New Licensing Round Planned to Put Nigeria Back on Investment Radar

Special Adviser to the President on Petroleum Matters Dr. Emmanuel Egbogah has told Reuters that a new licensing round will "definitely" take place in 2010 that will include both on- and offshore fields, with reserves of at least two billion barrels. The blocks on offer would include some relinquished areas, as well as areas left unbid in previous rounds.

The upstream tender would be the country's first since 2007, when Indian companies and smaller players made up most of the running for the 45 blocks on offer, following rounds in 2005 and a mini-round in 2006. In that period, the prevalence of unqualified players, irregularities over rights of first refusal by state-backed NOCs, and onshore violence against existing operations all combined to keep the supermajors away. Few expect a significant uptick in supermajor investment in the current circumstances, although the state-backed NOCs remain eager for new projects, as do mid-tier and smaller listed companies.

Circumstances favouring caution from Nigeria's existing supermajors include the continuation and recent resurgence of violence in the Niger Delta, which has started to result in small shut-ins again, including three pumping stations feeding into Shell's Forcados terminal and 20,000 b/d from Chevron in the last month (see Nigeria: 11 January 2010: Pipeline Attack Hits Chevron Output in Nigeria's Delta). The longevity and financial impact of the Delta dispute is such that Shell has found a buyer for licences OML 4, 38, and 41 in the Northwest Delta region, amid rumours that it is looking to significantly limit its onshore footprint in the country—and with it those of partners in the Shell Petroleum Development Corp., Total, Eni, and the National Nigerian Petroleum Corp. NNPC (see Nigeria: 1 February 2010: Shell Petroleum Development Company Sells Three Nigerian Licences in Refocus of Holdings).

Concerns over security and the loss of net entitlements through shut-ins have been further exacerbated by the proposed Petroleum Industry Bill (PIB), which among other things is seeking to increase government take from offshore ventures as well as reshape the institutional structure of the industry. It remains most unlikely that any licensing round will take place without that new bill in place—given its expected retroactivity—which means that the timing for any tender will be guided by its progress through the legislature. At present the PIB remains on the negotiating tables in both the Senate and the House after its second reading in the middle of last year, with some opposition from oil-producing communities, oil workers, and indeed, investors, who question the retroactivity and the increased costs associated with the bill. The NNPC this week released estimates that the bill would raise over US$300 billion a year through increased take from joint ventures and production-sharing agreements. State take, as the Nigerians define it, would rise from 84% to 87.5% for onshore and shallow-water operations, and from 32% to 72.35% for deepwater licenses, according to Victor Briggs, general manager of planning of the National Petroleum Investment Management Services, NAPIMS (an NNPC subsidiary). He said that the system will also have greater sensitivity to production rates and prices than the current formula.

Outlook and Implications

While Nigeria undoubtedly has plenty of resources still to develop and attractive prospects both on- and offshore, there is a sense that it is now treading water and even falling back when set against other regional producers, due to the intractability of its socio-economic problems in particular, although progress has certainly been made in setting in place a better social compact under the administration of President Umaru Yar'Adua. The president's absence due to illness has come at a sensitive time, both for legislative progress and too the Niger Delta, where the amnesty for militants looks close to unravelling after limited progress in providing alternatives for the vast numbers of unemployed youth. This has potentially serious repercussions for the industry if violence starts to pick up in earnest and will no doubt confirm any plans in place by companies to reduce their interaction—and investment exposure—with the local population.