Tuesday, January 31, 2006

Punch Article Hits Paper Bids By Oil Majors In Nigeria's 2005 Round; JDZ's Block 4 As A Beacon Of Value

The Punch of Nigeria has an interesting story today that tries to ferret out some of the little-known reasons big oil companies failed to mount anything more than paper bids for some of the 44 blocks in the 2005 Licensing Round conducted by Nigeria for its offshore and inland properties, an exercise that currently has only two paying customers.

The broad failure of the round depicted rather brutally in the Punch article is mirrored in the confusion and political strife over blocks awarded in the Nigeria-Sao Tome and Principe Joint Development Zone, where the $90 million signature bonus in Block 4 is used by a Federal Government spokesman, ironically, as an exemplar of the value of the blocks. He sawys, "[I]f a block could go as high $90million in the Sao Tome and Principe, there was no reason why Nigeria’s could not get up to $50million.”

The source for that comment is former ERHC Energy executive Tony Chukwueke, now director of the Dept. of Petroleum Resources, and he sounds like someone who is talking of a done deal, not of a deal that has gone astray.

ERHC Energy and Addax Petroleum will be required to pay the $90 million fee when Production Sharing Contracts for the block are signed, perhaps as early as next week. Addax is carrying ERHC Energy to first oil, and has published a prospectus on the Toronto Stock Exchange seeking $400 million to pay the fees and the cost of development, as well as an $18 million payment to ERHC, which will have slightly more than 26 percent of the block.

Here is the article, a long one but well worth the read:

Tuesday, January 31 2006

Why majors shunned Nigeria’s 2005 oil block bids

Clara Nwachukwu

For the umpteenth time, the Department of Petroleum Resources has insisted that the major oil producing companies; Shell, Chevron, ExxonMobil, Total, and Agip participated in the August 2005.

Only Agip with its local content vehicle partner, emerged winner of block 281, which was tied to an independent power project.

The DPR believes that the majors could not win more oil blocks because “they did not bid high enough for them,” adding, “Except for Shell, all the majors, Agip, Total, Chevron and ExxonMobil participated in the bid round.”

But available information indicated that although the majors “participated,” it was more of “fulfilling all righteousness” than any serious intention to acquire new acreages, beyond the collection of forms indicating interest to participate.

Indeed, the majors had indicated that they already had their hands full without having to add more, as many blocks were even withdrawn from them and thrown into the bid round basket.

As the DPR noted soon after the bid round, “A lot of the major oil companies have worldwide portfolio and they consider the exposure to certain countries and what they can manage. Some think their exposures are large as well as the risk, and preferred to manage what they already have. That is what Exxon and Chevron said, that they wanted to manage their exposures in Nigeria.”

It was also suspected that the majors had played low because they were irked by the blocks withdrawn from them, which government justified in that they had kept the blocks for more than 10 years without developing them.

While all of these might have been contributory factors, some disclosed that the main reason was that the offer prices for the blocks were rather unrealistic and too expensive, as well as the fact that there were many biddable items to determine the signature bonus.

Although the DPR and the Ministry of Petroleum Resources had argued that the blocks were not over-priced, however, the present difficulties in the winners paying the signature bonus indicate the contrary.

As far as Tony Chukwueke, Director, DPR, is concerned, “The reserve value for the blocks were correct,” pointing out that "if a block could go as high $90million in the Sao Tome and Principe, there was no reason why Nigeria’s could not get up to $50million.”

Indeed, Agip offered the lowest price of $10million among all the blocks zoned for the IPP, where other investors bidded as high as $75million for block 281 and $65million for block 290.

According to industry sources, “Government is in dire need of funds, so it got the Asians and the indigenous operators to price the blocks out of economic sense. Secondly, government had hiked industry tariff and reviewed the production sharing contract agreements.

“It is not done anywhere in the world, one of them has to give way for the other if they wanted to make a success of the bid round, reduced tariff enough to get higher signature bonuses.”

For instance, one of the majors recalled, “We had somebody bid $180million for an onshore block, where I know from experience, should not be more than $20million.”

As one operator noted, “If we had only professionals in the exercise, the outcome would have been different. We would have had a lot more sanity, because some consultants were told to be aggressive.”

He added, “There is need to discourage reckless bidding, and government should legislate on some of these issues.”

Another issue was that of the local content vehicles, an avenue government wanted to use to get more indigenous participation in the oil and gas industry in line with its Nigerian content objective.

As much as all the majors expressed support for the LVC initiative, many believed they should have been given the opportunity to choose their partners, rather than the marriage of convenience government forced on them, as they knew little or nothing about their local partners.

In addition to these, some of the majors revealed that from the onset, it appeared government had made up its mind to award the ‘juicy’ blocks to Asian investors, in pursuit of its aggressive quest for new investors, particularly those with heavy investment portfolio for the downstream sector, coupled with the fact the there were not enough data on the blocks to guide investment decision.

From unfolding events, it has become apparent that price was in- deed, the major issue in the bid round, as out of the 44 blocks awarded from the 77 offered, only18 were able to pay the signature bonuses.

Only two of them have gone as far as signing the Production Sharing Contracts, which raises questions on the payment status of the rest 16, even as the fate of the rest 26, particularly those that have made part payments, remain uncertain.

However, Chukwueke has said that winners of oil blocks who were yet to pay for their respective signature bonuses, did not have any excuse for defaulting.

Consequently, all those that have not paid run the risk of revocation, which already had received Presidential nod, while their money would be refunded to them.

The DPR boss insisted that the excuse that, “they did not bid well enough,” was not tenable, as this smirked of unseriousness.

“That is why the President said that they should all be revoked, because if they did not pay for the signature bonus, they don’t get the oil blocks,” he added.

Daukoru, had hinted that government was in a fix on deciding what to do with those who made part payments, saying, “We are looking at how to handle their case, whether to consider them as outright losers or allow them to meet up with their payments.”

The DPR explained that the delay in signing of the PSCs was connected with the fine-tuning of the about 76-page documents between it and the Nigerian National Petroleum Corporation.

For these reasons, stakeholders advised that bidders should attach cheques of between 25 and 50 per cent of the cost of the signature bonus to their bids in subsequent rounds, to prevent frivolous bidding.

Up till now, government is still keeping the names of those who have paid and those that have not close to its chest, in line with its consideration of discretionary allocations for oil blocks, which stakeholders have advised against, insisting that there should be no modifications after the end of the bid rounds.

The major thrust of 2005 bid round according to DPR, was to contribute to the long-term global energy sufficiency in Nigeria, to attract the most viable and commercially attainable value for its hydrocarbon asset in the Niger Delta, the inland basin and the deep offshore.

For the first time, government looked in totality at all the basins in Nigeria,to expand opportunities for gas development for domestic and export market.

Also, the bid round was meant to attract new international oil and gas operators whose entry would stimulate and fast track the new competitive commercial arrangement and technology.

THE PUNCH, Monday, January 31, 2006

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