Will Schlumberger Treat Otakikpo the Way it Treated Madu/Anyala?

In November 2018, Schlumberger pulled out of the Madu /Anyala field development project offshore Nigeria.

It was 17 months after the oil service giant had inked a tripartite agreement to be financier and technical service provider on the project, with the Nigerian Independent First E&P, operator of the asset, and NNPC, the state-owned partner.

Schlumberger’s decision to pull its $724Million funding for this development in Oil Mining Leases (OMLs) 83 and 85, has been kept out of public scrutiny by all the parties involved.

But as the company moves on to another Nigerian field development project, questions are being raised: Will Schlumberger prevail through the life of the Otakikpo field expansion project? Or will it, again, pull out?

These questions are grounded in some context.

Five months before Schlumberger walked out of the Madu/Anyala, it had pulled out of another planned investment in West Africa: The Fortuna NLNG project off Equatorial Guinea.

Schlumberger was involved in the Fortuna LNG project through OneLNGSM, a Schlumberger/Golar LNG joint venture partnership with which operator Ophir Energy had signed a binding Shareholders’ Agreement, to develop the 2.2Million Tonnes Per Annum Fortuna NLNG.

OneLNGSM owned 66.2% of the $2Billion project of which $1.2Billion was to be debt financed. Schlumberger did say it pulled out of OneLNGSM because the Fortuna project was unable to finalise attractive debt financing in time.

Less than a month after the mighty Schlumberger withdrew from OneLNGGSM, Gabriel Lima Obiang, the Equatoguinean Minister of Mines and Hydrocarbons (MMH), noted that the government could bring in some other investors to the project to replace Ophir. He referenced the expiration of the Block R licence at the end of 2018.

The minister did not renew the licence, effectively tossing out Ophir Energy’s five-year appraisal drilling, FEED studies, and three-year widely publicised effort to raise finance. Faced with the loss of its biggest development on the continent, Ophir has since exited its entire portfolio in Africa.

First E&P has not suffered the same fate as Ophir. It has struggled too, though, and scaled down the number of wells needed to drill to get to first oil by more than half. In its case the state has been more benevolent:  the Madu/Anyala development has benefitted from ready cash call payments by NNPC.

The Otakikpo field is operated by Green Energy International Limited (GEIL), which has the London listed LEKOIL as financial and technical partner. Schlumberger, officially never responded to enquiries from Africa Oil+Gas Report. But highly regarded sources who are familiar with the company’s working, say that the Schlumberger’s financial exposure in the two projects: Otakikpo and Madu/Anyala are dissimilar. And the terms are different.

Whereas the Madu/ Anyala project was to be executed under Schlumberger Production Management SPM, in which the company is an investor and recoups its money on production, the deal on Otakikpo is being consummated under the company’s Asset Performance Solutions (APS) scheme, in which case Schlumberger is not putting a single dollar on the table, but using its brand to help the partners pull in financiers. “Schlumberger’s involvement in Otakikpo is a support by way of investing sweat equity and integrity”, our sources say.

Still, there’s something unnerving about a partner who has dropped out of two hydrocarbon field developments inside of the last two years.

GEIL signed a Memorandum of Understanding (MoU) with a consortium of international financiers for a package of more than $350Million, to take forward the second phase development of Otakikpo. The consortium includes an international bank based in London, a crude oil off-taker and an EPC contractor.

The Field Development Plan FDP of the project involves the drilling of seven additional wells (there are two producing wells already) and expansion of the crude processing infrastructure. The plan also includes the construction of a 1.3Million barrels onshore terminal and a 17 kilometre export pipeline to connect the terminal to an offshore loading system. GEIL director of corporate affairs Olusegun Ilori said that the company intends to increase production from 6,000 barrels per day (BOPD) to 20,000BOPD.

Anthony Adegbulugbe, chairman GEIL has been quite enthusiastic about the work programme and vocal in the media about the financial and technical partnerships he has attracted on board of this expansion project. With COVID-19, there may be delays, the cost of debt financing may go up and the project may have to be phased, but Otakikpo expansion looks likely to go on.

The one other worry is, as Schlumberger is the main subsurface service vendor, and its services come at premium cost, continual benchmarking with the rest of the industry is key. After all, this is the era of bare bone cost of production.