How NNPC Shot Down The Revolution

In 1975, the Nigerian National Oil Corporation (NNOC) drilled seven hydrocarbon prospects in the south east shallow offshore Niger Delta, and encountered oil in four of them. It was a game changing result at the time: the discoveries opened up the south east offshore Niger Delta which was -with the geologic understanding of the time-considered a bad address.
Yet the government refused to fund the appraisal -and as such-development programme. The thinking was “how much would government spend to develop the wells, when they could give the acreages to Shell, without spending money”.

Since it is in the crucible of field development, production and crude oil/gas evacuation that a robust Exploration and Production (E&P) company is forged, the NNOC missed the opportunity to convert those drilling successes into building a world class hydrocarbon company with an upstream arm that operates on its own steam. As Ben Osuno, 77, team leader of the project at the time recalled, the Federal Executive Council (the cabinet) didn’t exactly take ownership of the “success” and “within the constraints of the environment at that time, the decision was taken that NNOC should just keep on exploring”.

NNOC was merged with the Ministry of Petroleum Resources  to form the Nigerian National Petroleum Corporation (NNPC) in 1977, which even had a fairly respected Exploration and Exploitation unit, but the lack of “can do spirit” has gradually seeped in through the 38 years since those discoveries, such that today, with a subsidiary ambitiously named Nigerian Petroleum Development Company (NPDC), the NNPC has fallen far back in the race with rivals like Petrobras and cannot beat its chest as a winsome, E&P operator.

NPDC was established in 1988 as the “operating arm” of NNPC. It’s the subsidiary of the state hydrocarbon company with the mandate to explore, operate and produce oil in the Niger Delta basin.

NPDC’s net equity production of 101,623BOPD, as of April 30, 2013, consisted of:

  1. 5,700 BOPD from Abura field, the company’s oldest asset, whose operatorship it took over from Mobil Producing with (then) production of 980 BOPD in 1988.
  2. 7,000BOPD from Oredo field in OML 111, which it has produced since 1996, (which is 17 years ago).
  3. 35,000BOPD from Okono and Okpono fields in the Oil Mining Lease(OML 119), developed  under a service contract executed in 2000, by which ENI essentially put the field in production, and operated it for five years before NPDC took over.
  4. 1, 500BOPD from Oziengbe South in OML 111, which came on stream in 2002
  1. 0.00BOPD production from Egbema, shut down due to a reported spill at Assa manifold; the field had produced as high as 4,000BOPD on average as of 2011. It was grabbed from Shell in 2006.
  2. 0.00BOPD production from Aroh field, due to production challenges. The field was handed over by Chevron as an undeveloped discovery and put into production by NPDC.
  1. 29,090BOPD from Oben, Amukpe and Sapele fields in OMLs 4, 38 and 41 respectively, operated by Seplat Petroleum. Gross production was 52, 873BOPD.
  2. 0.00BOPD production from Ogini/Isoko fields in OML 26 operated by NPDC. The fields had produced as high as 10,000BOPD(gross) earlier in the month, with about 5,500BOPD net to NPDC; it was shut down on April 27 due to leakage on the export line. First Hydrocarbon Nigeria is JV partner in this lease.
  3. 6, 862BOPD production from the Utorogu/Ughelli fields in OML 34, operated by NPDC. Niger Delta Western (NDWestern) is the JV partner in this acreage. Gross production was 12,476BOPD.
  4. 7, 261BOPD production from Batan field in OML 42, operated by NPDC. Neconde is the JV partner in this acreage. Gross production was 13,241BOPD.
  5. 9, 210BOPD production from Afiesere/Kokori fields in OML 30, operated by NPDC. Shoreline Natural Resources is the JV partner in this acreage. Gross production was 16,746BOPD.

The fields referred to in Numbers  8-11 in the numbered sentences above are the focus of this article.

NPDC’s take over Egbema and Aroh fields, which were wrested from Shell and Chevron in 2005, marked the beginning of the current phase in which the NNPC began to take over operatorship of assets that had all along been operated by International Oil Companies in Joint Venture with NNPC.

Just by looking at the figures alone, many would give a thumb up to NPDC. Just what is the hoopla around its competence?, some would ask. This is a company that operated Oredo field for 17 years. This is a government owned firm that took over a field of less than 1,000BOPD from Mobil 35 years ago and has kept it producing, even doing close to 6,000BOPD today. That’s productive, isn’t it?

Oil industry technical folk who interface with NPDC, know that things are different. From subsurface consultants working for Schlumberger and Halliburton, to welders constructing pipelines, everyone knows that this is a typical government organization beset with “issues”. People have stories of NPDC drilling a 10,000feet well for 90 days, not because of comprehensive geologic sampling or testing, but simply because supplies run out! The company hires some of the best technical minds from the best Universities around the world, then proceeds to de-motivate them.

