MOST OF THE NEWS ABOUT Africa’s oil and gas sector focuses on big, dramatic events: the start of production at Angola’s ultra-deepwater offshore oilfields, Royal Dutch Shell’s announcement of stoppages at the Bonny export terminal following civil unrest in the Niger River Delta, Tanzania’s plan to invest $30 billion in a huge new LNG plant, and protests against plans for hydraulic fracturing in South Africa’s Karoo shale basin.
This is unfortunate. It reinforces the journalistic habit of putting the spotlight on the most spectacular topics and ignoring smaller-scale success stories.
In this chapter, I’m going to narrow the focus so I can tell you about one of those smaller success stories: the Nigerian government’s deliberate effort to develop marginal oil and gas fields.
First, a bit of background: Nigeria began looking into marginal field development in the 1990s, after a number of international majors declined to develop some of the sites they had been awarded, saying that the reserves in question were too small to warrant their attention. In 1996, the government amended existing legislation to identify these sites as marginal fields and encourage their development by Nigerian companies. It spent the next few years developing guidelines for licensing and then launched the first round of bidding for 24 fields in 2003. Since then, it has handed a few more sites over to local investors, bringing the total number of marginal fields under development up to 30.1
The program has drawn some criticism, partly because it has played out painfully slowly. As of late 2018, less than half of the sites awarded to investors had started production, and Nigeria’s government was still not saying when it might hold the second round of bidding, originally scheduled for 2013.2 The first-round awards have raised questions about corruption since many of the awardees appear to have been chosen for their ties to powerful government officials and not for their ability to get the job done.3 They also played a role in the risk management and corporate governance crisis that led the Central Bank of Nigeria to take over Skye Bank, one of the country’s largest commercial banks.4
In this context, the new Marginal Fields Bidding Round launched in 2020 has seen the Department of Petroleum Resources (DPR) put a highlight on the transparency of the process while raising hopes to see a new wave of local content development across Nigeria’s upstream industry.
Even so, Nigeria’s marginal field initiative ought to be counted as a success. It has given more than 30 locally based companies the opportunity to establish themselves and develop their capacities as upstream operators. Also, it has allowed them to do so without assuming the risks (or the costs) of exploration, since all of the fields designated as marginal were confirmed discoveries, surveyed and tested by foreign companies, and known beyond a shadow of a doubt to contain hydrocarbons.
Marginal oil fields can serve as a foundation for bigger things. They can help African companies establish their reputations and gain enough standing to earn consideration for larger projects and work with more prominent partners, especially if they find ways to demonstrate that they can use modern technologies to make marginal sites profitable.
This has not always been easy to do. In fact, some of the Nigerian companies that won rights to marginal fields in the first bidding round stumbled at first because they didn’t have enough technical expertise to get the job done properly. But others succeeded because they hired ambitious young people with useful skills, such as Nigerians who had already gained experience by working on high-tech projects for foreign majors such as Royal Dutch Shell. They also leaned on Nigerian entrepreneurs who were able to use local networks to optimize their access to goods and services.
In some cases, this included financial services from Nigerian banks. Of course, the ill-fated Skye Bank was one of these, but it was not the only local lender to help fund development work at marginal oil and gas fields. For example, Intercontinental Bank lent $6 million to Niger Delta Petroleum to cover the cost of drilling a workover well, Ogbele-1, which brought the Ogbele field into production. Meanwhile, Union Bank lent a total of $50 million to Britannia-U for work at Ajapa, starting with the $23 million credit that allowed it to achieve first oil.5
In other cases, these connections facilitated partnerships with Nigerian companies that were in a better position to bankroll upstream operations. Platform Petroleum, for example, teamed up with a more cash-rich partner, Newcross, to cover its costs at the Asuokpu/Umutu fields. This alliance allowed Platform to become the first to begin production at a marginal license area.
Nigeria’s successes on this front have been substantial enough to have inspired other African states to promote the development of marginal sites as part of a wider effort to reform the oil and gas sector. In June 2018, for example, Thierry Moungalla, the communications minister of the Republic of Congo, said he hoped the country’s decision to join OPEC would lead to progress on this front.
