How to choose a viable field – Ayodele Oni

The Minister of State for Petroleum disclosed plans for a marginal oil and gas fields licensing round, this year. Practical issues and information for would-be bidders and enthusiasts.

A key consideration, around marginal fields bid rounds, is to have more Nigerians participate in upstream activities (and amongst others, reduce capital flight). Ditto for the indigenous sole risk regime.

The Petroleum Act, provides the statutory framework for farm-out of marginal fields in Nigeria and there would always be guidelines issued for any relevant bid round.

International Oil Companies are allowed to negotiate farm-out of marginal fields with bidders and Ogbele field, located onshore & carved out of oil mining lease (OML) 54, was the first marginal field to be so farmed-out pursuant to the Petroleum Act.

As stated, the relevant guidelines issued before any bid round will state the process, stages & application requirements (such as pricing, capacity, qualifications etc) for entities interested in bidding. It is likely that this time around, much of the process will be online.

Lessons from advising some of the players in that segment- wrong technical & financial partnerships is a key reason for failure. Not all holders succeed in generating wealth from their fields. Thus, due diligence- legal, technical & commercial, of would-be partner(s) is crucial.

Agreements between/amongst members of consortia & amongst winners and subsequent partners, must not be lopsided. Engage experienced lawyers to hold hands in this case. This is particularly where indigenous players seek to involve experienced foreigners/ technical partners.

Due diligence, on the relevant fields, is crucial, considering the sunk cost involved, the capital-intensive nature of the sector & cost of failure. The entire contractual structure and arrangements must appropriately cater to adequate risks assessment and allocation.

To reduce the likelihood of losing several millions of dollars, financing and technical documentation should be adequately drafted with thorough risks allocation and commercial considerations. Due thought should be given to likely future partnerships/ exits,

The entry strategy must involve a strong analysis & understanding of relevant technical risks/issues associated with specific fields & measures intended to cater to the same. Key queries are- Is there adequate infrastructure to properly integrate operations? Can the OML holder help?

The internal structure should be strong- decision making, HSE issues (especially dealing with the DPR EGASPIN), fund management and reporting, are very critical for success. Your relationship with OML Holder, also crucial.

Summary- (1) commercial and not emotional decision (2) sufficient data (formal & informal) (3) strong technical & financial arrangement (4) think of entry & exit (5) A-list professional advisors (6) no strange bedfellows (7) strong internal controls. (8) adequate infrastructural support by OML Holder (9) strong negotiation of Farm-out Agreement (yes, mainly standard/ template, but still room to negotiate) (10) strong risk assessment & mitigation strategy (11) understand the policy, regulatory & legal issues. (12) Don’t bid, if things don’t add up (13) engage professional advisors early (14) understand the fiscal issues clearly, including issues around the technical allowable output (15) You swim or sink with good/ bad data, good/ bad partners/professional advisors.