NPDC’s key challenges over the years, have been that it never has been allowed space to breathe, outside of Abuja’s influence. It doesn’t  have access to money it generates. And layers of bureaucracy make it difficult for it to raise money from the government treasury into which it returns the money it makes. This difficulty helps ensure poor quality of spending, such that, yes, money may be received and spent at the end of the day but the results have been, over the years, chronic-under achievement.

It is against the background of this bleak performance that many have contextualized the government’s  insistence on having NPDC take over operatorship of the four acreages(Nos 8-11 above) that were divested off by Shell, ENI and TOTAL as instructive of the willingness, or otherwise, of the Nigerian government to open up the space for investment, even to its own people.

As important as the operatorship, especially in the public interest, is the financial transaction involved in the process of ensuring that NPDC “gets the funds” to operate.

A brief background. In 2010, Shell invited a number of Nigerian independents to bid for its 30% stake, as well as the combined 15% stake of its partners ENI and TOTAL in OMLs 30, 34, 40 and 42, in Delta state of Nigeria. Some 30 consortia, most of them incorporated joint ventures led by Nigerian independents with mid sized European IOCs as funding partners applied. In the end four of the companies that made the highest offers during the tender process executed share purchase agreements with Shell &Co but this was subject to the approval of NNPC, the senior partner in the JV.  Conoil, a well honed 16 year operator producing 25,000BOPD from three fields, offered $1.29 billion for OML 30, Nestoil, which had proven itself in the oil (engineering)service sector, in partnership with Polish-based Kulczyk Oil Ventures Inc and Folawiyo Energy offered $800 million for OML 42; Eland-Starcrest Consortium, offered $157 million for OML 40 and Niger Delta Exploration & Production, operator of the Ogbele field, which has produced on average 5,000BOPD for five years, offered $600 million for OML 34.  The Nigerian companies had proven track records. They don’t have the volume that NPDC has on its books, but they are more competent and this time, they were coming with funding. The opportunity to “operate” an asset confers on you the responsibility to take the technical decision and lead the funding, in the entire exploration and field development cycle. A non-operating partner is a passive one.

NNPC was begged, by the investors, to waive its preemptive rights to operatorship of the blocks before the deals could be concluded.

In the event, this is what has happened:

  • Output in OML 42 was 15,000BOPD when the Sales Purchase Agreement was concluded between Shell and Neconde in mid- 2011. As of April 30, 2013, roughly two years after, the production was 13,241BOPD.
  • Production in OML 34, was 13,700BOPD in August 2012, when Niger Delta Western finalized its acquisition of 45% of the asset. Today, production is less than 13,000BOPD.
  • OML 26 was producing 6,000 barrels of oil per day as of when FHN bought into the asset in late 2011. It increased to 10,000BOPD in a few months and hovered around 11,000BOPD, for a while.

All of these acreages are operated by NPDC. Victor Briggs, the friendly, likeable CEO of NPDC complained that a newspaper report was undermining the operatorship of NPDC. But look again, is this crawl from 6,000BOPD to 10,000BOPD not sub optimal for a company like FHN, which is partly owned and powered by Afren?

Meanwhile, OMLs 4, 38 and 41 were collectively producing 30,000BOPD when Seplat bought into the leases in 2010. By 2011, production had zoomed beyond 40,000BOPD. Today, the output is 52,000+BOPD. The difference here is that SEPLAT, the Nigerian private company, is the operator of the assets. The company has added 22,000BOPD to the output it “inherited”.

Seplat “escaped” being drawn into a partnership with NPDC in a relationship in which NPDC is the operator. Timing helped. The company had almost concluded all the negotiations before the current Minister came into office.

The minister once told ThisDay that part of the reason for NPDC taking over operatorship of the assets was that some of them were so strategic to National Security in that they contained the key gas fields and infrastructure that supply most of the country’s domestic gas requirements. How does anyone respond to this kind of statement? That these assets were “safer” in the “hands” of the Anglo Dutch multinational named Shell, than, say, Niger Delta Western, a Nigerian company which is, to borrow a line from the poet Olu Oguibe, “bound to this land by blood”?

By insisting on operatorship of those assets, which in effect renders those companies who have invested between 157Million and 1.29Billion dollars as passive partners, NPDC was swimming against the tide of history.

In the last 15 years, a clutch of Nigerian independents have gone through stages of growth as E&P producers, and as a collective, become champions of indigenous capacity. To have homegrown companies who produce oil ranging from 1,000BOPD to 25,000BOPD does not happen anywhere else on the African continent the way it happens in Nigeria. African hydrocarbon economies, as a rule-whether it’s Libya, Angola, Algeria, Equatorial Guinea, Sudan, even Egypt- hardly have a thriving privately led E&P sector made up of homegrown producers. Angola has a clutch of E&P companies with some small output, but what they produce is infinitesimal compared with their Nigerian counterparts. (See: The African Independent Grows, Africa Oil+Gas Report, March/April 2013) What is homegrown, in these countries, is essentially the strong National Company, which crowds out indigenous private sector investment.

