As IOCs Divest, Can Indigenous Oil Companies Step In?

Well before energy transition became the new normal, International Oil Companies (IOCs) operating in Nigeria have in one manner or another indicated interest to streamline their operations in the country. Now it is an open secret. Emmanuel Addeh writes that the evolving realignment presents challenges and opportunities for Nigeria’s oil and gas industry
Divestment, whether in the oil and gas industry or any other sector, remains a fact of business life. Companies sell off their subsidiary assets, investments, or divisions, mostly to maximize the value of the parent company or in pursuit of other objecctives.

Most times, companies could divest their subsidiary assets or divisions when they are not performing up to expectations or in some special cases, due to legal or regulatory action, or even to satisfy social and political goals.

Although not particularly new, the term has in recent times almost become a buzzword in the lexicon of the Nigerian oil and gas industry as IOCs continue to indicate their interest to leave the country in their entirety or sell off some of their assets in alignment with their restructuring plans.

Divestment as a phenomenon in the oil and gas industry in Nigeria dates back to 2006 but only became pronounced from around 2010 and is now taking up more space in discussions about the future of the sector in Africa’s biggest oil producing nation.

Generally, the IOCs account for more than half of the nation’s daily crude production and a quick summary of their reasons for trimming or realigning their operations include onshore operational and security risks; re-balancing of their Nigerian portfolios ; global capital re-allocation; insecurity and sabotage to infrastructure and most recently and even prominently the drive towards renewable sources of energy.

It is estimated that as far back as 2013, IOCs in Nigeria had sold onshore and shallow-water producing assets valued at over $10 billion.

Old game

From Shell to Chevron and ExxonMobil, these IOCs which have unarguably dominated the industry in the last five decades or so, have had the plan to sell off some of their assets and move to more lucrative business areas.

So big was their influence that at a point, Shell , ExxonMobil , Chevron , Total and Eni pumped roughly 97 percent of Nigeria’s oil output, although the figure has fallen steadily since then as the oil giants embarked on the sale their assets.

Stakes in the assets have since been taken up by Nigerian companies including Seplat, Aiteo, Oando, Sahara Energy and the rest of them.

In 2013, Chevron offered about 40 per cent of its stake in selected assets in the country to “enhance capital efficiency” and for the prospective buyers an “opportunity to grow their own assets.”

British Gas also sold its Nigerian oil assets while Brazilian oil giant Petrobas notified Nigeria to auction 8 per cent stake of its Agbami block and 20 percent of the offshore Akpo project for N795 billion.
Total, the French giant, sold its 20 percent stake in the Usan field of Niger Delta area of the country. ConocoPhillips also disposed its onshore assets and left the shores of Nigeria after completing the sale of $1.5 billion of Nigerian oil assets to local player Oando.

New gale

Royal Dutch Shell has probably been the most vocal about its plans concerning it’s Nigeria operations. Recently, it said that it was reviewing its activities in Nigeria and moved to divest from its shallow-water and onshore operations.

Since then, the company as well as the Nigerian government have confirmed that talks are ongoing to ensure a smooth transition.

“Discussions with the Nigerian government are ongoing on the next steps for our onshore business in Nigeria. We are in the early stages of reviewing the commercial options,” a Shell official stated.

In May, Shell’s Chief Executive Officer, Ben van Beurden, while speaking at the company’s annual general meeting, said that Shell could no longer afford to be exposed to the risk of theft and sabotage.

But even before now, as part of its plan, the company’s onshore joint venture, Shell Petroleum Development Agency (SPDC) has sold about 50 per cent of its oil assets over the past decade.

On January 15, this year, SPDC completed the sale of its 30 per cent interest in OML 17 in the Eastern Niger Delta, and associated infrastructure, to TNOG Oil and Gas Ltd, a related company of Heirs Holdings Ltd and Transnational Corporation of Nigeria Plc, for a consideration of $533 million.

McKenzie listed the assets up for sale in Shell’s latest move as OML 11, OML 20, OML 21 (Assa North), OML 22 (Enwhe), OML 23 (Soku), OML 25, OML 27, OML 28 (Gbaran-Ubie), OML 31, OML 32, OML 33, OML 35, OML 36, OMLs 43 and 45 (Forcados-Yokri), OML 46, OMLs 74 & 77 and OML 79.

In addition, shell said that it had been under increasing pressure from investors to slash emissions and pivot toward cleaner energy as the CEO told investors that community issues in the Niger Delta was becoming a huge challenge for the company.

“The balance of risks and rewards associated with our onshore portfolio is no longer compatible with our strategic ambitions.

“We cannot solve community problems in the Niger Delta and the company has started discussions with the government on how to move forward,” the company’s chief executive said.

Wood McKenzie, a leading global oil and gas consulting firm, puts the total value of SPDC, the subsidiary it proposes to totally divest from, at about $2.3 billion.

Before Shell’s announcement, ExxonMobil was reported to have held talks on the sale of a suite of oil and gas fields in Nigeria as the company decided to focus on new developments in U.S. shale and Guyana.

At the time, a Reuters report said the potential disposals were expected to include stakes in onshore and offshore fields and could raise up to $3 billion.

The Irving, Texas-based company is one of the largest oil and gas producers in Nigeria, with 106 operated platforms and output exceeding 225,000 barrels per day (bpd).

Not to be left out American Oil giant, Chevron, has also been divesting its last stake in old oil assets located in Nigeria’s shallow waters; especially with the sale of Oil Mining Licenses (OMLs) 86 and 88, to Conoil Producing Limited, with plans to push forward with more divestment in the future.

