Niger Delta-based oil expert hints on challenges facing bidders and cost overview
dustry, especially the marginal fields, is usually complex, challenging and rewarding though there are a lot of blind spots. It is always advisable that the services of ex-managers with decades of actual working experience in the oil and gas industry should be sought. This is to avoid mistakes made by earlier marginal field investors.
“A well prepared and reviewed investment proposal will form a strong basis for deciding the threshold to be used for the commercial bid. Intuitively, the threshold for the commercial bid should be positively influenced by the positive net present value (NPV) and value investment ratio (VIR) arising from the investment proposal.”
Best templates
On the best templates to be used, Gborogbosi advised winners to consider what he called front-end planning right from the onset; plus the right financials and dataset that could sustain the operation of the marginal field lifecycle. “I will recommend that the investment plan for the marginal field should contain 10 key sections namely: executive summary that should provide summary information on the content of the investment proposal. “This section is key as it enables decisionmakers to have an overview of the investment decision points.”
This section additionally, highlight the source and forms of funding, the full scope of cashflow, and summary economics. There is the description of the proposal that provide concise details of the investment scope and objectives, he said. “Also, discuss the key technical and commercial variables impacting the investment. Some of the key variables will include existing agreements if any, government policies, expenditure and production profiles.
“The marginal field investor should have clear statements on the winning strategy and models for vertical integration and diversification, collaboration and synergy, aggressive work programme implementation, community relationship, regulatory compliance, cost control and optimization.
“The growth profile of the marginal field is expected to demonstrate the field’s contributions to national reserves and production growth, Nigerian content impact, domestic energy security, increased government revenue, and corporate social responsibility.”
He mentioned what he called value proposition and strategic and financial drivers of the final bid which would require the economics of the investment showing the base case and sensitivities, industry benchmarked discounted rate, net present value ( NPV), value investment ratio (VIR), and the payback period. “Also, discuss the economics, cashflow plot and all externalities that are included in the computation of the economics.
“Specifically, the value propositions for marginal field investment should clearly state how the investor will promote indigenous participation, generate employment, increase oil and gas reserves, increase production, encourage capital inflow, build technical capacity and promote the use of shared facilities.
In risks and opportunities and alternatives, Gborogbosi advised bides to evaluate and mitigate the standard industry risks such as technical, economic, commercial, organisational, political, health, security and environmental risks.
The estimated costs of implementing risk mitigations should be considered.
He gave advice on the corporate structure and governance as what would drive the strategy and execution of this investment. “Also, highlight how the overall investment (the marginal field) is going to be managed, performance monitored and reported. For instance, if this investment falls within a foreseen unitisation with an existing joint venture, how will that be managed?
He mentioned budget provision as a key section that should include the total expenditure phasing and cost classification based on the industry’s standard cost classification. Nigeria is striving to bring down its cost of operation to $10 from about $18. This would definitely require new cost outlines for marginal fields.
He said the financing section should look at funding strategy options and the contribution of each option to the financing of the investment. “Also, indicate the financial impact for investment’s full scope on the existing company as applicable.”
Taxation was brought up. He said: “Payment of tax and royalty is a major revenue stream to government. A comprehensive list of the tax rates used should be stated. Applying the wrong tax regime will hurt the investment.”
The parameters section should provide for a quick summary of the key aspects of the investment proposal for which organisational approval is sought; while there should be three parties who are indicated as being responsible for the investment decision on behalf of the investor. “They are the initiator (responsible for the preparation of the proposal), reviewer and approver.