Participation in OPEC “will help us to better liberalize the sector and bring in new players willing to invest even in marginal fields,” he told the Bloomberg news agency.6
Marginal fields have also drawn attention in Angola, one of the stars of the African oil and gas sector. As of late 2018, the country had retained its position as the second-largest crude producer in sub-Saharan Africa and was also working to boost natural gas yields. But it was also desperate to make up for the losses it had suffered in recent years. Angola’s oil output fell by about 20 percent between 2014 and 2018, not least because lower crude prices made its deepwater and ultra-deepwater fields off the coast of the Cabinda province less profitable.7 In turn, this decline caused the economy to take a hit—no surprise, given that oil and gas and related activities account for about 50 percent of Angola’s GDP and more than 90 percent of its exports.8
President João Lourenço, who replaced Angola’s long-time leader José Eduardo dos Santos in early 2017, hopes reforms will help turn the tide. One of his main targets is Sonangol, the national oil and gas operator. Lourenço’s government wants to restructure the company and dislodge it from its position at the pinnacle of the industry, partly by assigning its regulatory and licensing powers to a new state agency and partly by limiting its right to claim hydrocarbon deposits.
But the president is not just thinking in terms of country-wide institutions. In May 2018, he signed a decree that slashed production and income tax rates for marginal fields in half.9 His government has also said it intends to offer up a number of marginal fields in the Congo, Cunene, and Namibe Basins, during an upcoming licensing round in 2019.
Guillaume Doane, the CEO of Africa Oil & Power, praised this plan, saying in December 2018 that marginal fields might be the best avenue for bringing new and local players into the country’s hydrocarbon sector. “There is an antiquated perception that Angola as an oil and gas market is only for the big boys,” he told APO Group. “Through marginal fields, Angola is attracting a greater diversity of E&P players that can operate smaller onshore and shallow water resource plays. In the next decade, Angola can achieve historic developments through marginal fields, similar to what Nigeria [has] accomplished in recent years.”10
Doane’s remarks about the opportunities that await smaller companies in Angola highlight the real potential of marginal fields. As Nigeria’s example shows, these are the projects that can promote the development of local partnerships, business networks, and other arrangements that can pave the path to success for African companies.
If the Republic of Congo, Angola, and other African countries move forward with these upstream development programs, they will not just be creating opportunities for local companies that are willing to work at small sites. They will also be creating openings for local service providers. Oil companies rarely operate alone; they typically team up with contractors to farm out specific types of work, such as drilling, well servicing, repair and maintenance of equipment, rig transportation, marine services, and subsurface mapping.
In other words, local investors will need partners that can help them get the job done. They will need to establish relationships with companies that can deliver, operate, and move the type of rigs that are best suited for drilling in small fields. If they take on complex projects, they will need to find drilling contractors that have the specific skills and technologies required for directional drilling at unconventional fields or secondary recovery operations at mature sites. If they agree to develop offshore deposits, they will need to work with companies that specialize in marine services.
Historically, most of the companies that have provided services of this type have not been African. They have come from elsewhere and mostly worked for large multinational firms such as ExxonMobil—not for local investors focusing on smaller assets.
This means there is a hole in the market waiting to be filled. Local companies will need partners that can provide services on a scale suited to marginal fields. Angola, for example, will need marine service companies that can supply vessels and equipment for use at offshore fields that are several orders of magnitude smaller than, say, Block 0, where a Chevron-led consortium saw output peak at more than 400,000 bbl/d.11 Under these conditions, African entrepreneurs who can meet these needs are likely to be much in demand.
They will also have the opportunity to build their reputations—to become known as reliable partners capable of scaling upwards and taking on progressively larger projects. This, in turn, will allow them to expand their capabilities even further over time. It will put them in a better position to bid for marginal fields in neighboring and nearby countries and give them an incentive to invest in research and development programs that focus on African solutions for African challenges. It will also give them extra leverage in negotiations with foreign enterprises, which could provide access to new technologies that have enhanced upstream development in other regions.
