PETROLEUM CLUB RECOMMENDATIONS

Policy Note

Design and Conduct of Oil Licensing Rounds in Nigeria Submission from the Organised Private Sector 14 May 2012 | The Petroleum Club

Introduction

The Department of Petroleum Resources (DPR) announced on 24 February 2012 its intent to hold an oil block licensing round later in 2012. On 19 April 2012, the Petroleum Club Lagos (PCL) held a roundtable in Lagos to elicit experiences, insights and recommendations from the petroleum industry on how DPR should conduct the upcoming round. PCL is a private club for leaders in the Nigerian petroleum sector to contribute to policy formulation and promote best practices in the country’s oil and gas industry.

PCL, as part of its continuing mission to provide thought leadership for the sector, hereby offers guidance on the design and conduct of future upstream licensing rounds. The recommendations presented here, which come directly from participants at the roundtable, are submitted in the interests of creating a licensing process that delivers better value for Nigeria and industry stakeholders. The organized private sector has historically had little opportunity to make inputs into the design and conduct of Nigerian licensing rounds. Insights from established Nigerian E&P contractors and stakeholders are critical to getting the process right.

Problem Statement1

Past upstream licensing processes in Nigeria have fallen well short of best practices and failed to secure maximum value for the country’s assets. Discretionary decision-making and lack of openness drove down competition and returns to Nigeria, including over $2 billion in unpaid signature bonuses. This led to public controversy, including lawsuits, indictments, sackings, cancelled or revoked awards, and legislative probes. Many deals fell through, and barely half of the fields auctioned between 2000 and 2007 have seen serious drilling. The stated goal of increasing indigenous participation was not well served. Most of the marginal fields awarded during the 2000s have not produced.

Policy Recommendations

1. Before Bidding Starts

Write licensing best practices into the PIB: The proposed Petroleum Industry Bill (PIB) promises to streamline the upstream institutional and policy frameworks in line with the highest industry standards. Past drafts, however, contained only very general provisions for licensing criteria and continued to allow non-competitive awards of acreage. These provisions should be strengthened. The final PIB should also bring more clarity on issues like assignments, conversions, and

1 See the Annex for a summary of the different Bid Rounds (process and issues).

Design and Conduct of Oil Licensing Rounds in Nigeria | Submissions from the Organised Private Sector)

The Petroleum Club Lagos Page 2 of 7 14 May 2012

relinquishments. Separate drill-or-drop rules should also be instituted for marginal field operators, to ensure assets are developed.

Set goals for bid rounds based on long-term planning: Past licensing rounds in Nigeria were not tied

to any comprehensive asset development strategy or broader economic development plans. Objectives shifted from round to round, and some rounds had few longer-term goals at all. Nigeria needs to develop a strategy for managing its natural resource base for current and future generations, and tie each licensing round to that strategy. If government had adequate knowledge of reserves and conducted staged planning exercises, it could offer only those fields which make the most sense for Nigeria and the broader industry at a particular time. Angola, for instance, selects blocks carefully on the basis of articulated, well-planned development strategies. Too many bid rounds in a short timeframe could also lead to investor fatigue, as happened in the late 2000s in Nigeria.

Strengthen the National Data Repository: Geological risk is the number one concern serious E&P companies have going into bid rounds. The quality of assets on offer, supported by sound data, is often the lead factor determining what prices governments will fetch for their acreage. In past Nigerian rounds, poor access to data deterred capable bidders, made bid package development more costly, prevented proper field development planning, reduced bid quality, and lowered access to finance. Conditions in the National Data Repository (NDR) were a large part of the problem. Bidders in future rounds must have full access to a Repository that acts as the single source of authenticated and certified data. DPR should press operators withholding data on marginal fields for full turnover. Data on offer should include: A publicly-accessible concession map detailing the companies that hold rights in all closed and

open blocks.

All available geophysical data on all assets that may be offered in future, including 2-D seismic, 3-D interpretation, cores, logs and well cuttings.

All contents of the NDR should be open, transparent; access should be fairly priced. DPR should consider outsourcing management of the NDR to a private company if that would boost efficiency.

