SPE 163040

The Nigerian Marginal Field Initiative: Recent Developments

Leye A. Adetoba, SPE, Chevron Nigeria Ltd.
Copyright 2012, Society of Petroleum Engineers

This paper was prepared for presentation at the Nigeria Annual International Conference and Exhibition held in Abuja, Nigeria, 68 August 2012.

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Abstract
The marginal field initiative has come to stay within the
Nigerian oil industry since the signing of farm out
agreements in 2003 between the multinational oil
companies, the Nigerian National Petroleum Corporation
and the indigenous companies.

Some challenges such as security of operations, funding,
lack of technical know-how, Quota restriction, Lack of
infrastructure, Collaboration, Fiscal terms & incentives,
Inconsistency in government policies, Gas development,
Non availability of rigs, Violation of agreement terms
were earlier reported as affecting the progress of the
initiative.

This paper discusses the recent updates in the industry as
it affects the marginal field initiative especially the
improvements and set backs on some of these earlier
challenges and new challenges such as the PIB, the
Nigerian content law and the call for another bid round.


Introduction

The Oil and Gas sector in Nigeria is very important
to the economic development of the country. The
revenue from petroleum is responsible for 85 % of
Nigerias export revenues and over 95 % of foreign
exchange earnings
1
. As part of its strategy to fulfill
its national aspiration, the Nigerian government
through the Petroleum Ministry and supervising
agency awarded 24 of its marginal fields to 31
Nigerian Exploration and Production companies in
2003. Some other fields have been farmed out
under private arrangement.

Since the award, only about 7 out of the 24 fields
have been on production. Some challenges were
earlier identified that made it difficult for the
remaining fields to come on production. Also the
government has not been able to realize its
objectives for commencing the marginal field
initiative. Through the initiative, the government
intends to increase its oil and gas reserves and
collect payable revenue when the fields on are on
production;

116 marginal fields with 1.3 billion barrels of
reserves
a
have been identified as the marginal fields
by the Nigerian Department of Petroleum
Resources. These fields are situated within existing
acreages in the country and do not include matured
fields that have been abandoned using only primary
recovery methods with only some on gas lift or water
or gas injection.

In 2003, tripartite agreements were signed between
the Nigerian National Petroleum Corporation,
multinational companies and the marginal field
companies, but since then no appreciable progress
has been made due to the challenges discussed in
this paper.

The oil and gas industry is very capital intensive and
these indigenous companies find it difficult at the
time of award to come up with funds necessary for
the development of the fields. The Nigerian banks
could not finance these ventures for lack of funds
while foreign banks were not ready to lend for the
risks envisaged. Of recent, the financial sector has
been reformed
4
; the Nigerian banks, capital markets
and pension funds, which have been restructured
and recapitalized, can now provide funding support
for the initiative.

Definition of a marginal field

For the purpose of this paper, we will use the
definition used by the Nigerian Department of
Petroleum Resources.

According to the department, a marginal field is any
2 SPE 163040
field that has reserves booked and reported annually
to the department of petroleum resources (DPR) and
has remained unattended to for a period of ten
years.

According to the department, marginal fields have
the following characteristics
6
:



Low stock tank oil initially in place (STOIIP) and
therefore low reserves.

Long distance from existing production facilities
thereby making them uneconomically viable to
put on stream.

Fields with crude characteristics that is different
from current streams (such as crude with high
viscosity and low API gravity) which cannot be
produced through convectional methods.

Fields not yet considered for development
because of marginal economics under current
market and fiscal conditions.

Fields with one or more wells which have not
been developed by the operating companies as
a consequence of the companys ranking
including un-appraised discoveries.

Producing fields which have become
uneconomical when close to or passed
abandoned limits.