That Nigeria has not grown that way should be treated as a plus. While the national hydrocarbon company is weak, we have a private sector E&P class that is raring to go. It’s a model that’s uniquely Nigerian. Still, most of the local, private E&P firms have had access only to small fields and in several cases, relatively un- prospective acreages located on the flanks of the Niger Delta, the country’s sole producing basin. Shell’s divestment would have proven a revolution, but the Nigerian government is shooting it down.

To fund its operatorship of the leases, OMLs 26, 30, 34 and 42, the NPDC signed a strategic agreement with Atlantic Energy Drilling Concept, which had, until then, never featured in E&P activities either in Nigeria or elsewhere, “to provide funds for carrying out Petroleum operations and support NPDC with technical expertise”.  There are two things here.  For one, as the Nigerian media has extensively insinuated, the agreement smacks of arbitrariness, was executed in a patronage manner and the terms are clearly a give- away of resources. Examined closely, the deal with Atlantic on the assets puts to the lie, the impression given by the minister of petroleum,  that NPDC’s operatorship helps increase volume capacity of production for the NNPC group.

In order to recover its cost in funding the NPDC part of the operations, Atlantic Energy Drilling will receive, in the beginning of production, 60% of the volume of crude oil to which NPDC (NNPC)is entitled.  This is cost oil. When that cost is fully recovered, Atlantic’s share  will drop to 30% of the crude oil to which NPDC is entitled. Please read this carefully; if the entire volume of oil produced in that acreage before Shell’s divestment was 100,000Barrels per day, the NNPC , as a non operating partner, was receiving 55,000 Barrels of that production every day. Now, in the post-Shell operatorship phase, now that the NNPC equity has been transferred to its subsidiary NPDC, to become the “operator”, with so much fanfare, and NPDC has gone into an agreement with a company unknown to us until now to help it fund the operations, the share that will accrue to NPDC ( NNPC), and in effect, the National Treasury, will drop by at least 30%, all throughout the duration of that agreement, which is, really until Atlantic defaults in anyway.  By insisting on operatorship and bringing on board a funding partner, NNPC will help reduce the monies accruing to the National Treasury. This is what some people have done on our collective behalf: in the period that we expect increased crude oil proceeds, we have actually acted to reduce what is accruable to the national purse.

Why, for instance, can’t NPDC construct a funding and training programme with the companies who have won the bid at no cost? Isn’t this quite curious? Why can’t NPDC sit with, say, Niger Delta Exploration Production, a company which had produced  oil from a small field over the course of the last six years and say: You operate (do all the technical work)for the next five years, train our people and we’d take over operatorship five years after? Or Conoil, a company that currently produces 25,000BOPD, and has been in production without any foreign technical help for 20 years. There was a lot to be gained from engagement if the true reason for NPDC’s insistence to operate was to build technical capacity within the state hydrocarbon company.

 

Agreement: Atlantic Energy Drilling will receive, in the beginning of production, 60% of the volume of crude oil to which NPDC (NNPC)is entitled.  This is cost oil. When that cost is fully recovered, Atlantic’s share  will drop to 30% of the crude oil to which NPDC is entitled. Please read this carefully; if the entire volume of oil produced in that acreage before Shell’s divestment was 100,000Barrels per day, the NNPC , as a non operating partner, was receiving 55,000 Barrels of that production every day. Now, in the post-Shell operatorship phase, now that the NNPC equity has been transferred to its subsidiary NPDC, to become the “operator”, with so much fanfare, and NPDC has gone into an agreement with a company unknown to us until now to help it fund the operations, the share that will accrue to NPDC ( NNPC), and in effect, the National Treasury, will drop by at least 30%,

 

In the event, this is what has happened:

  • Output in OML 42 was 15,000BOPD when the Sales Purchase Agreement was concluded between Shell and Neconde in mid- 2011. As of April 30, 2013, roughly two years after, the production was 13,241BOPD.
  • Production in OML 34, was 13,700BOPD in August 2012, when Niger Delta Western finalized its acquisition of 45% of the asset. Today, production is less than 13,000BOPD.
  • OML 26 was producing 6,000 barrels of oil per day as of when FHN bought into the asset in late 2011. It increased to 10,000BOPD in a few months and hovered around 11,000BOPD, for a while.

All of these acreages are operated by NPDC. Victor Briggs, the friendly, likeable CEO of NPDC complained that a newspaper report was undermining the operatorship of NPDC. But look again, is this crawl from 6,000BOPD to 10,000BOPD not sub optimal for a company like FHN, which is partly owned and powered by Afren?

Meanwhile, OMLs 4, 38 and 41 were collectively producing 30,000BOPD when Seplat bought into the leases in 2010. By 2011, production had zoomed beyond 40,000BOPD. Today, the output is 52,000+BOPD. The difference here is that SEPLAT, the Nigerian private company, is the operator of the assets. The company has added 22,000BOPD to the output it “inherited”.


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