EXPLAINER: What’s the big deal about this frontier basin exploration?

There has been so much noise about the allocation of 30 percent profit of oil and gas from the NNPC Limited for oil exploration in frontier basins. 

In a letter addressed to the national assembly on Monday on behalf of the oil communities, Edwin Clark, an Ijaw national leader, described the 30 percent share as “fraudulent and provocative”.

The southern governors’ forum also rejected the allocation of 30 percent for the basins exploration.

The passed bill, however, did not give a specific definition of the frontier basin — but stated that the definition and scope will be issued by the Commission — the Nigerian Upstream Regulatory Commission.

WHAT’S FRONTIER BASINS, FOR GOODNESS SAKE?

Frontier exploration is the process of exploring hydrocarbons (the exploration of crude oil, natural gas, coal, and other energy sources) in the inland basins.

The inland basins consist of the Anambra basin, the lower, middle, and upper Benue trough, the southeastern sector of the Chad basin, the mid-Niger (Bida) basin, and the Sokoto basin.

The senate committee recommended that 30 percent of Nigeria National Petroleum Corporation (NNPC) profits from oil and gas for the exploration of frontier basins.

On the other hand, the house of representatives allocates 10 percent of rents on petroleum prospecting licences and 10 percent rent on petroleum mining leases to the frontier exploration fund.

It also allocates 30 percent of NNPC Limited’s profit oil and profit gas in the production sharing, profit sharing and risk service contracts for the exploration fund.

“The Frontier Exploration Fund shall be 10% of rents on petroleum prospecting licences and 10% rent on petroleum mining leases; and 30% of NNPC Limited’s profit oil and profit gas as in the production sharing, profit sharing and Risk service contracts. The fund shall be applied to all Basins and undertaken simultaneously.

It further stated that “NNPC Limited shall transfer the 30% of profit oil and profit gas to the frontier exploration fund escrow account dedicated for the development of frontier acreages only.”

SO, WHAT’S THE FUSS?

Stakeholders are raising alarms over the allocation of 30 percent from NNPC’s limited profit oil and profit gas for exploration. Most people believe the funding would eat deeply into an oil firm that returns nothing or meagre revenue over the years.

The governors’ concerns are not far fetched – oil revenue provides a lifeline for most state governors to run their day-to-day obligations. The creation of exploration basin fund could reduce the size pie(allocation) distributed monthly to states.

“Obviously, it would reduce government revenue. The new allocation to frontier wells would come at a cost. This kind of project has not really yielded needed investments,” Ebitonye Atte, oil and gas analyst at United Capital, told TheCable. 

WHERE WILL 30% COME FROM?

The bill provides that the fund should come from “production sharing, profit sharing and risk service contracts.”

Production sharing contract (PSC) arrangement is a contractual arrangement between government and foreign oil companies, in which the foreign oil companies (FOCs) bear the exploration, drilling and development expenditures. The government has the right to participate in the venture as a working interest owner at a predetermined rate.

In production sharing agreements, the government awards the execution of exploration and production activities to an oil company, while a risk service contract is when government hires the service of a petroleum company to benefit from its financial and technical expertise. The company assumes the risk and liability and is reimbursed by a service fee, usually paid in cash.

From these arrangements, profit oil and profit gas are expected to be deducted for the frontier basin exploration.

Profit oil (profit gas) applies to PSC. After deducting the cost of oil production and expenses, the remaining amount will be divided between the participating parties and the government. 

By implication, this means that 30 percent would be deducted from the profit accrued to NNPC under the PSC arrangement and paid into an account for the purpose of exploration. 

A typical example of this arrangement is the recently signed deal by Nigerian National Petroleum Corporation (NNPC) with partners on the oil mining lease (OML 130) on production sharing agreements (PSA) and production sharing contract (PSC) arrangement to unlock ‘$760 million’ in gas revenue.

Ebitonye Atte said with the huge investment in exploration, the federal government, through NNPC, may be doing so to attract more investors into oil exploration and get a share of profit from such activities.

“Generally, the allocation of 30 percent of NNPC LTD’s profit for exploration is relatively high for any company – compared to the fact that the revenue is meant to be remitted to the federation.  

“There are other oil activities for the NNPC, but profit from oil and gas are among the major sources of revenue for the federation.”

WHY IS EXPLORATION IMPORTANT?

As petroleum asset is utilised, production depletes the hydrocarbons available within that asset. The asset is not self renewable and thus finite, which will mean depletion over time. It is important that the total reserves of the country are replenished. And for this to happen, frontier acreages must be explored and new deposits must be found.

Also, the frontier exploration fund is not domiciled with NNPC LTD, rather it is saved in an escrow account overseen by the Nigerian Upstream Regulatory Commission saddled with the responsibility of improving Nigeria’s reserves via exploration on all fronts, including basins.

The commission takes over the functions of the Petroleum Inspectorate and the DPR, and will regulate the upstream sector of the petroleum industry. We will also have a Nigerian Midstream and Downstream Petroleum Regulatory Authority — this covers all three sectors of the industry.