China Wins Again in Nigerian Bidding Round

China Secures Five More Blocks in Nigeria

Nigeria's Energy Minister Dr Edmund Daukoru has announced that 10 companies have won preferential rights in the country's upcoming licensing round. Daukoru was speaking at the Nigeria Oil Block Licensing Round 2007 meeting in London, the United Kingdom, where he announced that CNOOC was given first refusal on four blocks, while CNPC won the rights to one block. China has dominated recent bidding rounds throughout sub-Saharan Africa and, by bidding aggressively and offering to invest in the country's domestic infrastructure, the East Asian giant has secured access to Nigeria's upstream sector and locked up future energy supplies to feed its rapidly expanding economy (see Nigeria: 27 April 2006: Nigeria Gives China Four Oil Licences for US$4-bil. Infrastructure Investment). The deadline for bids is 2 May and the Nigerian National Petroleum Corp. (NNPC) will announce all the results on 7 May. The auction will see 45 blocks offered; 11 of which are located in deepwater offshore, 10 in shallow water on the continental shelf, 13 onshore in the Niger Delta, and 11 in inland basins (see Nigeria: 4 April 2007:Nigeria to Auction 45 Blocks in May Bidding Round).

Stakes Are Going Up

Reuters reported Daukoru as saying that, like in the two previous bidding rounds in 2005 and 2006, the government will aim to tie upstream acreage to investment in downstream projects. This has become an expected strategy in Nigeria's bidding rounds. Nigeria is keen for oil companies to invest heavily in the nation's refineries, petrochemical plants, independent power stations, and gas-gathering projects that monetise the country's vast gas reserves.

However, the federal government must be strict about downstream investment and force investors to improve the health of the country's ailing refining sector. In last May's licensing round the Chinese government promised to invest US$4 billion in infrastructure, including a 51% stake in the Kaduna refinery, with a mandate to restore the faltering facility to its 110,000-barrels-per-day (b/d) capacity, in exchange for four oil blocks—two in the Niger Delta Basin and two in the Chad Basin. However, recent reports suggest that CNPC had shown little interest in managing the facility. The Nigerian oil sector is in desperate need of investment as the country currently imports 25-27 million litres of refined products a day to meet domestic needs—100% of local demand—which is acutely embarrassing for a country with a production capacity of 3.1 million b/d (see Nigeria: 24 January 2007:Nigeria Imports 100% of its Refined Petroleum Products).

Upstream reports that other companies winning first-refusal rights include Spain's Repsol YPF, the United Kingdom's Centrica, India's Oil ONGC, Malaysia's Petronas, and South Korea's KNOC. These companies were expected to feature in the bidding round as many western majors that already have huge presences in the country's upstream sector chose not to bid aggressively in recent rounds (see Nigeria: 22 May 2006: Indian and Chinese Oil Companies Dominate Mini Licensing Round in Nigeria and 10 March 2006: Korean State Oil Company Concludes Nigeria Deal, Clears Problems over Signature Payment in State Visit).

Outlook and Implications

The Department of Petroleum Resources (DPR), which has been organising the bidding round, has had to work to a very tight schedule to complete the auction before President Olusegun Obasanjo leaves office. Nigeria is due to elect a new president this weekend (21 April). The DPR had previously stated that there would be 60 blocks on offer, but reduced the number to 45 because of time constraints (see Nigeria: 20 December 2006: Nigeria Postpones Oil Licensing Round Until 2007; Production Capacity Rises to 3.1 mil. b/d and 24 October 2006: Nigeria to Launch 60 Oil Blocks in New Auction Round). Nigeria expects to collect US$500 million in signature bonuses alone. The hastily arranged auction will see the DPR sign production-sharing contracts within two weeks of the auction, to be completed before the Obasanjo administration leaves office. The licensing round has been delayed for over six months already and the administration has been desperate to auction off more of the country's oil blocks before the end of Obasanjo's time in office (on 29 May). Many corners appear to have been cut and there will be no proper road shows to publicise the round, with meetings arranged only in London and Houston (the United States).

The timing of the oil licensing round is contentious and the bidding round will have to be of the utmost transparency or the incoming president could decide to cancel the results. However, as Nigeria's next president is likely to be Umaru Yar'Adua, the candidate of the ruling People's Democratic Party (PDP), it should be business as usual.