Only one of the 77 oil blocks awarded by the Nigerian government during bid rounds between 2005 and 2007 is producing oil, according to the Department of Petroleum Resources (DPR), the country’s oil industry regulator.

The information was delivered by DPR director George Osahon, who spoke in August about the “Review of 2005-2007 Licensing Round and Government’s Perspective” in Lagos. In 2005, the federal government awarded 44 oil blocks, 16 in 2006, and 17 in 2007.

“Only one block is currently producing while less than 30% of blocks are actively worked, several production-sharing contracts are yet to be signed, bank guarantees yet to be put in place,” Osahon said. “Work obligations are not respected and downstream obligations not performed.”

Oil and gas experts interviewed in Lagos said the 2005-2007 rounds flopped because the government introduced the local content vehicle (LCV) as a way to reward cronies with oil enterprises although they did not have the wherewithal to pay the promised bonuses, nor did the companies have the capacity to conduct the work programs without additional partners.

The LCV mandates an operator offer up to 10% equity in any block to an indigenous company. This, however, produced difficulties as only a few of the indigenous companies had previous experience in oil exploration and development.

Experts identified insecurity in the oil-rich Niger Delta where the oil blocks are located, lack of access to financing, low technical expertise, unavailability of data and limited capacity as the major problems affecting the development of oil blocks in Nigeria.

Some of the companies that won the oil blocks said insecurity in the Niger Delta not only has prevented them from prospecting their licenses but also encouraged them to sell. They are also giving the non-passage of the Petroleum Industry Bill (PIB) that seeks to bring sweeping changes in Nigeria’s oil industry as reason for their inability to start E&P from their oil blocks.

Virtually all oil companies including the oil majors have slowed investments because of the uncertainty created by the PIB. The IOCs said the tax terms in the PIB are “uncompetitive, risk rendering offshore oil and projects unviable, and could halt investments.”

The government, Osahon said, is concerned about limited activities in the oil and gas industry and explained that the concerns should be addressed.

Report highlights concerns

A Chatham House report, Thirst for African Oil, Asian National Oil Companies in Nigeria and Angola, on the process of the Nigerian licensing rounds stated that the 2005 round “was better organized, and there were significant new elements. Most, importantly, months of prior negotiations with some Asian countries brought the ANOCs (Asian national oil companies) into the frame for the first time.”

The report explained that the 2005 round was Nigeria’s first open auction, with bids recorded simultaneously on an electronic screen for all to see. The round raised more than US $1 billion in signature bonuses, though this was less than had been anticipated.

However, many of Nigeria’s traditional international oil companies (IOCs), such as Shell, did not take part in the rounds while bids from Chevron and ExxonMobil were disqualified, according to the report.

The report added that two innovations had caused the IOCs to stay away. The first was the introduction of the LCV. The second was the introduction of the right of first refusal (RFR), which favored Asian oil bidders. Prior to the 2005 auction, the Nigerian civilian administration had entered strategic deals with South Korea, Taiwan, China, India, and Malaysia, offering them lucrative blocks in return for the promise of large-scale downstream/infrastructure investments.

Such investments included building gas pipelines, integrated gas power stations, railway projects, and hydroelectric complexes, as well as constructing independent power plants, building refineries or investing in the existing ones, and undertaking petrochemical projects. But many of the projects haven’t gotten off the ground yet.

Oil and gas experts said the ANOCs did not understand the Nigerian oil terrain well before they committed huge sums to the provision of downstream projects. Some of the oil blocks awarded to them have been abandoned due to low prospectivity.

Bid round method criticized

Experienced industry stakeholders would not be surprised that virtually no oil has been produced from blocks awarded between 2005 and 2007.

The stakeholders had criticized the method of award adopted in those bid rounds: the offer of lucrative blocks in return for the promise of strategic downstream investments by the winners. At the time, they said the method lacked transparency, encouraged corruption, and gave oil blocks to several companies that did not deserve them.

The civilian government that took over from the military in 1999, and left office in May 2007, conducted oil licensing rounds in 2000, 2005, 2006, and 2007 to raise Nigeria’s oil reserves to 40 Bbbl and increase production capacity to 4 MMb/d. The bidding round in 2000, the first leasing round under the new civilian government, was intended to put some order into how oil blocks would be awarded and meet the two targets, oil industry stakeholders said.

Before the civil administration took over, previous administrations gave oil blocks to their associates, family members, and friends at bargain prices, according to the stakeholders. The beneficiaries in turn sold their blocks to foreign oil companies and made huge profits.

Oil experts said lack of investments in E&P nowadays will make it difficult for Nigeria to boost its oil reserves and daily production.

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