Even better, increased activity in the oilfield services industry will create jobs and serve as an impetus for growth in other sectors of the local economy. It will stimulate the construction industry and retail trade since workers will need housing, food, and clothing. It will give a boost to local manufacturers and 3D printing services capable of turning out equipment and parts for use at oil and gas fields. It will support demand for banking, financial, and legal services since everyone involved will need ways to manage money and ensure compliance with local regulations and requirements. It will encourage commodities trading within Africa since local operators will need to find ways to move their product to market, finance transactions, and establish a platform for communication with third parties. Additionally, it will heighten the appeal of technology, creating opportunities for skilled workers who can operate the computers, software, and smart devices that offer the most cost-effective and reliable solutions for handling finances, commodity trades, record-keeping, design, and logistics.
In short, marginal field development programs are nothing short of a golden opportunity for Africa. They lay the groundwork for a rising tide that can lift many boats in the long term, with governments offering local investors the chance to gain a foothold in upstream hydrocarbon development, investors giving more business to local service providers, service providers creating demand in related sectors of industry, and workers in related sectors gaining skills in technology, trading, finance, and the like that will remain useful even after the oil and gas fields run dry.
Governments have a crucial role to play in promoting the development of marginal oil and gas fields—and not just in exercising their prerogatives as the source of official policies governing licensing, taxation, operations, and the like. African governments should also work to create an environment that supports entrepreneurs and discourages corruption.
So far, Nigeria has moved the furthest in this direction. To date, it has done more to promote the development of marginal fields than any other African country. Its track record is hardly perfect, but it is the most extensive. It has also generated some genuine success stories.
Take the example of Sahara Group—this Nigerian company has used its participation in the marginal field development program as a springboard for further development. It came into existence as a trader of petroleum products in 1996 and spent the next few years building up its business. In 2003, it built and launched one of the first independently owned fuel storage depots in Nigeria. Then, in 2004, it seized the chance to expand its operations and took part in the first licensing round for marginal fields. It won the right to develop OML 148, also known as the Oki-Oziengbe field, and brought it online in 2014.
But Sahara Group has done more than establish itself as a small-scale upstream operator. During the years when it was preparing OML 148 for development, it also developed other links in the value chain. More specifically, it struck deals for the supply of jet fuel to Nigerian and international airlines; established its own fuel distribution, storage, and marketing affiliates to handle downstream operations in nearly 30 African countries; provided bespoke marine solutions for offshore LNG projects; commissioned two LPG tankers; became a shareholder in several refineries and power plants, and accumulated an extensive portfolio of commercial real estate. Moreover, it greatly expanded its trading operations inside and outside Africa, setting up subsidiaries in Dar es Salaam and Conakry as well as Singapore and Dubai.12
Sahara Group is hardly in a position to compete with Shell or the other international majors that have led oil and gas development in Nigeria. Nevertheless, it has succeeded in growing far beyond its original scope. It now earns revenues of more than $10 billion per year and is capable of producing as much as 10,000 bbl/d of oil. It has expanded its upstream portfolio to include another 8 fields across Africa and hopes eventually to see its output rise to 100,000 bbl/d.13
Nigeria’s marginal field development initiative appears to have been the impetus for all these advances. Sahara Group got its start as a relatively small-scale fuel trader, and it only began to expand far beyond its origins after the acquisition of OML 148. Over the last 15 years, it has become a diversified and vertically integrated company, active in the upstream, midstream, and downstream sectors—and also in the service and power-generation sectors. It has created more than 1,400 permanent jobs in at least 38 countries.14
Sahara Group’s expansion and advances are a win for Nigeria. They show that government-sponsored programs can give a boost to local businesses that are eager to gain a higher profile. They show that marginal fields are worth developing—not just because of the oil and gas they yield, but also because they contribute to growth in other industries. They also demonstrate that African entrepreneurs are ready, willing, and able to make the most of the resources at hand.
Of course, Nigeria’s marginal field initiative has its flaws, as demonstrated by rumors of corruption in the first licensing round and local oil executives’ complaints about the ongoing postponement of the second licensing round.
Overall, though, it is a good model for other African countries to follow, and I look forward to seeing Angolan and Congolese companies follow Sahara Group’s example.