2. The Bidding Process

Publish and abide by clear, transparent asset information and bid criteria: To avoid confusion and ensure due process, DPR should:

Establish separate bid criteria for marginal fields. This is essential given the special natures of the assets and companies involved. Some thought the criteria from the 2004 marginal field rounds could be used as a template, while others endorsed the 2005 evaluation criteria. Whatever the criteria, they should be tailored to serve the bid round’s larger articulated goals.

Make criteria quantifiable and verifiable. For instance, in cases where the bidders offer investments in downstream industries or public infrastructure, fair value should be applied to these investments in a manner that is incontrovertible by any parties.

Include detailed guidance on process and fees in bid guidelines. Past guidelines gave an insufficiently clear picture of the bid process end-to-end, creating confusion and opportunities for abuse of discretion.

Offer publications and road shows that help explain the rules. Operators found the past road shows Indigopool conducted useful, for instance.

Publish on a website in an easily understandable format all details of: o Blocks on offer o Companies qualified to bid, along with their agents and consultants o Existing and model contracts, redacted only where government can prove the need for

confidentiality o Winning bids



Make pre-qualification criteria strict enough to privilege serious bidders: Based on objective, verifiable targets, all applicants should be forced to show baseline levels of:

Technical experience. The licensee must possess a minimum level of technical expertise in all relevant fields.

Financial capacity. The licensee must possess verifiable financial capacity to pay the signature bonus within the required timeframe. The main purpose of this provision is to ensure the licensee is financially stable and will not impede the development of the license for lack of financial capacity when a call is made for investment.

Human capacity. Successful bidders must demonstrate sufficient capacity and expertise to manage and carry out relevant operations and activities in accordance with prevailing regulations.

Tie the minimum size of signature bonuses to the characteristics of the asset: The past practice of

imposing a flat $150,000 bonus for marginal fields, for instance, is not sustainable. First, it results in assets being transferred for extremely low value—e.g., USD $0.10 per barrel of 2P reserves against the USD $5-8 per barrel seen in other auctions. Second, it prevents DPR from using signature bonus as a tool for eliminating non-serious bidders. Bonuses tied to asset quality will also discourage rent seekers, for instance by making quick asset “flips” and farm-ins less profitable.

Develop balanced, depoliticized criteria for supporting local content: Supporting local E&P companies is a serious imperative in Nigeria. However, government needs a model that does not compromise the sector’s development potential or returns. Nigeria must resist the tendency to extend preferential treatment to companies solely because they are local and well-connected. Available models include:

Forming consortia: Locally owned companies may need to aggregate to present stronger bid packages. In all cases, government must allow bidders to select their own partners, and must cease the practice of forced marriages. In past rounds these pairings did not create strong technical, financial, or management synergies. They also politicized awards in ways that were destructive for the licensing process and the long-term investment environment. Minority equity partners should be scrutinized closely, to ensure they add some value to bids.

Grandfathering/mentoring: Former staff of international oil companies (IOCs) could also form companies to participate in upcoming rounds. Such companies possess the same value systems, policies and practices as the IOCs and could become natural partners. The IOCs can provide both technical and financial support (guarantees) to such companies.

Local contractor and supplier quotas: Ensuring that awardees meet targets set under the Nigerian Content Act will also boost local content over the long term.

Abide by published bid guidelines for all awards: Here government should:

Consistently follow the recommendations of DPR bid evaluation committees. This was a major problem in past rounds.

Award all acreage through open auctions, not closed block-by-block negotiations.

Avoid awarding blocks to companies who do not participate in the bid process. In 2005, for instance, at least 38 winning companies sat out the auction altogether, negotiating deals with top officials after bidding closed. This should not be repeated.

Commission an independent audit of the auction process. DPR should invite outside experts to monitor all steps of bidding. These experts should then evaluate and certify compliance with the published bid guidelines.

Repeal ministerial discretion over awards: The 1969 Petroleum Act gives the Petroleum Minister broad, subjective authority to award OMLs and OPLs. In past bid rounds this grant of discretionary power led to serious distortions and sub-optimal outcomes. To protect the integrity of the process and ensure full returns for Nigeria, control of the awards process should be transferred to strong and independent institutions. DPR, which already has regulatory authority in all matters pertaining to upstream licensing, is the most obvious choice.



3. Post-Bid Activities

Do not award blocks after bidding closes. No exceptions should be made here, even for blocks where deals fall apart for legitimate commercial reasons.

Clean up the signature bonus payment process: Here government should:

Refuse to negotiate lower bonuses for awarded blocks.

