NNPC Confirms THE WHISTLER EXCLUSIVE, Replaces EROTON With Another Operator To Manage OML 18

…Notifies NUPRC About Change Of Operatorship

Barely a week after THE WHISTLER reported how EROTON mismanaged the investments of the Joint Venture (JV) partners of OML 18, the Nigerian National Petroleum Company Ltd and it’s partners have appointed NNPC Eighteen Operating Limited as operator of OML 18 to replace EROTON Exploration and Production Limited.

The move, which is a confirmation of the exclusive story done by THE WHISTLER is to curtail further degradation of the asset and revamp production of oil and gas.

The NNPC Ltd announced the latest decision in a statement issued on Monday and made available to THE WHISTLER.

It said in the statement that to protect the Joint Venture (JV) investment in OML 18, the non-operating partners, NNPC Limited (55% interest) and OML 18 Energy Limited (“OML 18 Energy” – 16.20% interest), jointly owning 71.20% equity, decided to remove EROTON as operator of the JV in line with the provisions of the Joint Operating Agreement (JOA).

The statement said that NNPC Limited and OML 18 Energy further appointed NNPC Eighteen Operating Limited as operator of the JV.

The change in operatorship, according to the NNPC, has been notified to the Nigerian Upstream Regulatory Commission (NUPRC) and communicated to EROTON.

It said while the key business reasons that made the change in operatorship are compelling, production has declined from 30,000 barrels per day to zero.

The statement reads in part, “The persisting inability of Eroton to meet the fiscal obligations of the Federal Government led to the sealing of Eroton’s head office in Lagos by the Federal Inland Revenue Service (FIRS) for more than twelve months due to non-payment of outstanding taxes to the Government.

“Eroton is also not able to remit to the JV parties the proceeds of gas supplied to its affiliate, NOTORE.

“A number of audits and investigations, including by the Economic and Financial Crimes Commission, NURPC’s work programme audit and others have been undertaken or are ongoing.

“Some of these audits are regulatory steps that could lead to licence revocation under the relevant laws if drastic steps are not taken by non-operating partners.

“NNPC Limited in particular, as majority shareholder with a unique stewardship responsibility to the Federation, is committed to assuring that the energy and financial security of the Country is uppermost in its business decisions.

“Removing an operator in these circumstances is therefore inevitable in order to protect the JV from Governmental or third parties action from entities, including Eroton’s lenders and other service providers.”

OML 18 is an oil-producing block covering 1,035 square kilometres located south of Port Harcourt and contains eleven (11) oil and gas fields with about 714 Million Stock Tank Barrels (MMSTB) of oil and condensate and 4.7 trillion cubic feet (tcf) of natural gas reserves.

Eight fields have been developed, but only four are currently producing: Cawthorne Channel, Awoba, Akaso, and Alakiri.

In 2014, EROTON acquired the 45% interest previously owned by Shell – 30%, Total – 10%, and NAOC – 5%, in the then NNPC/SPDC/Total/Agip OML 18 JV.

Following the equity acquisition, EROTON became NNPC’s partner in the OML 18 JV and Eroton was designated as the Operator in accordance with relevant provisions of the Joint Operating Agreement (JOA) between the parties.

Subsequently in 2018, Eroton farmed-out part of its equity to OML 18 Energy Resource Limited – 16.20% and Bilton Energy Limited – 1.80%.

From 2016 to date, OML 18’s net crude oil production has significantly fallen from approximately 30,000 bpd to zero production, despite consistent compliance to the joint venture’s funding obligations by the JV partners over the same period.

In recognition of the impact of the challenges in crude evacuation via the Nembe Creek Trunk Line (NCTL), the operator proposed, and partners approved an Alternative Crude Oil Evacuation Process by barging.

“Eroton is unable to execute this alternative, leading to the current zero production status of the asset.

“NNPC Eighteen Operating Limited has taken control of the operational and production assets in the block and is currently engaging the relevant stakeholders, including workers unions, communities, amongst others to restore operations to its full capability and secure value for all partners and the Federation,” the statement added.

How EROTON Breached JV Agreements With NNPC, Sahara Energy

THE WHISTLER had exclusively reported the several concerns over the way and manner the block is operated by EROTON, mostly bothering on transparency of procurement processes, confidence in reported production numbers, transparency of matching cash call payments and administration of JV partners’ funds.

It was gathered that in a bid to determine a true and impartial state of affairs and in accordance with clauses 2.2.11, 4.1.1, 6.6 -6.8 of the Joint Operating Agreement, the Management of NNPC Ltd appointed two Auditors – Messrs KPMG and Tamuno George & Co in July 2020, to carry out a forensic audit on the JV operations.

The forensic audit covered areas of budget process and implementation,governance and compliance and possible collusion with third parties.

In the Audit Report of Tamuno George & Co of July 2020 which was exclusively obtained by THE WHISTLER, the Audit Firm discovered that the expenses incurred by the company were excessive and over inflated.

For instance, the Audit Report revealed that two travel and tour contracts awarded to Dees Travels & Tour, and Silhouette Travels and Tours at N300,000,000 both totaling
N600,000,000 on call-off basis from 1st Nov 2019- 31st May 2020 appear exorbitant and negates the accounting processes of the company.

The Auditors stated further that travel and tour expense paid for in 2019 (N798,631,103.78); 2018 (N389,495,871.86); and 2017 (N382,984,561.02); whose invoices were provided by EROTON to prove genuineness of travel and to expenses from vendors could not be supported with official receipts.

The Audit Report added, “Travel and tours expenses are excessive and inflated
without arm’s length transaction.

“The N38,000,000 contract for Christmas Gift Cards in 2019 awarded to Artee Industries Limited is excessive and not at arm’s length.

