With Bonga, Nigeria signals its oil sector is open for business
After the Bonga deal, investors wait to see if the Erha oil field operated by Exxon will follow quickly
Last week, Nigeria signed a long-awaited accord renewing the oil mining lease 118, otherwise known as Bonga, for another twenty years, and it has signalled to the world that its beleaguered oil industry is open again for business.
Negotiations leading up to the deal carried on for more than four years, held up largely by the complexity of resolving Nigeria’s dispute with virtually all the international oil companies IOCs operating in the country. The disputes resulted largely from disagreements about the interpretation of contractual and fiscal terms which resulted in claims from IOCs up to $9bn.
The oil companies accused the Nigerian government of taking oil that it did not have rights to under the deep sea production sharing contracts, PSCs. This forced several IOCs to launch arbitration proceedings against the state oil corporation, NNPC. These proceedings were largely decided in favour of the IOCs.
However, Nigeria responded by challenging the arbitral awards in Nigerian courts, claiming that the arbitral panel had no jurisdiction to rule on issues with tax implications in Nigeria. This resulted in a protracted legal battle between the IOCs and Nigeria which has lasted for over a decade.
By signing the deal for Bonga, all that dispute has now been put behind the parties and this could end a decade of arguably the most difficult and unproductive patch in Nigeria’s oil history during which the IOCs refrained from any new investments and in some cases actually reduced their presence in Africa’s leading oil exporter.
This recent agreement capable of unlocking billions of dollars of investment saw the Nigerian national oil corporation, NNPC entering into pacts with Royal Dutch Shell Plc, Exxon Mobil Corp., Total SA, and Eni SpA for a new production sharing contract for Oil Mining Lease 118.
The permit includes Bonga, a deep-water oil field that pumped about 90,000 barrels a day in February and which may now be boosted to 120,000 barrels per day.
According to Bloomberg, the partners deferred taking a final investment decision on the Bonga South West project, which could add 150,000 barrels per day to Nigeria’s output and bring OML 118‘s total daily capacity to around 350,000 barrels.
Oil industry analysts called the agreement “a watershed” for deep-water oil exploration in Nigeria and settles long-running disputes between the Nigerian state and the IOCs and could clear the way for more than $10 billion of investment, according to a Shell statement.
“Through these agreements, stakeholders will have a clear and stable set of terms incentivising further development of the OML 118 block and opening further opportunities in the prolific Nigerian deepwater oil and gas industry,” a Shell spokesman said by email.
According to the NNPC, the key feature of the terms of the settlement include, clear terms on block ring-fencing, gas commercialization terms, replacement of disputed tax credits for clearer investment allowances, trade-offs on in-block consolidation and cost limits, early lease renewals, assurance of fiscal stability for investors, protection of profit-sharing schemes and settlement of disputed past, among others.
Investors and analysts are watching closely to see if the Bonga deal with Shell will be quickly followed with a similar deal on the Erha oil field operated by Exxon Mobil.
BusinessDay energy analysts attribute the successful renewal of the Bonga lease to the ground-breaking work began by former minister of state for petroleum Ibe Kachikwu and perfected by current CEO of NNPC Mele Kyari who himself was the lead geologist to the national oil company at the time Bonga was first sanctioned in February 2000.
“Kyari is courageous, innovative and in particular, he has brought due regard for commercial considerations to the national oil company and his impact in such a short time has been very pivotal in many ways”, said BusinessDay analysts.
Kyari is also credited with helping to restore some confidence in the petroleum industry bill, PIB now working its way through the national assembly.
According to one industry player, “this PIB is eminently better today than when it arrived the national assembly and if passed could further brighten the prospects of the oil industry in Nigeria.”
There is now growing confidence that the PIB will be passed this month at last. Ahmed Lawal, Nigeria’s Senate President at a recent conference in Abuja said that lawmakers will pass the PIB this month as both committees working on the bill in the upper and lower chambers are now working to produce a final report.
Earlier, Femi Gbajabiamila, Speaker of the House of Representatives had said that though the lawmakers imposed a deadline of April to pass the PIB, they could not meet the deadline because they thought it was important to get it right after 20 years of failed attempts.
The Senate President said previous attempts from 2007 were unsuccessful because either the lawmakers or members of the executive branch decided to go it alone.
“In the 9th Senate we have decided that we must have a better way as neither solo efforts from the executive or the legislature have been able to pass it,” Lawal said.
Delays in progressing badly needed reforms in the sector have stalled the development of oil and gas reserves and reduced value the country would otherwise have benefited from the oil and gas sector.
Nigeria which has dropped sharply on the foreign direct investment table for Africa also faces a severe cash shortage that has seen the contribution of oil to national revenues declining sharply by a third to just 45 percent and its once-lucrative oil industry is now just a shadow of its old self.
Despite the improving relations between Nigeria and the IOCs, it is possible that this is only the initial but tentative steps of a long walk away from the abyss.
According to a Bloomberg report, Shell in a separate investor presentation on Tuesday, May 25, said it has three projects related to Bonga that are in development but haven’t yet been given the green light — Bonga South West, North Tranche 1, and Main Life Extension and Upgrade.