• Friday, September 29, 2023
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Discretion on trial

Militancy and low oil prices question over 50 years of discretionary oil block allocations in Nigeria – an aberration that became a law, writes ISAAC ANYAOGU.

The Norwegian Petroleum Directorate (NPD), regulator of oil and gas activities said its paramount purpose is to “contribute to creating the greatest possible value for society from oil and gas activities by means of prudent resources management, taking account of health, safety, emergency preparedness and the natural environment, including the climate.”

Nigeria’s Department of Petroleum Resources (DPR) says its mission is “to serve as the watchdog over the development of our nation’s oil and gas resources, by employing modern tools and techniques to direct, influence and achieve the optimum exploitation, conversion and utilisation of petroleum and its derivatives for the maximum benefit of Nigerians while ensuring minimum damage to the environment.”

While these sentiments are similar, the results tell a different story. Through efficient regulation, NPD has delivered value up to $800 billion dollars in Sovereign Wealth Fund for Norwegians, while Nigeria has managed to save a paltry $2billion and created a privileged political class and pitiable citizenry. Owen Penny’s words couldn’t have been any truer when he said, “Mere words are cheap and plenty enough, but ideas that rouse and set multitudes thinking come as gold for the mines.”

With about 34 commercially viable mineral resources, 37 billion barrels of proven oil reserves and 187 trillion cubic feet of gas, experts say a good fiscal system, resolving governance issues and improving regulatory framework will deliver the best value to Nigerians. To address these issues, the Federal Government amended the Petroleum Act of 1969 and provided that the holder of an oil mining lease (OML) can farm-out any marginal field which lies within the OML in the 1996 amendment.

It granted the President of Nigeria the right to farm-out a marginal field, which has not been produced for a period of not less than 10 years from the date of discovery of the field. Nigeria’s president also has the power to award oil acreages to individuals and companies based on his discretion but stakeholders say it evidences poor fiscal terms. This has become a sore point in a regime claiming to fight corruption.

A panel session on the ethics and transparency for block concession and divestments in the Nigerian oil and gas industry at the 40th edition of the Society of Petroleum Engineers, Nigeria Annual International Conference & Exhibition (NAICE 2016), held in Lagos between August 2-4, members said this practice threatens licensing rounds objective of bringing investments that will grow reserves and drive future investments. “The problem is that Nigeria’s bidding round attracts the most irresponsible bidders because the process is not ethical and is not linked to our national purpose,” said Mutiu Sumonu, chairman of Julius Berger Nigeria.

In 2001, Nigeria held a bidding round for 24 marginal fields and allocated 31 indigenous oil companies in the exercise that ended in 2003. About 100 million barrels have been produced from 8 fields producing an average gross production of 27, 200 barrels per day (bpd) and 35 standard cubic feet per day of gas. While the 2013 bidding rounds failed to materialise, Nigeria’s reserves would have grown remarkably if all those who won bids for these fields have put them to work.

Overhauling a weak fiscal regime

Industry stakeholders say the sector is over-legislated; hence regulatory matters are brought into legislation making amendment process herculean and creating conflict between laws and regulations. Uncertainty is worsened over the passage of the Petroleum Industry Bill first proposed in 2008 but has been stranded in the legislature. Contending issues include proposed increase in government’s share of production revenue from deepwater projects and inclusion of a percentage of profits of oil producers to the host communities.

“Nigeria needs clarity in the law that empowers the minister to allocate oil blocks, clarity as to the applicant’s track record before approvals are given and clarity in the existing fiscal regime,” said Sena Anthony, legal expert and former group general manager, corporate secretariat and legal division of the Nigerian National Petroleum Corporation (NNPC).

Enthroning transparency

According to the DPR, each government adopted any method it deemed fit to award acreages prior to mid 2000, but currently what obtains is a mixture of competitive bidding and discretionary award of licenses. “The transparency of acreage allocation process can be enhanced by automating the process and strict adherence to applicable guidelines,” said Mordecai Laden, executive director, DPR.

Niyi Ayoola-Daniels, professor of energy law and president International Institute for Petroleum Energy Law and Policy (IIPELP) advocated ethics and good governance through the instrumentality of the law. “The only way to institutionalise ethics and good governance is to go through the law. A new petroleum legislation that will prevent the minster from discretionary award of licenses is sorely needed,” he said. Wumi Iledare, president, Nigerian Association for Energy Economics said the only way to enthrone transparency and accountability is to make the process open and change the role of government from a meddler to facilitator.

“Perhaps the role of government should be limited to resource development on policies through the act of the national assembly and to let an independent and autonomous agency be responsible for it.”

On divestments

Before the current lull in divestments, Shell, Total, ConocoPhillips and Agip, have all divested over 45 percent stake in at least seven oil concessions in five transactions. Industry stakeholders attribute these divestments to the belief that offshore assets are more commercially viable as some of the oil fields are turning Brown fields. Speaking to journalists at the company’s media presentation of its 2015 briefing notes in June, Osagie Okunbor, Chairman of Shell companies in Nigeria said that due to insecurity and technical expertise, the company was prioritising deepwater offshore exploration.

High level of government interference in the process of divestment of oil blocks, undue consideration for political stakeholders and lack of transparency in the process have been identified as key reasons International Oil Companies (IOCs) hold back from divesting their oil blocks. “It is interference from government and legislators that made the other IOCs to step back from also divesting some of their assets,” said Mutiu Sumonu.

This has led to a situation where due diligence is compromised and investors without requisite technical expertise and financial competence acquire these divested assets and could not produce because technical competence has been sacrificed for political expediency. The implication of this interference is that Nigeria is missing out on opportunities to increase local participation in oil exploration and production, generate increased revenue from acreages now lying fallow, deepen capacity and better engage with local communities to check militancy as local E&P companies have better track record of engagement with host communities.

“Marginal fields are lying idle because some of the bidders who acquire divested assets lack financial and technical competence to run them,” said Osten Olorunshola, chairman, Energy Institute, Nigeria and former director in DPR. Tony Chukwueke, technical director, Tenoil Petroleum Services and former director of DPR, said that divestment could not happen because it is difficult to do without consideration for political stakeholders. “When we were at the DPR, we created a system that accommodated political stakeholders through local content vehicles and community stakeholders, by allocating 10 percent for the purpose,” he said.

Wumi Iledare, said, “Whoever owns the property should be allowed to divest it the way he or she deems fit but it is still the responsibility of the government to make sure that the people who are buying the assets do not take Nigerians to the cleaners.” “The moment you tie the hand of the regulator behind with 10 percent political expediency, then all of this reform will have no basis,” he said. Industry operators have also attributed divestment to unfavourable profit-sharing agreement, high royalties and taxes, insecurity and low production output of some onshore fields.

Meanwhile, Nigeria’s policy makers have accused the IOCs of using divestment as a ploy to escape maturing onshore liabilities by hiding behind indigenous oil firms who pay lesser royalties and qualify for pioneer status, a provision that exempt tax payment for five years. “In talking about value, we should be careful that value for one party does not result in loss of value for another,” said Daniels. As oil prices continue to plummet and new upstream investments became too few and far between, industry operators call for efficient utilisation of oil acreages when militancy continues to pose a threat to production. It would then mean exercise of discretion in awarding oil blocks has no place in a well articulated fiscal regime.