Nigeria’s precarious economic situation may lighten up pretty soon as Federal Government of Nigeria through the Department of Petroleum Resources (DPR) flags-off the commencement of Marginal Fields Bid Rounds for 2020.
DPR stated that the exercise which will be conducted electronically, will include expression of interest/registration, pre-qualification, technical and commercial bid submission and bid evaluation.
Marginal fields will be are awarded to indigenous companies but often involve farm-in and joint venturing arrangements with international oil companies (within mandatory maximum participation allowances).
The award of the marginal fields in Nigeria always leads to triggers a farm-out agreement to be made with the original OML holders, which allocates responsibilities and liabilities as between the area holders, as well as the royalty payable and terms for accessing infrastructure.
What is a Marginal Field?
A marginal field is defined in the Guidelines as a field that has been discovered and left unattended for a period of not less than 10 years from the date of first discovery.
Once there is designated marginal field, that area is “farmed-out” from the wider Oil Mining Lease (“OML”) area. The overall effect is to cede such area/field from the original OML holders to the recipient of the marginal field award.
The first marginal field bid process in Nigeria started in 2001 and resulted in the award of 24 marginal fields to 32 companies. A bid round was scheduled in 2013 but was significantly delayed following the initial announcement and ultimately never concluded. Recently, the DPR has taken steps to revoke previously awarded marginal fields (some of which are being contested but have been included to be freshly awarded in this 2020 bid round).
What is Farmout?
Farm-out is the assignment of part or all of an oil, natural gas or mineral interest to a third party for development. The interest may be in any agreed-upon form, such as exploration blocks or drilling acreage. The third party, called the “farmee,” pays the “farmor” a sum of money upfront for the interest and also commits to spending money to perform a specific activity related to the interest, such as operating oil exploration blocks, funding expenditures, testing or drilling. Income generated from the farmee’s activities will go partly to the farmor as a royalty payment and partly to the farmee in percentages determined by the agreement.
What is Farm-out Agreement?
Farmout agreements give farmees a potential profit opportunity that they would not otherwise have access to. Government approval may be necessary before a farmout deal can be finalized. A company may decide to enter into a farmout agreement with a third party if it wants to maintain its interest in an exploration block or drilling acreage but wants to reduce its risk or doesn’t have the money to undertake the operations that are desirable for that interest.
Farmout agreements work because the farmor usually receives a royalty payment once the field is developed and producing oil or gas, with the option to convert the royalty back into a specified working interest in the block after paying for drilling and production expenses that were incurred by the farmee. This type of option is commonly known as a back-in after payout (BIAPO) arrangement.
Farmout agreements are effective risk management tools for smaller oil companies. Without them, some oil fields would simply remain undeveloped due to the high risks facing a single operator.
Marginal Fields 2020 Location:
The 57 announced Marginal fields by Department of Petroleum Resources (DPR) is a mix of onshore, swamp and shallow-offshore fields.
Marginal Fields 2020 Fees:
Application fee of N2 million per field
Bid Processing Fee of N3million per field
Data prying fee of $15,000 per field
Data Leasing fee of $25,000 per field
Competent Persons Report of $50,000 and
Fields Specific Report for $25,000.
Official exchange rate of $360/$1
With the above, interested bidders are expected to pay a total of $115,000 in statutory fees and another N5 million in local currency.
All application fees and processing fees are expected to be paid into the Treasury Single Account (TSA)
Signature Bonuses are to be paid into the Federation Account.
Data leasing, data prying, Competent Persons Report (CPR) and Field Specific Report to be paid into the National Data Repository (NDR) account for repayment.
Marginal Fields Requirements & Guidelines
For the 2020 oil bid round exercise, DPR announced that a total of 57 fields located on land, swamp and shallow offshore terrains are on offer. According to the approved guidelines, applicants must show evidence of technical and managerial capability and must also demonstrate the ability to fully meet the objective of undertaking expeditious and efficient development of a Marginal Field.
- Bidding process: Interested companies must register for access to a DPR portal and submit an application for pre-qualification. Bidders can then review field-specific data and thereafter submit a detailed technical and commercial bid, and the Guidelines explain the expected contents of such bid and the criteria for evaluation. A selection committee will evaluate and select the winning bids. The parties then proceed to negotiate a farm-out agreement (and, in the event that two or more companies are awarded one field, a joint operating agreement).:
- Eligibility: The process is open to all indigenous companies that are “wholly or substantially” Nigerian, duly registered to carry out exploration and production operations in Nigeria, and can demonstrate requisite experience and capabilities to develop the field. Companies that are indebted to the Nigerian Government or hold assets that are not being operated in a “business-like manner” will not be eligible.
- Signature bonus: Companies are expected to confirm their willingness to pay a signature bonus upon selection and prior to the award of the marginal field. :
- Nigerian content: Interested bidders are expected to demonstrate their commitment to developing local manpower and supporting indigenous service providers. Read Nigerian Local Content Act
- Farm-out process: The Guidelines explain the key terms that are expected to be included in the farm-out agreement with the OML holder. If the parties are unable to reach agreement within 90 days, the DPR can be notified and will intervene to adjudicate the applicable terms.A winning bidder obtains the right to enter into a farm-out agreement with the owners of the wider OML, which allows it to explore, produce, and take any petroleum encountered in the marginal field area, in return for paying consideration and a royalty to the superior OML holders. While a relatively customary form of agreement has developed, there can be many contentious issues:
- The marginal field holder will assume all liabilities in relation to the marginal field area, including environmental and decommissioning matters. This can raise payment security demands from OML holders to support this allocation.
- The parameters of the farmed-out marginal field area may raise questions about how discoveries that either straddle or lie deeper than the field boundaries should be allocated.
- Alongside the farm-out, it will be necessary for marginal field owners to secure adequate access to neighbouring infrastructure to ensure production can be exported from the field – often owned by the superior OML holder. This may be difficult to negotiate and there can often be complex issues around how losses from pipelines are to be shared amongst the various users.
- Government back-in right: The Government expressly reserves its right to take a participating interest in the marginal field.
- Five years to develop or lose: The Guidelines appear to set an effective five year term for the award of the marginal field, and require progress in the development of the field to be shown before then (failing which the farm-out agreement can be made “void” or not be renewed).