PIB: Sinkhole Called Frontier Basin Development

By Victoria Ibezim-Ohaeri

The news of the passage of the Petroleum Industry Bill hit the airwaves like a tsunami last week, sparking surprise, disbelief, and confusion among stakeholders in the Nigerian oil and gas industry. Like the miracle in Cana in Galilee, the House of Representatives passed 318 clauses in less than 20 minutes! This is a feat four to five republics of the National Assembly could not achieve in nearly two decades! Shortly afterwards, the PIB also passed the third reading in the Senate amid chaos and heated debate by the federal lawmakers.

Out of the five parts, eight schedules, and 319 clauses of the Bill, Clause 9(4) relating to the Frontier Exploration Fund  is the most startling provision that has dominated discussions since the passage last Thursday. The FEF comprises 10% of rents on petroleum prospecting licences, 10% rent on petroleum mining leases, and 30% of NNPC Limited’s profit oil and profit gas in production sharing, profit sharing and risk service contracts. The funds shall be applied to all basins and undertaken, simultaneously. The national oil company is obligated to transfer the 30% of profit oil and profit gas to the frontier exploration fund escrow account dedicated for the development of frontier acreages only!

What is frontier basin development by the way? In simple terms, Nigeria is exploring other sedimentary basins, including Bida, Gongola, Sokoto, Anambra, Benue Trough and Dahomey in an attempt to diversify the country’s hydrocarbon resources to complement over 93 per cent of its oil production which comes from the Niger Delta basin alone. The Chad basin is the largest, crisscrossing countries like Nigeria, Chad, Niger and Cameroon Republics. Only about 10% of the Chad basin lies within North-East Nigeria.

The frontier basins can be likened to sinkholes because they share uniform characteristics. Sinkholes take and take and take, but never give back! In May 2008, a large sinkhole that formed in Daisetta, Texas, a suburb of Houston, swallowed several cars, oil drilling equipment, and oil tanks. In one day, the depth of the Daisetta sinkhole expanded to 200 metres (656 feet) in diameter and 75 metres (246 feet) deep. Within a couple weeks a 23-metre (7-foot) deep lake had formed in the sinkhole, and a two-metre (7-foot) alligator had taken up residence in the waters.

I stumbled on the front page of Daily Times Newspaper of April 3, 1956, which reported about the early exploration of the Chad inland basins as far back as 1956! One thing we need to find out now is how much this sinkhole called ‘frontier basin development’ has gulped in the last 50 years or so. How much has Nigeria sunk into exploration gambits for over five decades? A comparison needs to be drawn between that outlay and the quantum of discoveries that have been made over time. Without that data, it’s hard to reasonably project whether these basins have any oil worth spending money looking for in the first place.

The good news is that the exploratory activities in the basins have significantly opened up the country’s huge gas potential. Of the 23 dry wells drilled in the Chad basin, only the Wadi-1 and Kinasar-1 wells recorded non-commercial gas accumulations. But oil? I find no convincing data showing that frontier basin development in Nigeria has yielded new oil finds in commercial quantities. Some experts say since the Chad basin, for instance, has oil in its non-Nigeria eastern section, its western end should hold also commercial promise. Again, this is mere optimism that is unsupported by any shred of evidence. Investment decisions are based on sound economics, and not on radiant hope. Sound investment decisions are anchored on the precise mathematics showing how liquid capital plus assets ploughed in today will increase the revenues of tomorrow to cover costs and yield higher returns. To the best of my knowledge, this evidence (as regards the frontier basins) does not exist anywhere.

Despite the paucity of evidence, the PIB wants 30% of the NNPC profits to be channelled into this same sinkhole called frontier basin development. Why are private investors avoiding similar exploratory investments in the frontier basins? What do private investors know about these basins that we do not know?  Is that a sign of project non-viability or outright waste of funds? This want of evidence supporting profit maximisation appears to be the real reason private investors have avoided this route. Past exploratory initiatives in other parts of the country (especially in the Niger Delta basins) have been initiated and undertaken primarily by private investors -Shell Petroleum, Exxon Mobil, Agip, Chevron etc. Understandably, as private companies unused to the sort of freebies and dash money the NNPC steadily enjoys from the state coffers, their investment decisions are pinned on near-sure commitment of resources in expectation of economic returns in future dates. It seems obvious investing in the frontier basins does not give them this kind of assurance.

Why then is the Nigerian state taking over this role? A friend suggested that capacity development for the NNPC is one of the benefits of developing the frontier basins. The NNPC lacks experience, knowledge, and the corporate appeal to attract foreign financing. In fact, it lacks general capacity for the alternative offshore play. Thus, the inland basins are the only exploratory play the state oil company can grow itself. With the Niger Delta complex over-explored, if the NNPC needs to improve its upstream experience and double-up capacity in exploration, the inland basins are its natural and only turf. This suggestion makes some sense and appears to be the only sensible rationale for the state to take over the role of oil exploration in the basins. If that is the real reason for the continued sinking of resources in the basins, then 30% of the NNPC profits would be too much in a country where infrastructure is in ruins, education is the shambles and doctors are exiting the country in droves in search of greener pastures elsewhere.

Again, why are the NNPC profits going directly into the development of the frontier basins and not to the federation account? Section 162(1) of the Constitution of the Federal Republic of Nigeria 1999 (the “Constitution”) provides for the establishment of a special account to be called “the Federation Account” into which all revenues collected by the Government of the Federation. All revenues should rightly go to the federation account to be shared by the federal, state and local tiers of the federation. On what basis is the PIB setting aside a whopping 30% of the NNPC profits to frontier basin development, without subjecting the allocation to the rigours of appropriation? The ball is now in the court of the FG, state governors and local government councillors. Remember, the proposal and efforts to establish the Sovereign Wealth Fund  as a replacement for the current oil savings mechanism, excess crude account, were greeted with stiff opposition and contentious litigation instituted by the 36 state governors. The governors feared that the SWF portends fewer cash to share and spend. Just like the current proposal to plough 30% of the NNPC profits into the frontier basins without appropriation, the opposition to the SWF primarily stemmed from the absence of constitutional backing for the initiative. So, would Nigerian governors repeat this feat and challenge this appropriation through the back door? Time will tell.

And finally, what happened to the much-touted transition to a low-carbon future? Many countries around the world are setting timeframes for phasing out sales of new internal combustion engine (ICE) vehicles. European countries are leading the way with Norway and the Netherlands committing to the most stringent timelines. Norway is also aiming for 75% of new long-distance coaches and 50% of new trucks sold to be zero-emission by 2030. Joining the comity of nations clamouring for a cleaner energy future, the Nigeria Economic Sustainability Plan prioritised plans to provide solar systems to connect five million households, serving about 25 million citizens, to new solar home installations and mini-grids. This has not happened. Why then would a country that loudly advertises its commitment to cleaner energy fuels sink a chunk of its profits into the search for fossil fuels? Is Nigeria no longer interested in exiting a mono-economy hinged on crude oil? Is the planned diversification of the economy just a myth? Are these plans dead on arrival? There are too many questions and too few answers. The coming weeks will be interesting to watch.

Ibezim-Ohaeri, Executive Director Spaces For Change (S4C), wrote in from Lagos


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