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Financial Times: Doubts over Nigeria oil awards

By Dino Mahtani in Abuja
Published: February 14 2006
Nigeria's first open oil licensing round has ended with a roughly $1.5bn shortfall in pledged signature fees amid perceptions that some awards have been subject to political favouritism and back-room dealing.
Edmund Daukoru, Nigeria's minister of state for petroleum, said at a closing ceremony last week that Nigeria could only expect “about a billion dollars” in signature fees after 19 winners of blocks were unable to raise funds. Nigeria is the biggest oil producer in Africa.
The bid round is part of an ambitious strategy to boost production by 60 per cent to 4m barrels in the next five years. The signature fees are a fraction of the investment needed to develop the blocks to produce new oil.
The bid round did not raise interest from established multinationals, instead attracting new entrants, including those from Asian countries keen to expand their energy sources. Nigeria's main producers, Shell, Exxon, Agip, Total and Chevron, complained that the new contractual terms would make it unprofitable to explore and invest.
Nigeria stands to benefit enormously from the recent sale of a share of an oil block originally awarded under military rule to a former defence minister. China's largest offshore producer, CNOOC, last month agreed to pay close to $2.3bn (€1.9bn, £1.3bn) for rights in the lucrative oil block that has been partly backed into by the government.
The auction was presented as a transparent process marking a break from the types of discretionary awards prevalent in Africa's largest oil producer under military rule, which ended in 1999. Olusegun Obasanjo, Nigeria's president and also a former military ruler, has staked much of his credibility on bringing transparent governance to Nigeria before he is due to step down after elections in 2007.
A panel report seen by the Financial Times, reflecting the views of oil companies, diplomats and a presidential consultant criticised the implementation of a new policy of reserving a 10 per cent minority stake in awarded oil blocks for local companies. It said the policy could have led to “forced marriages”.
Consultants who performed due diligence on the minority companies said many did not even exist before the auction, and few had track records in the industry. Many companies are connected to senior politicians.
“This process was a far bit ahead of the discretionary awards but there is still a problem of encouraging genuine players as opposed to those who think they have got the winning lottery ticket,” said Antony Goldman of Clearwater Research Services.
Only 25 of 44 blocks originally awarded are to be finalised. In contrast to bid rounds in some other countries, no deposits on signature fees were required. Many winners also could not provide bank guarantees. The “lack of sanctions and flexible bid framework may have encouraged unprofessional, reckless and frivolous bids now abandoned”, the report said.
However, at least $300m in signature fees had been finalised for some of the awards, executives said. Another $485m is expected to be settled only when the confusion over ownership of the two most prized blocks is resolved between India's ONGC and Korea's KNOC, which has exercised pre-emptive rights in both blocks in return for promises to undertake huge infrastructure projects. The signature fees for the remaining blocks should be effected once those contracts have also been finalised.
Meanwhile, some blocks have been partly farmed out to other interests, without being declared. Oil executives say at least $16bn would need to be invested every year over five years for Nigeria to meet its production targets for oil and gas. Currently, the figure stands at about $13bn.

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