After weeks of consultation, deliberation and negotiations, including mediation by the United States, the Organisation of Petroleum Exporting Countries (OPEC) and its allies OPEC+) finally agreed to a cut in crude oil output as part of the measures to tackle the global crude oil price crisis.
On Thursday, April 9, 2020, OPEC member-countries agreed to cut their output by 10 million barrels per day with non-OPEC nations to cut by five million barrels per day.
This OPEC deal in April has helped to prop up prices of crude oil which have been battered by the coronavirus pandemic and a price war between Saudi Arabia and Russia. The agreement will also see Nigeria’s daily production pegged to an average of 1.4 million barrels per day – below the revised vol-ume of about 1.7 million barrels per day contained in the amended 2020 Appropriation Act.
The Nigerian government reacted to this development in a statement issued by the minister of State for Petroleum, Timipre Sylva, where it stated that the country will adhere to the output cut to re-balance and stabilise the global oil market.
Notwithstanding the significant gap between the new OPEC production quota and the proposed pro-duction capacity in the 2020 budget, Sylva remains optimistic that Nigeria would still break even and meet its revenue target.
The minister stated that Nigeria will now be producing “1.412 million barrels per day, 1.495 million bar-rels per day and 1.579 million barrels per day respectively for the corresponding periods in the agree-ment.”
In a recent report by the United Kingdom (UK)-based Energy Intelligence shipping data, Nigeria, Afri-ca’s biggest oil-producing country, recorded 80 per cent compliance with the OPEC June oil production cut (a production cut of 333,000 BPD, leading to a total production of 1.49 mbpd). Although the produc-tion cut agreed by OPEC and its allies is aimed at boosting crude oil prices, it is bad news for countries such as Nigeria that depends heavily on crude oil revenue to run the economy.
In the wake of the OPEC production cuts for crude oil production and allocation of quotas to member countries, the Nigerian National Petroleum Corporation (NNPC) assigned certain percentages of pro-duction cuts to oil companies operating in Nigeria in order to achieve compliance with the OPEC crude oil production quota for Nigeria.
While this is understandable, NNPC’s decision to allocate production cuts to marginal field operators is worrisome in view of the fact that these fields contribute a meagre two per cent to Nigeria’s daily out-put.
What Are Marginal Fields?
Marginal fields are oil fields that have been discovered within a larger acreage by major International Oil Companies (IOCs) and have been left undeveloped (typically for more than a decade) due to lim-ited potential for attractive returns and production. To facilitate the development of indigenous com-panies and capacity, the federal government and or the IOCs may decide to farm out such fields to other companies to develop. Invariably, the independent producers bear all the costs and risks associ-ated with the field development for a share of the revenue from the production and sale of the hy-drocarbons in the field.
Marginal fields in Nigeria evolved from the Petroleum Amendment Act 1996, which introduced para-graph 16A into the First Schedule to the Petroleum Act.
According to the Department of Petroleum Resources (DPR) guidelines on marginal fields, the main objectives of Nigeria’s marginal field programme is to grow production and capacity of local producers, diversify resources and investment flow. It is also meant to promote technology transfer, common usage of assets to ensure optimum use of available capacity across various disciplines.
Marginal fields in Nigeria are located onshore and in the shallow waters. There are about 178 marginal oil fields in the country.
The nature of the title of marginal fields can be seen as a sub-lease in which there is a head lease be-tween the government as lessor and the Oil Mining Lease (OML) holder as lessee on the one hand and a sub-lease between the OML holder (the “farmor”) and a marginal field holder (the “farmee”) on the other hand.
Saving Marginal Field Operators
The new cut in production volumes imposed on marginal field operators by the NNPC has become a millstone on their neck, coupled with other existing burdens such as onerous debt service obligations, relatively low production levels, inadequate technical expertise, government policies on royalties and petroleum taxes.
The current low prices of crude oil have significantly impacted the revenues of marginal field operators with virtually all of them barely able to survive. This is partly because most marginal field operators are highly leveraged and with significant reduction in crude oil prices and production volumes, they are no longer able to meet their loan repayment obligations to several lenders who are mainly Nigerian banks. There is a significant risk of loan default and bankruptcy for these companies.
If the federal government fails to quickly step in to save the marginal field companies and the looming collapse sets in, it will have dire consequences for the economy. For instance, there will be more job losses when Nigeria is already struggling to contain rising levels of unemployment – currently one of the highest in the world.
According to the National Bureau of Statistics (NBS), about 27.1 per cent of Nigerians or 21.7 million people are currently unemployed. Underemployment rate is pegged at 28.6 per cent. Nigeria’s youth remain the hardest hit by unemployment with over 13.9 million people aged between 15 and 34 years unemployed. This is a frightening statistic that the government cannot afford to exacerbate.
In the same corresponding period covered by the NBS report, the nation’s economy contracted by a whopping -6.10 per cent in Q2 of 2020. Forecasts show a strong likelihood that the economy will con-tract further in Q3 of 2020 with consequent recession – the second time Nigeria’s economy will slip into recession in four years.
At a time when the federal government is holding its first marginal fields licensing round since 2003, it will be a huge contradiction for the government to indirectly extinguish current marginal field opera-tors while soliciting investment in new fields. In fact, it is a disincentive for investors.
Given the current circumstances, it will be unreasonable for the federal government to further burden the marginal fields with production cuts – after all they contribute a negligible quantity to Nigeria’s daily production volume. A more humane and considerate action would be to exempt the marginal field companies from the production cut in order to protect employment of Nigerians, investment by Nige-rians as well as stop the unpleasant impact on host communities, local vendors among others.
It is a tough decision but one which the federal government has to take very quickly in the best inter-est of Nigerians and in support of its own local content and development initiatives.