By Kester Oyibo LLB, LLM and Nkobowo Frederick Nkobowo LLB
On the 1st of June 2020, the Department of Petroleum Resources (DPR) announced the commencement of marginal fields bid round for 2020. The importance in the oil & gas sector cannot be understated since the last bid round took place in 2002, almost twenty years ago. As announced by the DPR, a total of 57 fields are on offer in the current oil bid round exercise and registration for the bid ended on the 21st day of June 2020.
The process and criteria for the current marginal fields bid is contained in the Guidelines for the award and operations of Marginal Fields in Nigeria (the Guidelines) as issued by the DPR.
What is a marginal field?
A Marginal field is any oil field that has been discovered but has been left unattended for a period of not less than ten (10) years from the date of first discovery or an oil field that the President of the Federal Republic of Nigeria declares to be a marginal field.
Put differently, marginal fields are oil fields in Nigeria that have been discovered by major International Oil Companies (IOCs) but have not been developed for not less than 10 years or fields that have been so declared by the President.
Eligibility to take part in the Marginal Fields Bid
It is stipulated that only companies that are duly registered to principally carry out petroleum exploration and production business in Nigeria are eligible to participate in the bid. Such companies are required to have a hundred percent (100%) indigenous shareholding. Where two or more companies carry out a joint bid, each joint bidder is expected to satisfy the requirement of 100% indigenous shareholding. Apparently, this measure is geared towards increasing local participation and technical competence in the sector. However, companies that are indebted to the Government of Nigeria are disqualified from taking part in the bid. In addition, companies that are not run or operated in a business-like manner would not be accepted for the bid. This would imply that companies that are not operated in an efficient manner with a clear business template or structure would not be accepted for the bid.
How to acquire a marginal oil field from the current bid round?
The process which is expected to be run for a period of about six months involves different aspects which include registration, application and bid processing, data prying, data leasing, Competent Persons Report (CPR), Fields Specific Report (FSR), payment of applicable fees and signature bonus. At the pre-qualification stage of the bid, interested companies are expected to submit specific information that include; evidence of the company’s existence, evidence of the company’s technical capability and the fields it is interested in amongst others.
Companies that scale through the pre-qualification stage will be invited to submit a field specific technical and commercial proposal based on relevant and available field data. These proposals are very important documents in the bid process. Consequently, bidding companies are expected to set out in these documents detailed plans to develop the field, demonstrate their technical competence to explore the field and their capacity commercialise same upon successfully acquiring the field. The application, documentation and information supplied by the interested companies will be screened by the DPR before recommendations are made for the award of the fields.
As part of the bid requirements, a bidding company is expected to present a comprehensive strategy for maximising local capabilities and manpower in the exploration of the field. Also, a bidding company is expected to give ample consideration and in fact show commitment to the socio-economic development of the host community as well as the state where the field is located.
While the DPR is expected to make appropriate recommendation of successful bidders to the Minister for Petroleum Resources after its evaluation of the bids submitted, the final approval rests with the President. This is followed by the execution of relevant agreements to transfer the fields to the successful bidders, subject to any condition precedent.
Relevant Contractual Framework
It is noteworthy that a farmout agreement is a very important agreement that sets outs the legal and commercial framework for the running of the field. Paragraph 8 of the Guidelines provides that a farmout agreement is to be executed between the holder of the Oil Mining Lease (OML) that covers the marginal field (the farmor) and the successful company (the farmee). It is a contractual agreement where the farmor assigns all or part of the working interest in the lease to the farmee in exchange for services involving exploratory, development and production activities on the farm-out area. The farmout agreement usually requires the farmee to drill a well to a certain depth, at a specified location, and within a certain time frame, at the farmee’s own risk and expense. It is vital to note that farmout agreements are negotiated agreements and take varied forms that often include complex provisions. Hence, the OML holder is expected to negotiate the terms of the farmout agreement with the successful bidders and reach an agreement on the terms and conditions within 90 days. If the parties are unable to reach an agreement on any of the terms and conditions of the farmout agreement within the stipulated period, the Minister for Petroleum Resources (HMPR) shall adjudicate in
 FG EXTENDS DEADLINE FOR MARGINAL OILFIELD BIDS TO JUNE 21 available at https://www.dpr.gov.ng/fg-extends-deadline-for-marginal-oilfield-bids-to-june-21/
 Paragraph 4 of the Guidelines for the Award and Operations of Marginal Fields in Nigeria, DPR Guide 0041 – 2020
 Under the Petroleum (Amendment) Act No. 23 of 1996, the President has such powers.
 Paragraphs 5.4.6 and 5.4.8 of the Guidelines
 Paragraph 5.3 of the Guidelines
 Paragraph 5.4 of the Guidelines
 Paragraphs 5.4.4 and 5.4.5 of the Guidelines
respect of the relevant terms and conditions. Also, where the successful bidders comprise of more than one company, the execution of a joint operating agreement shall precede the farmout agreement between the leaseholder and the joint bidders.
Applicable Fees for the Current Marginal Field Bid Round
The fees stipulated in the Guidelines to be paid by Applicants in the current marginal field bid round are:
|Registration Fee (Per Applicant)|
|Data Prying Fee||US$15,000.00|
|Data Leasing Fee||US$25,000.00|
|Specific Field Report||US$25,000.00|
|Competent Person’s Report (w applicable)||US$50,000.00|
The Registration fee is to be paid per applicant but all other fees are payable per field of interest.
Financing the Development of a Marginal Field
It is important to note that the Federal Government of Nigeria is keen to ensure that awardees of the marginal fields demonstrate and indeed possess the ability to finance their proposed development plans and commercialisation projects on the fields. Therefore, it is unsurprising that the Guidelines clearly emphasise that interested companies must show evidence of financial and technical ability.
This requirement that an interested company must show evidence of financial ability definitely brings to the fore the issue of how funds can be raised by indigenous companies for the successful exploration of the field. On this note, internal financing or structured financing models exist to help indigenous Companies raise sufficient funds to finance operations on the field.
The internal financing option entails securing funds for the operation of the field through direct financial contributions from shareholders or partners of the indigenous company. This type of funding has allowed indigenous companies to explore a number of successful marginal fields. Nonetheless, this option may not be readily available for some companies considering the capital-intensive nature of exploring the field.
An alternative to the internal financing model is the structured financing model. This model usually entails sourcing for bank funding. Indigenous companies who successfully obtained funding from local commercial banks have profitably exploited a number of marginal fields. An example is the Union Bank funding of the marginal field acquired by Brittania-U Nigeria Limited for its operation of the Ajapa marginal oil field. Therefore, bidding companies can take steps to secure funds from commercial banks and other lenders to ensure the required capital is raised.