Stop late payment of signature bonuses. In past rounds the Nigerian government essentially offered interest-free credit to preferred bidders on some blocks. Participants at the roundtable argued that winners should be required to pay 50 percent of the signature bonus upon contract signing, and then submit the full balance with interest within 12 calendar months. Those who do not should forfeit all bonuses and fees paid and relinquish their asset.

Collect all outstanding signature bonuses from past bid rounds. Payment of signature bonuses was a fundamental condition for past awards. Allowing them to go unpaid sends the wrong signal to industry players both in and outside Nigeria, and creates a chaotic environment that could drive away serious contenders in future.

Receive signature bonuses payments in a single government account. Past rounds used many accounts, leading to confusion.

Commission an outside, independent financial and process audit of future rounds. This audit would confirm that all payments were effected when due and paid into the appropriate account.

Require performance bonds for marginal field awards: While this could prove challenging for some local firms, a mandatory bond sends a strong signal that only serious bidders need apply. To ease pressures on committed operators, the size of the performance bond could be reduced for bid packages containing a sound work program. All bonds should require that winners submit a work program within some period after the award or else forfeit the license.

Encourage strong legislative oversight: The National Assembly should have access to all information on the award of licenses in the execution of its oversight functions.

Involve NEITI and civil society more meaningfully: The Nigeria Extractive Industry Transparency Initiative (NEITI) should conduct regular, timely audits of licensing rounds to ensure the integrity of the process. Government should also open its doors to media and civil society groups seeking to monitor whether license holders are delivering to the terms of their contracts.


Annex 2000 BID ROUND GOALS PROCESS ISSUES

Expand scope of participation of

investors

Broaden reserve base

Avoid previous pitfalls by

discouraging speculation and block

hawking

Guidelines were issued outlining

“Procedures for granting concessions

under the Petroleum Act and the

relevant terms, conditions and

documentation in respect of bid

submission”

Guidelines were very clear on each

stage of the process

Distortions associated with the provision for discretion of the Minister of Petroleum Resources

A 2008 House Probe could not determine that every instruction said to be from the Minister of

Petroleum Resources had Ministerial approval.

Abuse of office by presidential aides who subjectively and on criteria not contained in the

guidelines altered the results of the evaluation in the announcement of the final results

Litigation instituted on 4 out of 22 blocks on offer by previous awardees of the blocks

Blocks awarded to companies that did not participate in the bid process

In the years following the bidding (2001 – 2007), recommended awardees for the 10 oil blocks lost

possession of the blocks as the assets were re-awarded to other parties. The House Probe found that

most of the original awardees did not pay their signature bonuses

USD $248 million lost in signature bonuses lost as a result of a number of issues. Companies that

paid a part of the signature bonus refused to pay the balance when they did not find oil

2003 BID ROUND GOALS PROCESS ISSUES

This bid round stands on its own as

there are no clear objectives

Participation was purely on

“invitation”

Invitation was extended by the

presidential aide

There is no proof of Ministerial

approval for the Bid

Due Process not followed in the award

Was not open and transparent although the principle of open competitive bid was introduced in

2000

Conducted 8 days after the announcement of the Final Results for the award of the Marginal

Fields

The 3 OPLs were not part of the blocks on offer in the Marginal Fields farm-out

No evidence of Ministerial approval was ever presented by the presidential aide who championed

this bid round

Parameters for invitation to bid were not evident

Parameters for evaluating the bids were not evident

Blocks were awarded to companies with doubtful experience, technical ability and track record

Signature bonuses were not paid in full

2004 MARGINAL FIELD AWARDS PROCESS ISSUES

2004 MARGINAL FIELD AWARDS As documented in the “Guidelines for

Farm out and Operations of Marginal

Fields”

Lack of due process, transparency and credibility

Companies that did not bid or pre-qualify ended up as co-winners of assets

In an instance, companies that were tied in first place did not win the bid. The assets were

assigned to the two companies at the bottom of the list

Arbitrariness ran through the entire award process

Most of the awardees did not pay their signature bonuses within the 120 days following the awards

as stipulated in the Guidelines

Both DPR and the MPR could not produce the Presidential approval for the Farm-out of the

marginal fields despite repeated demands by the House Probe Committee



2005 BID ROUND GOALS PROCESS ISSUES

Increase capacity to produce more oil

(40 billion barrels of reserve target; 4

million barrels per day of production

capacity)

