Oil industry governance regime under scrutiny

The ongoing asset divestment, lingering delays of licence renewal for international oil companies (IOCs), and the next marginal fields bid round have put the spotlight on the strength of the institutions and policies governing the Nigerian oil and gas industry as the industry awaits the passage of the vital Petroleum Industry Bill (PIB).

The growing divestment trend seen in the industry follows the continued struggle by some IOCs to have their onshore and shallow-water licences renewed by the Federal Government since 2008, a delay which industry analysts see as a bad omen for the industry.

Shell Petroleum Development Company (SPDC) holds an interest in six shallow-water offshore leases, of which five expired on November 30, 2008, but are yet to be renewed by the government. The oil major seeks to renew rights on Oil Mining Leases (OMLs) 71, 72, 74, 77 and 79 on which it operates the EA field with its capacity of 115,000 barrels per day.

The company had in its 2013 annual report published in March 2014 reiterated that it had satisfied all the requirements of the Nigerian Petroleum Act to be entitled to an extension, but the government had yet to renew the licences.

“SPDC is pursuing a negotiated solution with the Federal Government of Nigeria. Production from the EA field in one of the disputed leases continued throughout 2013,” Shell had said.

Chevron is also awaiting the renewal of its rights on its concessions in Nigeria’s shallow offshore, and especially on the oil-rich OMLs 86, 88 and 89.

There is a notion in many quarters that the oil majors had been asked by the Ministry of Petroleum to divest what is considered as near-marginal assets to enable them get renewal, while some sources say the non-passage of the PIB is affecting the negotiations for the renewal.

Ayodele Oni, an energy law and policy expert and senior associate in top law firm, Banwo & Ighodalo, said the delay in renewing the licences might be connected with negotiations of the fees payable, and the terms and conditions that may be imposed by the minister for the grant of the relevant renewal.

“It is also not impossible that the Ministry of Petroleum Resources/the DPR are still discussing the compliance of these companies with the terms, conditions and obligations of their initial (now expired) oil mining leases. I believe that the procedure for such renewals can be improved and it may not necessarily be a drag to investments in the sector, as it is generally understood that renewals are granted years after the expiration of such oil mining leases,” Oni said.

Meanwhile, with the ongoing divestment of assets by the IOCs, such as Shell and Chevron, and the imminent licensing of 31 marginal fields, analysts say the industry would get the best out of the divestment and the bid round if the institutions governing the industry ensured that the assets ended up in capable hands.

Diezani Alison-Madueke, minister of petroleum resources, had in November 2013, when the licensing round was flagged off, said the competitive bidding process would be in line with “the Federal Government’s commitment to openness and transparency in the conduct of business activities in the country”.

“The divestment by the IOCs is not necessarily bad; it is an opportunity for indigenous players. As the IOCs go to more difficult terrains like deep offshore, then it is left for the indigenous companies to take over the onshore assets,” said Wumi Iledare, president, International Association for Energy Economics (IAEE).

“If we have strong institutions and good governance to ensure that the assets being divested are acquired by people who have the wherewithal and the technical capacity to develop them and grow capacity, we will be able to get the best impact from the divestments,” he said.

Out of the 24 marginal fields awarded in 2003, only seven are currently producing, with some of the fields reportedly lying dormant as a result of financial and technical constraints. It has been announced that licences of assets not producing by March 2015 would be revoked.

“Many Nigerians have oil blocs, but they are sitting on them without doing anything to develop them. Probably, they intend to use them in future. Not much value has been created in the bulk of awards held by indigenous companies,” said Osten Olorunsola, former DPR director, at a forum in March last year.

Currently, some local Nigerian companies own more than 100 blocs across domestic oil-producing regions, and own at least 30 marginal fields, and analysts have said the figures will likely double over the next few years.

By the end of this year, the major divestments by IOCs since 2010 would transfer about 5 billion barrels of oil and 20 trillion cubic feet (Tcf) of gas to indigenous players, said Austin Avuru, managing director, Seplat Petroleum Development Company, at a conference in Lagos in January.

“The only problem I see in the oil industry is institutional, as far as I am concerned. If there are strong institutions and sound policies, we will have a sustainable, pragmatic and very dynamic industry. Institutional strength, good governance and transparency are the key drivers to continue to motivate the flow of investment into the industry,” said Iledare.

FEMI ASU