Managing Asset Retirement Obligation of Nigerian Oil Companies: The Elephant in the Room

Abstract

Asset retirement obligation (ARO) will play a vital role in the valuation of Nigerian petroleum assets, and most importantly, in providing analysts and operators with a regulatory mechanism with which to assess the ultimate value of an asset. It can also form the basis for holding the licensees accountable for their contractual obligations on environmental issues and the legislation governing field abandonment and reclamation liabilities at the end of the useful (economic) life of a project. Viewed as the potential elephant in the room, this lifecycle environmental liability can sometimes exceed terminal asset value, unless it is carefully managed by both the company and the regulator. The fact that there is no active regulatory framework currently in existence in Nigeria underscores the urgency for a system to guide oil companies in accrual and compliance obligations. Absence of such system can have significant but latent impact on what the future value can be as well as the exit or terminal liabilities. As crucial as ARO seems to be, experts believe that Nigeria's ARO liability coming from well abandonments, facility decommissioning and site reclamations may exceed $9 Billion, if properly assessed. Establishing the ARO liability of Nigerian oil companies is one tool that the regulator needs to effectively manage accrual, amortization and contributions. It will help to enforce compliance with the laws as well as bind the licensees to their contractual obligation to Nigerian government and various lenders. To determine ARO, certain legislative, financial, technical, economic, environmental and commercial criteria must be considered in the estimation and assignment of liability. The paper aims to review existing regulatory regimes and leverage that to proffer new ways by which the government and its stakeholders can harness the best technical, financial and operational practices to improve the situation and reposition the industry going forward into the future. This paper therefore addresses the key issues starting from ARO estimation, when does it accrue and who should implement it. It deals with fiscal or financial reliefs based on global best practices and proposes win-win schemes for Nigeria's government and operators. Implementing ARO will safeguard Nigeria's long-term economic and environmental interests, and consequently, become the cornerstone upon which an abandonment blueprint can be proactive and retroactive implemented.