Expand gas development

Attract new international players

Reverse migration to Deep offshore

and attract attention to Inland Basins

with significant gas

Strategic Downstream Developments

in IPP, gas for IPPs, investments in

refineries

Implement a viable and

comprehensive Local Content Policy

(Local Content Vehicles)

Commitment to transparency and EITI principles

Registration and payment of all fees

were made mandatory

Introduced concept of strategic

partners (local content vehicles and

investors in strategic downstream projects), operators or both

Idea of strategic investors later

metamorphosed into the principle of

the Right of First Refusal

Guidelines were published. Web-

based system and instant public

display of the winning bid were put in

place. These provisions set apart

“2005 bid round from the

discretionary allocation bid process”

Although the process aimed for transparency and due process, the end result left a lot to be desired

Confusion as to number of blocks offered (61 or 77 blocks)

Contradiction on number of blocks won (36 or 44 blocks)

Many application forms were not included in the Compendium of application forms raising

questions of integrity of the process

38 companies whose names do not appear in the Registration report and whose application forms

are not contained in the compendium won interests in 23 of the 36 oil blocks

The application forms of 11 companies who participated and won blocks are missing

Based on the Internal Memo and Guidelines, it is not possible for a company to win a bid if it has

not paid the registration and bid processing fees

Companies that did not register for the bid process were pre-qualified and eventually awarded

blocks

38 companies did not pay the statutory application and processing fees

14 blocks were tied to strategic downstream investments and had the RoFR attached to them

although no particular block was tied to any particular downstream project

Any company with a RoFR over a block had the right to match a winning bid and pay within a specified time

Non availability of comprehensive data on the blocks on offer

RoFR was not clearly defined although it was clear that the government wanted to involve strategic

partners through the RoFR provisions. The operation of RoFR introduced distortions to the process

and subverted Due Process

Ministerial discretion negatively impacted Due Process and Transparency

A higher bid was rejected for an allocation to a different party based on the discretion of the

Minister of Petroleum Resources/ President. The latter offered a lower price for the block

claiming to have received a “discount” on the signature bonus although it could provide no

document to back up the claim.

None of the payments were made in accordance with the Guidelines

Executed PSC on the block without full payment of signature bonus

18 months after the signed PSC, development of the strategic downstream development is yet to

commence

Awards were made by the Presidential Adviser on Petroleum and Energy (PAPE) after the bid

rounds had closed

2006 MINI BID ROUND PROCESS ISSUES

Attract strategic downstream

investments such as new railway

lines, refurbish existing railway lines,

expand local refining capacity, gas for

independent power plants and

investments in poverty reduction

Governed by “Guidance Information

for Prospective Bidders in the Year

2005 Licensing Rounds”

Participation was on invitation only

The practice of ROFR subsisted

Blocks were awarded without the requisite Ministerial Approval. Most were “regularised” after the

award

PSCs were executed prior to Ministerial Approval

Awards were reversed without documented explanations

No clear parameters on how Local Content Vehicles emerge in the bid process which opens the



Companies could choose their

preferred Local Content Vehicle to

partner. Later cancelled by

government

Separate and distinct strategic/ downstream investment formed part

of the consideration for the block

Timeframe for commencement of

activity on the block was 18 months

Committee of senior staff from DPR

and NNPC was set up to oversee the

process

system for abuse

DPR and CBN were reluctant, and at other times, refused to disclose authenticated financial

information on transactions

2006 Mini Bid Round was a discretionary award of oil blocks to whomsoever the operators of the

Bid Round desired without clearly defined parameters

2007 BID ROUND PROCESS ISSUES

Pursue governments target of 40

billion barrels reserve and production

capacity of 4 million barrels per day

Encourage investments in strategic downstream assets

Attract credible foreign investors

President cancelled all 2005 awards

on which signature bonuses had been

partially paid

Public announcement of all equity in each block including names of

companies and equity allocated to

non-operators

Only 45 of the approved 54 blocks were put on offer with a lot of confusion regarding the particulars

of the blocks on offer

All the winners paid the mandatory fees, but not all signature bonuses

However, some companies that did not participate in the process were named as parties on the PSCs

Continued retention of funds belonging to third party companies without the execution

Documents

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