“The sum of N439,255,269.49 was
paid to Oilserv as an advancement in respect of 30 per cent pipeline installation of N1,169,182,468.20(EROTON’ s purchase Order)/ $12,001,512.89 (Oilserv Invoice) without specifying the 30 per cent was calculated on purchase order or invoice.

“Oilserv limited was paid N439,255,269.49 for
services rendered portrays some
elements of compromise and casts
doubt on the true value of the
contract.”

With similar concerns about the mismanagement of the oil assets by EROTON, findings revealed that another partner in the Joint Venture, Sahara Energy, in a letter dated 21st October 2021, petitioned the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), alleging persistent mismanagement of operations of OML 18 by the Company.

Sahara Energy also wrote the NNPC In a letter dated January 10,2020 raising the alarm about the mismanagement of the OML 18 by EROTON.

As soon as the petition got to the Nigerian Upstream Petroleum Regulatory Commission, it quickly constituted a committee to investigate the allegations on EROTON to determine the veracity or otherwise of these allegations.

It was learnt that upon the conclusion of their preliminary investigation, the outcome also indicated mismanagement of the asset by EROTON.

NUPRC was said to have confirmed EROTON’s default in making statutory payments (Oil Royalty, Gas Sales Royalty, Gas flare payments, and Concession rentals), award of contracts to unapproved vendors without recourse to due process.

The regulator also confirmed the sale of gas to a related company without the JV partners’ approval, a valid Gas Sales Agreement, and a proper revenue remittal and accountability framework.

In the letters, also exclusively obtained by THE WHISTLER, Sahara Energy requested for the intervention of NUPRC and the NNPC to avoid catastrophic outcomes for the OML 18 JV partners, the Federal Government, the local communities and the environment.

In the letter to NNPC, Sahara Energy alleged that EROTON has continued to act with impunity, adding that it had become imperative to take decisive steps to ensure compliance, by EROTON, with due processes in order to assure prudent management of the OML 18 asset.

The letter, addressed to the NNPC Group Managing Director which was the former nomenclature of the current Group Chief Executive Officer reads, “Sir, we had specifically informed you that EROTON has continuously failed to officially invite Sahara or frustrated attendance at various meetings at which the 2020 Budget were discussed.

“We thought it useful to express some of our grave reservations (which we have severally – follows:

“Following interactions (at Sahara’s insistence) between Sahara and EROTON with a view to streamlining the 2020 budget and reducing costs, the said budget costs were only partially reduced to $412m from the in initially proposed $517,650,000) even though EROTON could justify only US$205m aggregate expenditure.

“Also, EROTON’s proposed 2020 budget sum of USS412,000,000 (with a view to attain increase in production) is unsupported by tenable underlying technical facts. Thus to provide supporting information to justify $205,000,000 production and evacuation facilities which yields the same desired increase in the production for the asset). This is the amount Sahara is willing to accept despite the fact that the asset, on its own (including the anticipated new production can only support $177,000,000 expenditure.

“Despite repeated requests from Sahara, EROTON is unable to provide any tangible explanations for how it intends to fund this budget cashflow deficit nor has provided any tenable supporting information for the $207,000,000 proposed expenditure above the U$205,000,000 portion of the proposed budget that it has supported.

“Despite numerous requests from Sahara as it is entitled to do pursuant to the OML 18 JOA for EROTON to render account of its stewardship of OML 18 and how it expended monies on behalf of Sahara in the period when EROTON held Sahara’s interest in OML 18 in trust, EROTON has failed to render such account and has instead ignored Sahara’s request for an account of its stewardship.

“It has become glaringly obvious that the asset is being run as a ‘family business’ with very poor governance structures, a total lack of transparency and total lack of value for money for expenditure.”

Flowing from the letter by Sahara Energy, NUPRC constituted a committee to investigate the allegations on EROTON to determine the veracity or otherwise of these allegations.

NUPRC’s investigation revealed that EROTON defaulted in making statutory payments on Oil Royalty, Gas Sales Royalty, Gas flare payments and Concession rentals that fell due in excess of $30,151,491.40 and N210,946,398.17 as of December 2021 which remained unpaid.

This, THE WHISTLER findings revealed, is against the provision of the Petroleum Industry Act 2021. The implication of this default is the risk of revocation of the mining lease by the Regulator.

It was also revealed that the Audit exercises carried out by NNPC Ltd Internal and appointed External Auditors indicated the award of contracts to unapproved vendors without recourse to due process, amongst several other compliance-related issues.

EROTON has also been selling gas to a related company without the JV partners’ approval, a valid Gas Sales Agreement and proper revenue remittal and accountability, despite several requests by the JV parties.

This action contravenes the provisions of the JOA. It was revealed that NNPCL has initiated reconciliation exercises with EROTON to recover all outstanding unremitted revenue due to the federation from NNPCL’s 55 per cent equity.

As at the last reconciliation of non-remitted proceeds from gas sales, EROTON had sold 46.19 BSCF of gas and is yet to remit NNPCL’s share of the revenue, amounting to a total of $36.88m.

Further findings revealed that from 2016 to date, OML18’s net crude production has significantly fallen from about 30,000 barrels per day to less than 1,000 barrels per day despite the JV Partner’s consistent cash call payments over the same period.

Asides from the insecurity-related impact on the corridor of OML 18 operation, THE WHISTLER understands that there has been the persistent issue of poor implementation of the JV-approved work programs, including the Alternative Crude Oil Evacuation Project.

EROTON is also said to have been heavily indebted to contractors making it challenging to secure service providers in addition to the financial exposure to the JV.

Other infractions include the non-remittance of domestic gas revenue to joint venture partners, default on tax obligations, and shut-in of production for the last 18 months.