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Proposed 2010 bid round for award of oil blocks - International Law Office

International Law Office

Energy & Natural Resources - Nigeria

Proposed 2010 bid round for award of oil blocks

March 22 2010

Introduction
2005 bid round
2006 mini-bid round
2007 bid round
Proposed 2010 bid round
Lessons


Introduction

The president's special adviser on petroleum matters, Dr Emmanuel Egbogah, recently announced a bid round for the award of oil exploration blocks. Details of the proposed 2010 bid round are yet to be published.

The award of oil exploration blocks in the petroleum industry has evolved from discretionary grants by incumbent heads of state to the recent practice of open bids aimed at achieving greater transparency and maximizing state revenue while fostering the growth of local content by developing technical competence and capacity in the Nigerian petroleum industry.

2005 bid round

In the first open bid round in 2005 the government, which was commended for its efforts to achieve transparency in the bid process, awarded only 30 of the 77 auctioned blocks to new Nigerian players. Awards were made to Asian oil companies (eg, the Korean National Oil Company), controversially securing such companies strategic rights of first refusal over some of the world's richest oil blocks in exchange for a commitment to invest in Nigerian infrastructure projects.

There was little interest in the auctioned onshore acreages, which likely stemmed from the Niger Delta unrest, and few locally based international oil companies participated in the bid round. Companies expressed concerns over perceived risks of enforced partnership and financing imposed by the new regulations. The rules required successful bidders to form partnerships with Nigerian players, despite a lack of local capacity to conduct work programmes and meet financial commitments. The use of Nigerian subcontractors, services and employees mandated by local content policies also appears to have deterred international companies.

2006 mini-bid round

In 2006 Nigeria conducted another bid round, auctioning only 18 blocks and earning around $292 million in signature bonuses. Only companies willing to invest significantly in the country's infrastructure development projects and power structure were pre-qualified to participate. The blocks that were offered included blocks from the 2005 bid round which had not been awarded and others that had been voluntarily relinquished by production sharing contract operators.

The guidelines for the bid round included local content specifications for each type of block (ie, onshore, offshore and deep water), and the requirement that bidders attach bank drafts representing 25% of their proposed signature bonus to their bid documents. The rules on gas discovery and exploitation were not explicitly defined. International oil companies again demurred and only 11 companies participated. Blocks were awarded mainly to Nigerian, Chinese and Indian companies.

In December 2006 many of the 2005 and 2006 bid round winners had yet to make payments in relation to their respective blocks, leaving around $2.7 billion outstanding. This and other factors led to the suspension of a proposed further sale of around 60 oil blocks, which had been scheduled for the end of 2006.

2007 bid round

In his final year as president, Olusegun Obasanjo authorized a bid round for 2007 in the hope of raising around $500 million in signature bonuses. Forty-five blocks were put on offer for the inland basins, continental shelf, onshore Niger Delta and deep offshore. The international oil companies were again conspicuously absent and Nigerian and Indian bidders won most of the 19 blocks that were awarded at the end of the bid process. The government raised around $266 million in signature bonuses.

Although the 2007 bid round attracted the largest Nigerian participation of all the bid rounds to date, the legality of the awards has been questioned. An investigative panel was established in June 2008 by the government to review the 2007 bid round; the reach of the investigation was extended to the 2005 and 2006 bid rounds. Following these investigations, some of the licences which were awarded in the 2007 bid round were revoked. These include Oil Prospecting Leases 226, 2005 and 2006, which had been awarded to two Indian oil companies, Essar Exploration and Production Limited and Sterling Global Resources Limited. The licences were revoked on the grounds that neither firm had met the pre-qualification requirement to participate in the 2007 bid round or to bid formally for the blocks.

Proposed 2010 bid round

Egbogah has predicted that several billion barrels of oil reserves will be put up for auction in the 2010 bid round. There is speculation as to the qualification requirements. The development of Nigeria's gas reserves, downstream sector and infrastructure, as well as local content, remains high on the government's agenda. It is likely that Nigerian oil companies, as well as Asian companies (particularly Chinese companies), will again be the primary bidders. China has already publicly expressed an interest in gaining access to Nigeria's lucrative oil and gas reserves: in September 2009 the China Offshore Oil Corporation declared its interest in buying stakes in as many as 23 Nigerian blocks.

Lessons

There are lessons to be learned from early discretionary allocations and previous bid rounds. Criticism of the pre-qualification of under-qualified companies and allegations that certain awardees lacked the knowledge and financial capacity to develop the blocks (as was the case with Essar Exploration and Production Limited and Sterling Global Resources Limited) have been made in relation to the previous bid rounds.

In addition, allegations continue to be made that blocks were awarded as political favours under discretionary allocation regimes which existed prior to Obasanjo's 2005 introduction of the open bidding process. It was not uncommon for early awardees to re-sell blocks at much higher prices to international oil companies which were able to exploit fields. This problem appears to have been reduced by the advent of local content policies which restrict foreign ownership of oil blocks. Awardees of rights of refusal from 2005 onwards were exempted from making mandatory deposits of signature bonuses in support of their bids. In addition to the resulting loss of hundreds of millions of dollars, the granting of such rights has been criticized as being discretionary, anti-competitive and politically motivated, and has failed to boost infrastructure development.

In 2006 only 11 companies were pre-qualified to participate in the 2006 mini-bid round based on their commitment to contribute to Nigerian downstream oil and gas infrastructure by investing $2 billion in infrastructure projects. However, allegations have been made that the winners failed to invest in such projects. As a result of its failure to meet its commitment, ONGC-Mittal - one of the 11 companies which promised to invest $6 billion in a refinery, a power plant and a railway line - is now under investigation by a House of Representatives panel, which was established to investigate irregularities in the award of oil blocks between 2006 and 2008. Many more awardees which have failed to meet their commitments may face similar investigations.

It remains to be seen whether the promoters and regulators of the proposed 2010 bid round will take into consideration the lessons learned from earlier bid rounds to achieve a balance between the need for technical knowledge, financial capacity and greater revenues for the development of national capacity and participation, and the preservation of transparency.

For further information on this topic please contact Folake Elias Adebowale, Funmi Olojo or Nnewuoghor Ogboi at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831), fax (+234 1 263 4541) or email (folake.adebowale@uubo.org, funmi.olojo@uubo.org or oghor.ogboi@uubo.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.


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