How ready are local firms?

Unarguably, local Nigerian oil companies have substantially improved their capacities and capability in the last few years since they became active in the sector, scaling up production capacity and flexing their financial muscles when necessary.

Benedict Peter’s Aiteo, without much ado, acquired OML 29 in 2015 for $2.8 billion and has since then increased crude production from an average of 23,000 bpd to over 90,000 bpd, while Seplat, another local oil company has emerged Nigeria’s largest listed oil and gas firm by market value.

Similarly, Wale Tinubu’s Oando Energy Resources (OER) has ramped up production, same with Nestoil, another indigenous oil firm, which has strong capabilities in Engineering, Procurement, Construction& Commissioning (EPCC) services.

First E&P also recently announced the commencement of oil production from the Anyala West field in OML 83 and 85 acquired from Chevron’s 40 per cent stake in the two oil blocks, not forgetting ND Western, which has vowed to take its gas production to above 510 million standard cubic feet per day and grow oil production to above 60,000 barrels per day in the nearest future.

It is not in doubt whether a number of Nigerian firms have developed capacity in the last couple of decades, but what is not clear is whether it has upskilled to the level of taking over the grand scale of divestment currently being planned.

Dollar Scarcity as challenge

But there are fears that the current dollar-crunch challenge in the country may hamper the plans by the companies to sell off their onshore and shallow water assets.

Recent information indicates that Nigeria’s lenders likely don’t have enough dollars to fund clients seeking to acquire the oil assets put on sale by IOCs, according to Nigeria ‘s biggest lender, Guaranty Trust Bank Plc.

The bank said it didn’t see the likelihood of any client, for instance, raising the estimated $2.3 billion needed to purchase the Shell assets.
CEO of the financial group, Segun Agbaje, said that such a deal would require a syndication of up to $1.8 billion, and it “can be very tough to raise this kind of funding locally at the moment.”

“When I look at the books of Nigerian banks today, I don’t see a lot of dollar liquidity,” Agbaje told an investor conference call in Lagos, adding that “It’s becoming a very difficult deal for people to pull off.”

Nigerian banks, which in 2013 syndicated $3.3 billion debt to Dangote Industries for a refinery and petrochemical plant and recently financed Heirs Holding’s $1.1 billion acquisition of OML 17, have seen their capacity to take on such deals wane considerably.

A slump in crude prices and an economic downturn arising from the coronavirus pandemic curbed foreign-currency flows into Africa’s largest crude producer and has continued to pressure its foreign reserves.

Oil firms must fix the environment, says activist

Secretary General of the Niger Delta Ethnic Nationalities, Capt. Bassey Henshaw, told THISDAY that the oil companies must clean up the environment before planning any exit from their onshore and shallow water activities.

Taking on Shell specifically, he claimed that the fir has degraded the environment over the years, urging it to pay compensation before any talk about leaving its operations in the region.

“We do not dispute the fact that they can go green or whatever, but there has to be some closure. You have a business running and there are issues emanating from those businesses. You do not wake up and say you are going green. All the issues have to be fixed and resolved.

“We are totally against it and we will do everything to frustrate them and send a petition to the federal government and the concerned ministry that we vehemently kick against it. We cannot hold then ransom if they want to leave, but they have to have a closure of the previous business they have done, the degradation of the environment, the oil spillages and all,” he said.

According to the Niger Delta youth leader, the clean-up shouldn’t take much time since the company already has a idea of what it will cost to carry out the reversal of the destruction done to the environment.

“You cannot start a new business until that old one is totally settled. If they try that , we will move for the federal government to nationalise them until the issues are resolved. There should be a clean-up of Ogoni and the entire Niger Delta and if they agree, no problem and it should be a full package.

“The closure that I am talking about should include compensation. If they are serious, they have the records already, having consulted with the companies doing the clean-up. Once they pay and bring in the indigenous people to be part of it, then they can exit. They can’t use us this this time, it will backfire,” he noted.

NNPC: We will protect Nigeria’s interest

But the Nigerian National Petroleum Corporation (NNPC), the country’s eye in the oil and gas sector, has assured that it would protect the interest of Nigeria in any transaction involving international oil companies interested in divesting from the country.

Group Managing Director of the corporation, Mr. Mele Kyari, who spoke recently, on the matter, however maintained that the NNPC cannot stop any of the oil concerns from deciding to sell off any of their assets as far as the rules are followed.

The national oil company listed a plethora of outstanding issues that have to be totally resolved before major oil companies can successfully divest their interests overseas.

According to the NNPC, they are: abandonment and relinquishment costs; severance of operator staff; third party contract liabilities; competency of the buyer; post-purchase technical, operational, and financial capabilities, especially in the era of activist investor’s sentiments against funding of fossil fuel projects and alignment with Nigeria national strategic interest.

Kyari noted that having learnt from previous experiences, the corporation was developing requisite divestment policies that will provide clear guidelines and criteria for exiting of partners’ interest in all its Joint Venture (JV) and Production Sharing Contracts (PSC) arrangements.

“On the other side, we are seeing a wave of divestment by oil majors operating Nigeria. NNPC as a national oil company cannot stop partners from divesting their interest, even though it creates challenge for us in ensuring that we get right and competent investors to take position and add value to the assets.

“NNPC will ensure that Nigeria’s national strategic interest is safeguarded, by developing a comprehensive divestment policy that will provide clear guidelines and criteria for divestment of partner’s interest,” he stated.