NIGERIA - E&P Offerings.

President Obasanjo's administration in March 2000 began the first of open and competitive licencing rounds in the country to encourage a shift to the offshore by foreign companies. It offered 22 new blocks, including 11 in the Niger Delta deep and ultra-deep offshore, and 46 oil companies participated in the round, with 14 blocks receiving a total of 51 bids. Eight blocks were awarded in December 2000.

Major signature bonuses were asked for the deep-water blocks. The Department of Petroleum Resources (DPR), in charge of regulating and licencing in the petroleum sector, expected $900m in signature bonus revenues from the round, mostly from the winners of the eight offshore licences awarded. Although the DPR sets the rules and issues the licences, NNPC does the negotiating with the bidders through its upstream arm, National Petroleum Investment Management Services (Napims).

The eight deep-water blocks were awarded to Shell, Chevron, ExxonMobil, Agip, Phillips Petroleum, Petrobras and Ocean Energy. The blocks were for Oil Prospecting Licences (OPLs) 214, 229, 242, 244, 250, 318, 320 and 324. Competition was hottest for OPL 250, believed to be rich in petroleum, with Shell bidding $200m for this against US-based Ocean Energy's $210m and Brazil Petrobras' $100m.

However, negotiations with NNPC dragged on for many months. In June 2001 President Obasanjo ordered NNPC to sign final agreements with the companies by the end of that month. But there was disagreement over the sharing of profit oil under the PSA, with NNPC E&P unit Nigerian Petroleum Development Co. (NPDC) insisting on 30% for itself instead of the original 20% agreed with the government.

The deadlock was broken in late 2001, when ChevronTexaco agreed to give NPDC a 30% share of profit oil in OPL 250 and signed a PSA accordingly. The US major holds 50% in this. Its partners are Shell (35%) and Petrobras (15%). Since then the government has resorted to selective tenders, in which a few firms are invited to bid.

In July 2002, Shell was awarded the highly prospective Block OPL 245 in the Niger delta which is said to contain about 500m barrels of oil. The licence for this, first taken by the local firm Malabu Oil & Gas, was revoked in May 2001. The DPR said Malabu, owned by former dictator Sani Abacha and his oil minister Dan Etete, was given improperly and that it failed to pay the $20m signature bonus by the agreed deadline. But in May 2003, the House of Representatives ordered Shell to surrender OPL 245 to Malabu. It also told Shell to pay $550m to Malabu and $50m to Pecos, another local company involved in the raw. The government is yet to make a final move on this issue.

The US independent Ocean Energy was awarded offshore OPL 256 in November 2002. The block is adjacent to both OPL 245 and another highly prospective area, OPL 246, operated by Total in partnership with South Atlantic Petroleum. Ocean Energy pledged to pay a $70m signature bonus, with another $75m to be payable as a "prospectivity and production bonus" after its commercial discoveries have been approved. In early 2003, Total won a selective tender for OPL 221, adjacent to Total's OPL-222 where the French major found the Usan and Ukot fields which will start producing in 2006.

Nigeria's next deep-water licencing round, originally scheduled to begin following the April 2003 elections, will be delayed until 2004 according to officials at the DPR. The delay was caused by confusion over acreage awarded under the previous regimes of Presidents Abubakar and Abacha.

In May 2001 Funsho Kupolokun, special petroleum affairs assistant to President Obasanjo, was quoted as telling companies interested in the the deep-water blocks to be offered: "Next round it will be winner takes all. Next round give it your best shot first time and if you get it right you get it, the issue of marriages will be less. This time we wanted to ensure everyone will be in Nigeria, like Petronas" of Malaysia. He was referring to the strategy applied in 2000 of forcing operators who bid individually on blocks to combine into groups, which has come under criticism. It was partly that move which caused delays in finalising the deals.

There are also to be changes in the organisation of the state's petroleum hierarchy. While NNPC is in charge of the state assets, its NAPIMS is more involved in the day-to-day business and the DPR regulates. There have been wasteful power struggles between these bodies.

Soon after taking the presidency in 1999, Obasanjo cancelled 47 offshore exploration licences. These were the subject of controversial contracts awarded to local companies in the four previous years by his military predecessors. The licences were given by the military without any attempt at a competitive bidding process.

They consisted of: (a) 11 highly attractive deep-water blocks awarded in March 1999 to companies with links to the then ruling military; (b) six blocks awarded in late 1998 and early 1999 by the military to favoured firms; and (c) 30 blocks revoked by the DPR because the licencees had failed to execute agreed work programmes within the first five years of their leases.

The country's main foreign operators, led by Shell, have long been interested in these blocks and have since bid for them. Shell has discovered over 2 bn barrels of oil in deep-water blocks which may be related to diapirs in front of the delta slope.

In 1993/94, foreign companies had acquired 13 deep blocks. Shell took two, OPL 212 and 219 as operator. Shell also got equity in three other blocks, OPL 209, 211 and 316 - with Agip operating in OPL 316. Elf (now part of Total) became operator in OPL 222, 223 and 309. Mobil took two blocks and got Amoco (now part of BP) as a partner in one, OPL 221. A Statoil/BP partnership got four blocks. Other companies taking deep-water tracts included Exxon and Conoco, both having come to Nigeria for the first time. Among those farming into some of the blocks were Texaco (now part of Chevron) and Total.

The PSA terms have been attractive enough for the companies to spend heavily on exploration for deep offshore oil. They are committed to invest at least $54m in each block for the initial six-year licence period, but with no fixed programme. Shell estimates each block would need $150m or more over a ten-year exploration period. The foreign operator covers all exploration and development costs. If oil is discovered and developed, the operator simply pays tax and royalties to the government when it starts to produce. The terms are among the best in the world. In March 1999, the then military government improved the terms for deep-water licences affecting foreign companies. These included a 35% tax cut, down to 50% from 85%, and a graduated royalty plan whereby operators would pay 12% for production in depths of up to 500 metres. There is no royalty on production in waters deeper than 1,000 metres.

Deep-water drilling is expensive, as the blocks are at least 1,000 metres below sea-level and the oil lies another 2,000-4,000 metres deep under-ground. A 3D seismic, a rig and first well would cost $50-60m. A second well would cost another $30-35m. Up to $1 bn would be needed to bring a production platform online. For deep-water blocks to be developed on the scale wished by the government, a total investment of more than $10 bn could be required. Operators would need to find fields able to produce at least 300,000 b/d to justify investment on such a scale.