Here's Why FG Wants To Auction Nigeria's Oil Field This Year

For the first time in 17 years, the Federal Government will be auctioning Nigeria's marginal oil field with the auction happening at a time crude oil price is crashing. The current market sentiment in the oil industry could cause investors to bid at a lower price for the oil fields' license, but FG is not bothered.

The government said it will go ahead to auction marginal oil fields amidst the current wave of price decline in the oil market, revealing that the purpose is to encourage local investment. It was learnt that marginal oil fields don't require much capital compared to substantive ones, so domestic participation get access to credit to fund their operation.

This was made known by the Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mele Kyari, while speaking during a virtual dialogue session on government fiscal policy decisions in response to the current challenges. The session was organised by the Ministry of Finance and the UK Department for International Development Partnership to Engage, Reform and Learn.

Kyari further explained that costs of production of marginal oil fields are usually lower, so acquiring the license during the crash in crude oil price isn't a bad business move, “Marginal fields by their very nature, require very small-scale investment. Countries normally do this (licensing round) to encourage local participation and this local participation are usually funded by local borrowings because the scale of investment is not huge.

“So, you can typically do a marginal fields bid round even when oil prices are low because their costs of production are usually lower; they don’t need huge capital outlay. It is possible to do a marginal fields bid round this period.” He said in a Punch report.

Why government won't auction substantive license?

According to Kyari, auctioning substantive oil fields will require foreign investors, but the current market sentiment doesn't favour such for now. He said investors could price the license low and foreign participation in the bid round will be low, while the big corporation will most likely not take part.

So, for now, the substantive license will take the back seat, “a substantive, full-scale licensing round, (is) where you require foreign investments. This is not the best time to call foreign investors to participate in any bid round. The licences will be priced very low, and even the appetite will be very low.

“You are not likely to end up with the big players when you start a bid round under very low crude oil prices. I know we will go ahead with the marginal fields bid round, but will have to delay the substantive bid round to a later date.”

Meanwhile, the Director General, Budget Office of the Federation, Ben Akabueze, told the session that licensing of marginal fields and renewal of expiring oil mining licences will be accelerated by the government in order to increase revenues.