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Funding crunch: Investors flay 2020 bid round timing

Indigenous players that stand in the frontline of the newly launched marginal bid round are not impressed with the management of the much awaited opportunity, pointing at the prevailing low demand and low price cycle in the global oil industry.

The situation points to low revenue expectations for government as investors might not be as bullish with bids as they would if the viability outlook were bright.

Department of Petroleum Resources (DPR) had launched the bid round almost silently on Monday but some indigenous investors in the upstream petroleum industry who spoke to The Oracle Today flawed the timing of the bid round, pointing at financial squeeze in the domestic economy, loan fatigue in the local banking industry and high per capital production rate at existing marginal fields.

Some of the players who spoke with The Oracle Today expressed worry that the global business outlook for small number producers in the petroleum industry would not provide the required support for marginal asset funding, especially in the domestic banking industry.

An eminent industry professional leader who also holds financial stakes in multiple marginal fields in the country lamented that Department of Petroleum Resources (DPR) launched the 2020 marginal field round even after it is aware of difficulties faced by existing lean asset operators.

The Oracle Today reports that DPR which is the nation’s lease administrator and operations regulator in the industry had in April supervised revocation of 11 existing marginal field licenses even as the operators struggled with mobilization of funds under the current tight liquidity situation to meet set field activity benchmarks.

Our findings show that operators of nine out of the 11 revoked fields had achieved test production and have paid royalties to government in their struggle to retain the assets, yet their licenses were revoked even when it was clear that the investors are already exposed to the banking system to the tune of over $400 million.

An oilfield contractor who also spoke on the licensing round pointed at twin headwinds of funding drought and low oil price cycle imposed on the global petroleum industry by the raging coronavirus pandemic and the global movement and activity lockdowns associated with contagion containment measures deployed by governments.

Our source whose companies operate round the world pointed at the mass closure of low margin assets in the United States as critical indicator that now is not the time for investments in low volume petroleum assets.

In responding to opportunities presented to members of the local Petroleum Technology Association of Nigeria (PETAN), he expressed fears that funding crunch in the domestic economy where oil companies owe banks over N1.08 trillion might hinder the activity surge earlier anticipated from the marginal field round.

He pointed out that oil industry transactions are dollar denominated and that government’s foreign exchange earnings have since taken a plunge and remain incapable of helping banks support forex demand from project promoters.

A Managing Director of an indigenous independent producer also expressed worry over the timing of the marginal field round, arguing that the programme is designed assist high skilled and low capacity indigenous professionals mount the growth ladder. He noted that the prevailing domestic economic environment and industry business outlook do not provide the required grounds for realization of the goals.

In pointing at thin operating margin under the low oil price cycle, he noted that economies of scale does not favour loan funding for marginal field acquisition under the prevailing business environment beclouded by demand uncertainties.

With oil price at $30 per barrel in the market, he pointed out that cost of production in Nigeria has been as high as $17 per barrel for large asset operators that maximize economies of scale, while marginal field operators currently struggle with zero margin at $30-35 per barrel per capita production cost. He expressed worry that the marginal field round launched by DPR failed to consider the economics of such a venture under the current low oil price market.

“Why would anybody get up and launch a marginal bid round in this environment?” he asked.

He also pointed out that investors still awaited the oil industry bill expected later in July to provide direction on licensing rounds in the country, including how marginal fields are auctioned. He added that DPR would have waited for the passage of the bill which would govern operations in the industry.

All of the players who spoke to The Oracle Today on the launch of the much awaited marginal field round expressed disappointment that DPR offered the assets at a time production economics work against production of small reserves at high cost.

It would be recalled that the DPR opened the commencement of the 2020 marginal field bid round to indigenous companies and investors interested in working with them.

Under the Nigerian Oil and Gas Industry Content Development (NOGICD) Act 2010, government provided indigenous companies the concessionary rights to marginal fields as stepping stones to greater exploration and production capacity.

DPR stated that total of 57 fields located on land, swamp and shallow offshore terrains are made available for electronic bidding a nine step process that includes expression of interest and registration, pre-qualification, technical and commercial bid submission, and bid evaluation.

Petroleum lease bid round has been part of the high income channels targeted by the debt ridden government of President Muhammadu Buhari as it struggles with strings of fiscal failures in the past five years. However, raging dispute between major international investors and government over planned alterations in existing fiscal terms threatens failure on any attempts at major lease auction in the country.

Government, through the Nigerian National Petroleum Corporation (NNPC), is working to moderate the stringent tax upgrades earlier proposed in the law. The earlier versions of the Petroleum Industry Bill which was made public in 2008 had taken consideration of price jumps above $100 per barrel oil, and recommended increased takes for the government.

Unfortunately, oil prices took a dive below $50 per barrel in 2015 and sank further below $20 per barrel last month; rendering earlier fiscal projections untenable.

SOURCE: theoracle