Fields are small fields which cannot produce
10,000 barrels per day

Regulatory framework for marginal field
development
In creating the marginal field development
opportunity, the Federal Government of Nigeria
applied the decree promulgated as the Petroleum
(Amendment) Decree No 23 of 1996 which is
customarily referred to as the Marginal fields
decree. This law amended the Petroleum Act by
inserting a new Section 16A
5
.The new section
provides that:
A concession holder may farm out a marginal
field situate upon its concession, with the
approval of the Head of State as to the farm out
terms and conditions;
The Head of State is empowered to farm-out a
marginal field if the field has been left
unattended for a period of not less than 10 years
from the date of its discovery;
The Head of State alone may classify fields as
marginal for the purposes of the decree; and
The Head of State shall not approve of a farm
out arrangement or cause a marginal field to be
farmed-out unless it is in public interest to do so;
and in, addition, in the case of a non-producing
marginal field, that the marginal field has been
left unattended to for unreasonable time not less
than 10 years; and the parties to the
arrangement are agreeable to the Federal
Government.
In the Guidelines issued in connection with the
Farm-out and Operations of Marginal Fields" as
prepared by the Department of Petroleum
Resources, it was stated that:
Current holders of OPL/OML, except indigenous
oil companies, are excluded from farming into
marginal fields. Indigenous companies must
relinquish existing OPL/OML to be eligible.
Only companies incorporated in Nigeria i.e. 51%
Nigerian owned are eligible to bid and applicants
should not bid for more than a single field.
Marginal fields may only be operated on a "Sole
Risk" basis. The agreement shall be for an initial
period of 5 years, renewable thereafter every 5
years until the expiry of the lease.
A marginal field holder may have a foreign
technical partner with not more than 40%
interest in the marginal field.
Various fees, Premium, Rents and Royalties are
prescribed, while Petroleum Profit Tax is
charged at the rate of 65.75%.
Where a field is farmed out, the marginal field
holder is obliged to pay the original owner the
entire fee in installments over a maximum period
of 5 years. The fee payable is the present day
value of the previous exploration cost as
determined by both parties.
This aspect of the decree has since been changed
to payment of Overriding royalty interest to the
original leaseholder.
Marginal fields are small fields which cannot
produce 10,000 barrels per day and are judged
not viable for development by the leaseholder.


Objectives of the marginal field development

The government had six objectives for creating the
marginal development initiatives. They include:
SPE 163040 3
Expand the scope of participation in the
upstream sector of the oil and gas Industry and
diversify sources of investment and flow of
funds.

Increase oil and gas reserves through
aggressive exploration.

Promote indigenous participation thereby
fostering technological transfer.

Provide employment generation for highly skilled
Nigerian professionals.

Increase production output capacity.

Expand employment generation.


Recent developments

There have been several developments on the
earlier reported issues and challenges affecting
marginal fields development in Nigeria.

Funding

Funding of the marginal fields is still the greatest
challenge. The issue of funding improved for a little
while but has further degenerated due to the
downwards trend in the world economic situation
which has not speared Nigeria coupled with the
confusion unfolding within the banks in Nigeria.

There have been mergers and acquisitions that
make granting loans to marginal field companies
difficult.

The estimated funding required for funding the 24
farmed out in 2003 is between $1 billion and $1.7
billion per year out of which technical/financial
partners are responsible for 40%. This is still difficult
to come by.

The issue of high interest rate charged by Nigerian
banks still exists. This has made life unbearable for
those who took loans before the economic crunch.

Financing needs can still be met from a range of
sources
7
but under stringent conditions which may
hardly be met by marginal field operators:



the local financial system
foreign equity partners
international banks
multilateral financial institutions

One of the suggested solutions has been the setting
up a new bank like the Bank of Industry by
government to help out while in the Vision 2020
there is the suggestion that a special fund for
indigenous operators be established
8
. However,
government must guard against problems of
bureaucracy that may frustrate the process of
accessing the loans.

