diversification, collaboration and synergy, aggressive work programme implementation, community relationship, regulatory compliance, cost control, and optimization.
“The growth profile of the marginal field is expected to demonstrate the field’s contributions to national reserves and production growth, Nigerian content impact, domestic energy security, increased government revenue, and corporate social responsibility.”
He mentioned what he called value proposition and strategic and financial drivers of the final bid which would require the economics of the investment showing the base case and sensitivities, industry benchmarked discounted rate, net present value (NPV), value investment ratio (VIR), and the payback period. “Also, discuss the economics, cashflow plot, and all externalities that are included in the computation of the economics.
“Specifically, the value propositions for marginal field investment should clearly state how the investor will promote indigenous participation, generate employment, increase oil and gas reserves, increase production, encourage capital inflow, build technical capacity and promote the use of shared facilities.
In risks and opportunities and alternatives, Gborogbosi advised bides to evaluate and mitigate the standard industry risks such as technical, economic, commercial, organisational, political, health, security, and environmental risks.
The estimated costs of implementing risk mitigations should be considered.
He gave advice on the corporate structure and governance as what would drive the strategy and execution of this investment. “Also, highlight how the overall investment (the marginal field) is going to be managed, performance monitored, and reported. For instance, if this investment falls within a foreseen unitisation with an existing joint venture, how will that be managed?
He mentioned budget provision as a key section that should include the total expenditure phasing and cost classification based on the industry’s standard cost classification. Nigeria is striving to bring down its cost of operation to $10 from about $18. This would definitely require new cost outlines for marginal fields.
He said the financing section should look at funding strategy options and the contribution of each option to the financing of the investment. “Also, indicate the financial impact for investment’s full scope on the existing company as applicable.”
Taxation was brought up. He said: “Payment of tax and royalty is a major revenue stream to government. A comprehensive list of the tax rates used should be stated. Applying the wrong tax regime will hurt the investment.”
The parameters section should provide for a quick summary of the key aspects of the investment proposal for which organisational approval is sought; while there should be three parties who are indicated as being responsible for the investment decision on behalf of the investor. “They are the initiator (responsible for the preparation of the proposal), reviewer and approver.
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