Funding, dealbreaker for Nigeria’s oil block sale

Nigeria is looking to tap its ultra-deepwater oilfields, but several hurdles are still dampening the drive to maximise the country’s oil and gas potential.

Nigeria’s offshore domain is one of the most fertile hydrocarbon provinces in the world, yet assets with 13 billion barrels of oil equivalent resources remain untapped in the waters of Nigeria’s oil-rich coast.

To change the narrative, the federal government is mulling plans to conduct auctioning of seven deep offshore oil and gas blocks for the first time in 15 years.

“All the blocks are in the Lagos waters, not in the Niger Delta, with the added advantage of its proximity to the export-free zone in Lagos,’’ Gbenga Komolafe, head of Nigerian Upstream Petroleum Regulatory Commission (NUPRC), said.

Analysts have said issues such as lack of finance, ugly experiences with the last marginal bid round and rampant crude oil theft are more nuanced.

“Sourcing dollar investments for oil and gas developments are more difficult due to green investments,” Ola Alokolaro, partner, energy and infrastructure at Advocaat Law Practice, said. “With fewer specialist banks willing to lend, that leaves a challenge for existing banks, given their internal obligations to reduce oil and gas investments.”

BusinessDay’s finding showed over 1,110 institutions have committed to policies blacklisting coal, oil, and gas projects from new investments.

These include sovereign wealth funds, banks, global asset managers, insurance companies, cities, pension funds, healthcare organisations, universities, faith groups and foundations, according to Canada-based Anadolu Energy.

“Oil and gas investments is currently playing second fiddle to green investments,” said Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector.

Foreign investment into Nigeria’s oil and gas sector slumped 82 percent to a new low of $1.93 million in the second quarter of 2022, according to data from the National Bureau of Statistics.

Beyond financing, investors are concerned the government may conduct auctioning of seven deep offshore blocks in a similar manner it conducted the last marginal fields bid round.

“The Department of Petroleum Resources’ [now NUPRC] attempts to marry up winners complicated the process. Companies competing for the same field were, in some instances, made joint winners. The plan was that the competitors would form a joint venture and develop assets together,” an investor who participated in the last marginal bid round told BusinessDay.

Other experts say Nigeria’s last marginal bid round resulted in battling with legal issues brought about by partnerships foisted on them by the government during the award of the fields, lack of access to initial funding, crude theft, and pipeline vandalism, among others.

Niyi Awodeyi, a chartered accountant and CEO of Subterra Energy Resources Limited, said winners of deep offshore exploration would struggle if the government does not solve the challenges of crude theft, vandalism, and security of lives and properties as well as the general harsh business environment.

“The situation is a bit complicated; oil majors are on a selling rage. No one is willing to invest,” Awodeji said.

This situation has crimped government earnings from the oil sector, exacerbating the fiscal crisis facing the government.

Over the last decade, Nigeria is witnessing the biggest divestment drive by international oil companies (IOCs) operating in the country. Shell, ExxonMobil, Chevron, Eni and Total are all involved in efforts to offload their onshore and shallow-water assets.

The fallout of their departure from these fields is worsening output in Nigeria’s oil production. Already, Angola and Libya have overtaken Nigeria as top producers as the Africa’s most populous nation has seen its output dipped below 1 million barrels per day.

“The timing of this deep offshore auctioning is a major concern, considering the current administration ends in months,” Awodeyi said.

Less than three weeks before he was due to hand over to a new government in 2005, President Olusegun Obasanjo launched an open auction process and said the country would no longer award lucrative drilling licenses on a discretionary basis.

However, the auctions drew criticism that they were neither as transparent as they should be nor as successful in terms of securing investment in Nigeria.

Other experts say the auction was controversial because the government of President Obasanjo allocated several companies the right of first refusal.

The 2006 round caused a scandal after a block that was left unclaimed during the public auction later turned out to have been awarded in private to Starcrest, an unknown firm, that later sold it for a $35 million profit.

The deep water offshore crude oil production, which is dominated by IOCs like Shell, TotalEnergies, ExxonMobil, accounts for about 35 percent of oil output in the country.

The S&P Global Commodity Insights, a market intelligence agency, in a report, stated that deepwater projects hold the key to Nigeria’s production growth and ultimately, stability, saying if properly implemented, the Petroleum Industry Act could transform the fiscal side of the Nigerian oil industry.

“The deepwater projects that are due to start between 2025 and 2030 are estimated to hold recoverable resources of 2.3 barrels. Without the sanctioning and commissioning of currently unsanctioned projects, Nigeria’s overall production will likely decrease from the end of the decade,” the report said.