Security of Operations

Security initially improved but degenerated because
of lack of continuity of earlier initiatives by
government. Production activities are still ongoing in
the area and crude theft has increased.
Multinationals have complained about revenue
losses resulting from these. The marginal field
companies cannot afford to face this kind of ordeal.
There is still loss of lives, property and
environmental damage resulting from kidnapping,
bunkering and vandalization of oil equipment. Most
marginal field operators who have funds have made
some progress within the window of opportunity to
do appreciable work.

The government of Nigeria should therefore review
the issue of security. The earlier initiative on seven
point agenda with security as one of them
introduced by an earlier government is no more
talked about.


Lack of Infrastructure

Most marginal fields are located within or far away
from infrastructure for producing them. A lot of
cooperation with multinationals to share excess
capacity or lease/repair older ones that are not in
use has developed due to intervention either by
DPR or NAPIMS who happens to be the JV partner
in most cases. This is to support the government
initiative on marginal field on one hand while making
extra money from excess capacity available within
the various production facilities.


Fiscal Regime & Incentives

The fiscal regime for the upstream in Nigeria has
always been structured to maximize revenue
accruing to government. It is also supposed to
guarantee a reasonable return on investment to
investors.
12


For the marginal field operators, the government
allocated fields that have proved reserves thereby
making life easy for the bid winners. Most fees have
been paid and Overriding royalties to the original
leaseholders have also been agreed to. A Petroleum
profit tax of 65.75% per year for the first five years
has been agreed with government rather than the
85% currently being paid by the multinationals.
4 SPE 163040
Overriding royalties of between 2.5 and 7.5% based
on variable production rate has been agreed with
original lease holders.

Some other tax incentives that can improve the lot of
the Nigerian marginal field operators if adopted was
announced by the Malaysian government in
November 2010 under its Economic Transformation
Programme to promote the development of new oil
resources, facilitate the exploitation of harder to
reach oil fields and stimulate domestic exploration.
They include among others
10
:
A reduced tax for marginal oil field development,
from 38% to 25%, to improve commerciality of
their developments.
Investment tax allowance of 60-100% of CAPEX
will be deducted against statutory income to
encourage development of capital intensive
projects (i.e. enhanced oil recovery (EOR), high
CO2 gas fields, high pressure high temperature,
deepwater and infrastructure projects for
petroleum operations).
An accelerated Capital Allowance of up to 5
years (from 10 years) for marginal oil field
development where full utilization of capital cost
deducted could improve project viability.
Qualifying exploration expenditure will be
allowed for transfer between non-
contiguous petroleum agreements with the same
partnership or sole proprietor to enhance
contractors risk taking attitude.
A waiver of export duty will be given on oil
produced and exported from marginal field
development

Quota Restriction

The issue of quota restriction is of low importance
since the production expected from marginal fields is
low and can be accommodated within the countrys
quota. But when the number of fields increase,
government should protect them but adherence to
good reservoir management should prevail at that
time.

Competition

There seems to be more collaboration nowadays
than competition among the marginal field holders.
They need to surmount most of the problems facing
them especially in the areas of rig sourcing,
Environmental Impact Assessment development,
production facilities, etc. Collaboration will give the
marginal field companies power to negotiate better
deals and save money.

They should emulate their Malaysian counteract
where consultants team up to apply for marginal
fields.
9


Most of the in-fighting among companies paired up
during the award have subsided since they have
realized that revenue is being lost.

Many foreign partners are ready to finance and
provide technical assistance to marginal field
operators. This is as a result of improved security
and stability in the government but with the latest
degeneration in security nobody can predict what
will happen.

Inconsistency in Government Policies

A lot of inconsistencies are on- going and these
send wrong signals to interested investors. Such
was the plan to do a bid round in 2010-2011 that
could not hold. So the plan to carry out another bid
at this time without detail analysis on why the earlier
initiative failed will be an exercise in futility since
most of the challenges preventing progress are still
there.

