A Review of Asset Retirement Obligations of Nigerian Oil Companies

Abstract

Asset Retirement Obligation (ARO) is becoming the focus of many oil and gas companies around the world. It is a critical aspect of the Exploration and Production business which has suffered professional neglect for too long. As a subject matter, the principles of ARO owe credence to both national and international legislative perspectives. Its future impact equally draws from visible and disruptive environmental dimension. It is one link that connects the obligation of oil companies to their host governments and surviving communities. ARO will play a major role in valuation of Nigerian petroleum assets. It can also provide a regulatory mechanism to hold a licensee accountable to Nigerian legislation governing environmental liability for field reclamation and retirement of oil & gas installations by end of 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. Experts believe that Nigeria’s ARO liability may exceed $9 Billion USD if properly assessed. More so, establishing ARO will help the regulator manage and enforce the law as well as bind the licensees to their contractual obligation to Department of Petroleum Resources (DPR) and various lenders. To define ARO, certain legislative, financial, technical, environmental and commercial criteria must be considered when estimating and assigning liability. The objective is to identify existing gaps in the Nigerian fiscal, legislative and regulatory practices and proffer ways to improve the situation going forward. This paper therefore reviews the key issues relating to Nigeria’s ARO, ranging from international to domestic legislative provisions, which include, but not limited to laws, regulations and guidelines. On one hand, it highlights relevant global best practices on the subject and makes policy recommendations as suggestions of what can be done to close existing compliance gaps. On another hand, it also outlines various schemes that Nigeria and its operators can adopt to safeguard their long-term economic and environmental interests. Consequently, the proposal could form one of the cornerstones upon which a future abandonment blueprint can be developed for Nigeria starting from proactive and retroactive implementation of the proposed framework.