Financing Options for Marginal Fields, Nigeria

Nigeria’s Department of Petroleum Resources (DPR) recently launched its first marginal field bid round in 17 years (the Bid Round). The Bid round comprises a total of 57 onshore and near-shore fields containing  approx. 1 Billion barrels of oil and near 5 TCF of gas.

This note is not intended to discuss the commercial viability of the marginal fields or where the best opportunities lie which will, in addition to the fiscal terms, be a function of reservoir characteristics, proximity to infrastructure, capital and operating expenditure requirements, and production profile.

REGULATORY AND COMMERCIAL FRAMEWORK

Nigeria’s Petroleum laws empowers the President of the Federal Republic of Nigeria to designate any discovered oil fields left abandoned or unattended by existing licence holders for a period of 10 years or more as a marginal field. Once designated a marginal field, the field and or area is “farmed-out” from the wider Oil Mining Lease (“OML”) which effectively means the existing lease (OML) holders cede these designated fields to the awardee of the marginal field.

While the initial prequalification and subsequent submission of technical and commercial bids under the Bid Round were the exclusive preserve of indigenous companies, there are opportunities for foreign participation up to a ceiling of 49% ownership upon award of the fields.

The guidelines for the Bid Round provides that notified preferred bidders for the marginal fields must pay the assigned signature bonus as stated in their commercial bids within 90 days from the date of the award failing which, the awardee will be issued with a 30 days’ notice of revocation. Upon the expiration of the extended 30-day period and the awardee’s failure to pay the signature bonus, the award will be revoked without further notice.  This stringent timeline makes access to finance an important consideration for prospective bidders and presents opportunities for cash rich foreign mid-caps looking to increase their acreage portfolios.

The result of the bids are expected before year end with the process to culminate with the execution of Farmout Agreements between existing OML holders and the designated recipients of the marginal fields. The negotiation of the Farmout Agreements and any the Joint Operating Agreement (where more than one party is awarded the same field) must be concluded within 90 days of notification failing which, the regulator could rescind the award. For straddling fields, a unitization agreement will be a condition precedent for approval of the Farmout.

CHALLENGES

Assuming the Bid Round runs its course, there are various challenges to potential preferred bidders.

1. Fiscals

Given the prevailing market conditions in the global oil market – low prices and oil glut, attracting foreign capital may be difficult. The Petroleum Industry Bill (PIB) currently before the National Assembly contains a number of provisions which if passed, will impact on the fiscal terms for the development of the fields. Some of these include the requirement of payment of 2.5% of the audited operating expenses by all operators into an endowment fund for the benefit of the host communities. The PIB also provides for payment of 30% corporate income tax on upstream operations and replaces petroleum profit tax with a hydrocarbon tax at a rate of 50% for onshore and shallow-water operations and 25% for deep-water and frontier acreages.

2. Financing and Bankability

As international lenders continue to shift their focus from financing fossil fuels to renewables, bidders may find it difficult to access the finance required to develop the assets once assigned. That said, some international lenders will still finance fossil fuel developments where asset owners have existing assets of good quality, a sound financial track record and are led by a strong management team.

The financial exposure of domestic lenders to local independents may curtail their ability to fund the marginal field acquisitions and subsequent development. Local lenders may therefore, be unwilling to fund successful bidders who are new entrants, without cash flow and a tested management team. The low debt capacity of such newcomers due to a lack of proven reserves and cash flow means that equity issuance or technical and financing arrangements with service companies may be the available funding options until such fields have been appraised for development to attract debt funding. 

3. Non passage of PIB

The delay and uncertainty in the passage of the Petroleum Industry Bill (PIB) to comprehensively reform of Nigeria’s oil and gas sector continues to undermine the confidence of investors in the sector. Passage of this law should help improve governance of the sector by strengthening institutions and providing clarity of structures, roles, accountability, transparency, and overall efficiency.  

4. Farmout Considerations

Given the short timeframe within which investors are required to negotiate the farmout agreements, it is important that bidders avert their minds to the various issues that may likely arise during such negotiations and these include the following:

• Negotiating access to infrastructure necessary for evacuation of production: issues such as capacity and tariff and the possibility of review of same must be considered by bidders for the purposes of separation, treatment, storage, transportation of crude oil and gas to be produced from the fields,. In addition, issues such as pipeline losses and the risk allocation of same, given the constant vandalisation of evacuation pipelines must be taken into consideration.
• Decommissioning and Abandonment: negotiation of the requirement for security payment by leaseholder to cover these environmental issues from the marginal field operator; and
• Unitisation: where the fields of the leaseholder of the OML and the designated marginal field operator straddles or the field of the marginal field operator straddles the fields in another licence area, there will be need for the negotiation of a Unitisation Agreement in conjunction with the farmout agreement to set out the determination and redetermination of the petroleum from the straddling fields.

FINANCING OPTIONS FOR MARGINAL FIELD OPERATORS

The oil and gas sector is capital intensive and prospective bidders will find it difficult to access financing given prevailing global financial crisis. Some of the financing options below may be considered for the purposes of financing the acquisition and development of the awarded fields.

1. Equity Investment

This is one of the traditional modes of raising finance and for an awardee, it involves finding the right equity partners to inject the necessary capital into the awardee entity or an SPV. This is the most suitable means of sourcing financing for newcomers that don’t have assets with reserves and or and cash flow. Equity funding can be raised through private placement or from the capital market. Another avenue to source for equity is through private equity investment.

2. Debt Finance

Equity investment typically goes hand in hand with debt financing as majority of lenders would require some evidence that the promoters have committed or will commit some equity to the project (usually 30%) before providing the debt. As noted earlier, awardees may find it difficult to attract this form of financing as the usual Debt Finance Institutions (DFI) are expressing aversion to financing oil development projects. Given the reluctance of the DFIs, the local banks will struggle to provide the necessary capital to develop these fields particularly in light of the existing indebtedness of oil and gas exploration companies.

3. Reserve Based Lending (RBL)

 RBLs are typically secured against developed, undeveloped and producing assets. The loan to be secured is based on the determined reserves of the awarded marginal field and the facility is repaid from crude oil proceeds from the field. For a bankable RBL transaction, the reserves of that field, anticipated price of oil and gas, expected capital expenditure and operating costs of the awardee must be ascertainable.

4. Contractor Financing

This option involves Oil Field Service (OFS) contractors providing required services for the development of the field in exchange for either cash or with the products (either oil and gas or both). The drawback with this mode of financing is that oil field service contractors are generally averse to production risks therefore it tends to be the larger OFS contractors that provide this form of financing given the strength of their balance sheets. With the Covid 19 pandemic and the effect on the oil and gas service industry, this form of financing may be limited.

5. Trading

This is a developing practice whereby the International Oil Companies (IOCs) using their trading companies or oil trading companies execute offtake agreements with local independents which allows the local companies to source financing from financial institutions for the development of the fields or in some instances advance the finance for the development of the fields.  The IOCs often execute these agreements with the awardees that are awarded fields carved from blocks originally owned by the IOCs the reservoir characteristics of which are known to the IOC.