A way out may be to study the Malaysian model
where a Risk Service Contract petroleum
arrangement is used to handle their marginal field
program. This model strikes a balance in sharing
risks with fair returns for development and
production of discovered marginal fields. In this
arrangement, NNPC will be the project owner while
the contractor is the service provider. Upfront
investment of the capital will be contributed by the
contractors. The contractor group shall be
compensated accordingly with reimbursement of
costs plus a remuneration fee for services rendered.
The remuneration fee is based on oil and gas
production, as well as the contractor group meeting
key performance indicators. Payment to contractors
shall commence upon first production and be paid
throughout the duration of the contract.

Lack of Technical know-how

The Marginal field opportunity is unique and is
uncommon especially as the industry moves
towards reactivating older or abandoned fields
where unconventional equipment and technology
are required. The industry needs to adapt to the
technologies needed to make the development
profitable.

Violation of Agreement terms

There seems to be an improvement in this area.
Marginal field companies are respecting some of the
farm-out agreement. They are still at fault in some
the areas mentioned earlier such as the assignment
SPE 163040 5
of interest, insurance, abandonment security and
press releases
11
.

They still continue changing financial and technical
partners without early recourse to the agreement.
Some still require some insurance coverage and
sometimes they forget to put in both joint venture
owners as parties.

The abandonment security payment issue is very
important to the development of marginal fields. The
abandonment security payment although is
negotiated has not been easy to collect. Opening
escrow accounts are also not easy too but starting
early in the process and the use of a solid Nigerian
bank is recommended.

Press releases concerning the activities of the
marginal field companies are common in both
national and international press media without
reference to the agreement. These releases are at
times embarrassing to the joint venture partners.
Caution should be taken such that Technical or
financial partners are advised of the need to abide
by the terms of agreement.

Gas Development

The assumption that marginal field operators lack
the fund to prosecute their gas development plans
should not be entertained. They should come up
with their plans before production which should be
implemented within one or two years of production.
There cannot be any exception to zero flare and so
the marginal field owners should look for ways of
utilizing the produced gas either by selling their gas
to other operators or look for small gas utilization
projects that will generate some funds to relief them
of the cost to handle this. This is already happening
in the industry where some companies are now
developing gas through toppling plant and gas
production for sales.

Non availability of rigs

The Niger Delta problem has scared rigs from
coming to Nigeria because of the risk involved in
operating in the area. With the increase in oil and
gas prices worldwide, there has been increase in rig
activity.

The Petroleum Industry Bill

The Petroleum Industry Bill (PIB), which has been
under legislative consideration for sometime, is the
most comprehensive review of the legal framework
for the oil and gas sector in Nigeria.

The Bill is the outcome of a report produced by the
Oil and Gas Reform Implementation Committee
(OGIC). The PIB can be classified under three
headings
13
: separation; professionalization; and
commercialization.

The bill is still under consideration and hopefully will
soon be made public when necessary legislative
procedures have been satisfied and passed into law.

Some of the key features expected of PIB are as
follows:

The consolidation of existing laws into one
encompassing legislation to address policy,
legal and governance.

The establishment of three different sectors of
the industry namely: upstream, midstream and
down stream.

The promotion of transparency, good
governance and accountability in the operation
of the oil and gas industry in Nigeria especially
the management and award of licenses through
open and accessible processes.

The introduction of clear separation of roles
which will be assigned to appropriate agencies
to ensure clear delineation of functions and
responsibilities.

Some sort of compromise on the issue of the
formation of Incorporated Joint ventures (IJV)
that can source for funds on their own thereby
making cash-call problems a thing of the past.
Review of the current tax system in the industry.

The introduction of modern acreage
management system with strict relinquishment
guidelines.

The recognition of host communities in the
sharing of the benefits accruing from petroleum
assets.


HOW THE PETROLEUM INDUSTRY BILL (PIB)
AFFECTS MARGINAL FIELDS

The way the PIB is going to affect the indigenous
company is unknown for now but feelers within the
industry expect them to gain from it.

Modalities may be worked out for them in the areas
of:

Provision for the relinquishment of current
licenses, leases and for the operators of
6 SPE 163040
Marginal Fields to be allowed to apply for
Petroleum Mining Leases for fields operated by
them.
They may also be awarded leases from
relinquished acreages

All these will help build more capacity for indigenous
producers.

NIGERIAN CONTENT LAW
The Nigerian Content bill which received presidential
assent on 22nd April 2010 created a regulatory
framework to provide for the development of
indigenous content in the Nigerian Oil and Gas
Industry.
According to the Act, Nigerian Content is defined as
the quantum of composite value added to or created
in the Nigerian economy by a systematic
development of capacity and capabilities through the
deliberate utilization of Nigerian human, material
resources and services in the Nigerian oil and gas
industry.
Highlights of the Nigerian Local Content Act
Some key highlights of the Nigerian Content Act as
they affect the oil and gas industry are stated below.
The establishment of the Nigeria Content
Monitoring Board (NCMB) to set procedural
guidelines to coordinate and enforce the
provisions of the Act.
The Board maintains the Nigerian Content
Development Fund which is to be used
for implementing the Nigeria content
development.
Prescription of minimum thresholds for the use
of Nigerian Content in any project to be
executed in the oil and gas industry in Nigeria
Submission of Nigerian content plan by
Operators to the Board in bidding for a license,
permit or interest and before carrying out any
project.
Provision that Nigerians shall be given first
consideration for employment and training in any
project executed by any operator or project
promoter in the Nigerian oil and gas industry.

I MPLI CATI ONS FOR I NDI GENOUS
OPERATI NG COMPANI ES

Under t hi s new l aw, Ni ger i an oper at i ng
compani es wi l l have a gr eat oppor t uni t y
f or gr owt h and expansi on.
Some benef i t s t o mar gi nal f i el d oper at or s
ar e:

They wi l l be gi ven f i r st consi der at i on
i n t he awar d of oi l bl ocks, oi l f i el d
l i cences, oi l l i f t i ng l i cences and i n al l
pr oj ect awar ds i n t he Ni ger i an oi l and
gas i ndust r y. .
Conclusions

The Marginal field development initiative has come
to stay in Nigeria.
Only about 7 fields are on production out of the 24
fields farmed out in 2003 while about 4 are striving
to come on soon.
About 4% reserves and production output increase
is expected from marginal fields.
Government should review and revise the fiscal
terms to reflect the risky and sensitive terrain of
marginal fields to encourage aggressive exploration.
The Niger Delta problem still poses a big threat to
the smooth running of marginal fields likewise other
big fields. The cost incurred in providing security for
field operations and projects are so enormous that if
not curbed or checked could lead to economic loss
for everybody companies (whether big or small) on
one hand and the government on the other hand.
This problem of security may lead to the closure of
some of the marginal fields on the long run.
.
Funding is still the number one problem confronting
the marginal field operators. The enthusiasim shown
between 2008 and 2010 by Nigerian banks to fund
marginal field companies seems to be dwindling due
world recession. But with the upsurge in interest
shown by foreign partners who are ready to fund,
this challenge may be solved.

The introduction of and delay in signing the PIB is
holding investments in the oil and gas sector
including the marginal field.

Bidding out another set of marginal fields at this time
with the poor performance witnessed is not only a
wasteful exercise but not recommended.
Government is advised to study the Malaysian
model of Risk Service Contract petroleum
arrangement that is used to handle its marginal field
program and adapt if beneficial.

Partners especially the marginal field operators and
their technical partners should respect the terms of
farm-out agreement to avoid disagreement with the
majors.

SPE 163040 7
References

1. Nigeria Vision 2020: The first National Implementation
Plan (2010-13) Vol II: Sectorial Plans and
Programmes, Oil and Gas vol. 2 Chap. 7 at p. 77
2. Department of Petroleum Resources, Guidelines for
the Farm-out and Operations of Marginal Fields,
1996.
3. United Nations Conference on Trade & Development ,
UNCTAD/CALAG African Oil and Gas Services
Sector Survey, vol. 1 Nigeria, Creating local
linkages by empowering indigenous entrepreneurs
Ch. 9 - Sources of financing for Operators in Oil &
Gas Sector.
4. Pitan K., Financing the Marginal fields A bankers
perspective: paper presented at the NAPE monthly
meeting in Lagos Nigeria.
5. The Petroleum Act, Laws of the Federation of Nigeria,
1990. Para.16A (3)(a) Petroleum (Amendment)
Decree1996.
6. Department of Petroleum Resources, Guidelines for
the Farm-out and Operations of Marginal Fields,
1996.
7. Roberts, WJ. C.: Unlocking Upstream Financing for
Africas Oil & Gas Sector, presented at the CCA
Africa Oil & Gas Forum held in Houston, USA, 1
December 2004.
8. The Proposed National Policy on Oil and Gas 2004,
vol. 2 Chap. 6 at p. 55
9. Shaheen, Bakr & El-Menyawy 1999: "Engineering and
economical concerns on cost recovery treatment for
sharing production facilities", 1999 SPE Annual
Technical Conference and Exhibition: 'Production
Operations and Engineering - General', Oct 3-Oct 6
1999 Soc Pet Eng (SPE), Richardson, TX, USA,
Houston, TX, USA, pp. 121.
10. Gunasegaram, P., Petronas will own Marginal fields.
Malaysian Starbiz Newspapers, Friday, January 28,
2011.
11. Adetoba L.A.: The Nigerian Marginal Field Initiative
presented at the 32
nd
NAICE conference at Abuja,
Nigeria, Aug 1-5, 2008.
12. Omorogbe, Y., Fiscal Regimes, Paper presented at
the Nigerian Extractive Industries transparency
Institute (NEITI) Civil Society Capacity Building
Workshop, Port Harcourt, Nigeria , 27-28 July 2005.
13. Adeoye Adefulu, a partner at Odujinrin & Adefulu,
Lagos, - Comments on New Petroleum Industry Bill
for Nigeria as assembled by Debbie Legall
14. Roberts, P., Legal Considerations in Successful
Marginal Oil and Gas Field Divestments and
Acquisitions, 11 O.G.L.T.R. 391, (1998).


8 SPE 163040

Table 1 - LIST OF MARGINAL FIELDS

FIELD OPERATOR OML RESERVES
(MM BBLS)
PRODUCING
OR NOT
Asuokpu/Umutu Platform Petroleum 38 16.0 P
Asaramatoru Prime Energ Ltd./Suffolk
Petroleum
11 7.1 NP
Atala Balyesa O&G Co. Ltd. 46 2.4 NP
Eremor Excel E&P 46 3.9 NP
Ibigwe Waltersmith/ Morris
Petroleum
16 17.2 P
Ofa Independent Energy. 30 5.2 NP
Oza Millenium Oil & Gas Co.Ltd. 11 7.3 NP
Qua Ibo Network E&P 13 13.1 NP
Stubb Creek Universal Energy 14 18.4 NP
Tom Shot Bank Associated O&G/ Dansaki 14 8.6 E
Tsekelewu Sahara Energy/African O&G 40 2.2 NP
Uquo Frontier Oil 13 14.2 E
Ororo Guarantee Petroleum/ Owena
O&G
95 5.65 NP
Akepo Sogenal Ltd. 90 3.9 E
Ogedeh Bicta Energy 90 7.4 NP
Ajapa BrittaniaU NjG. Ltd. 90 4.6 P
Dawes Island EurAfric Ltd. 54 1.4 NP
Ke DelSigMa 54 5.5 NP
Oriri Goland Petroleum 88 4.0 NP
Ekeh Movido E&P 88 3.0 NP
Umusadege Midwestern O & G/Suntrust 56 49.3 P
Obodogwa/Obodeti Energia Petroleum 56 4.8 P
Umusati/Igbuku Pillar Oil Ltd 56 6.7 P
Amoji/Matsogo/
Igbolo
Chorus Energy 56 6.9 NP