Shell’s Onshore Divestment: Let the Buyer Beware!

Since last year, Royal Dutch Shell has been in the news with the plan to sell off its onshore oilfields in Nigeria to focus on deep offshore exploration and production, citing several operational risks it claimed had become incompatible with its future plans. However, there are concerns in some quarters that the oil major may be trying to avoid liability as it concerns the environment and the host communities. This may also push the would-be buyers, ignorant of the possible landmines in the deal into avoidable business risks, writes Peter Uzoho

Translated caveat emptor in Latin, the phrase “let the buyer beware”, in the law of commercial transactions, is a principle that the buyer purchases at his own risk in the absence of an express warranty in a contract. Last week, the news of Royal Dutch Shell placing more of its onshore oil assets in Nigeria on sale dominated the headlines, just as it had done in the past.

THISDAY exclusively reported last Friday that at least five Nigerian oil and gas companies were preparing to submit their respective bids for the acquisition of the assets this month. The deal, according to industry and banking sources involved in the transaction process, was estimated to fetch up to $3 billion, being the value of the assets.

Some independent Nigerian oil and gas companies including Seplat Energy Plc, Sahara Group, Famfa Oil, Troilus Investments Limited and Niger Delta Exploration and Production (NDEP) have excitedly indicated interests to purchase the assets.

There are indications that these business concerns could be oblivious of the dangers waiting for them when they purchase the assets without caution and carrying out due diligence. Curiously, no international oil companies are expected to take part in the bidding process at this initial point and bids are due by January 31.

SHELL’s DIVESTMENT MOVES

Shell, last year started discussions with the federal government about selling its stake in the onshore fields, where it had been active since the 1930s, as part of a global drive to reduce its carbon emissions. The Anglo-Dutch company has stakes in 19 Oil Mining Leases (OMLs) in Nigeria’s onshore oil and gas joint venture – Shell Petroleum Development Company (SPDC), which the industry and banking sources, particularly Wood MacKenzie, a leading global oil and gas consulting firm, had said were valued at between $2 billion to $3 billion.

Shell operates SPDC and holds a 30 per cent stake in the venture, Nigerian National Petroleum Company (NNPC) Limited holds 55 per cent, TotalEnergies has 10 per cent and ENI has five per cent.

WoodMac had listed the assets up for sale 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.

Giving a background to the company’s decision to divest from the facilities, MacKenzie had stated that emissions from Shell’s assets in the onshore and shallow water Delta are among the highest in its global portfolio.

The Anglo-Dutch oil major has also struggled for years with spills in the Niger Delta due to pipeline theft and sabotage as well as operational issues, leading to costly repairs and high-profile lawsuits
In May last year, Shell’s Chief Executive Officer, Mr. Ben van Beurden, had declared at the company’s annual general meeting that Shell could no longer afford to be exposed to the risk of theft and sabotage in its Nigerian operations.

NNPC could also choose to exercise its right to pre-empt any sale to a third company, the sources said.

Sources said it was unclear whether potential bidders could raise sufficient funds as many international banks and investors have become wary about oil and gas assets in Nigeria due to concerns about environmental issues and corruption.

Some African and Asian banks, however, were still willing to finance fossil fuel operations in the region, they said.

Furthermore, Troilus has hired Nigeria-focused Africa Bridge Capital Management to raise up to $3 billion for the assets, according to sources and documents.

The sources said any buyer of Shell’s assets would also need to show it can deal with future damage to the oil infrastructure which has ravaged Nigeria’s Delta in recent years.

LANDMINES FOR UNSUSPECTING BUYERS

Over the course of the last 60 years when offshore investments were largely unviable, the activities of oil companies, including Shell, have devastated the ecosystems of the host communities where they operate.

However, the thinking is that they are now rushing to offload toxic assets to unsuspecting local investors who may just be too excited to acquire producing oil blocks without properly carrying out the relevant due diligence required to make such investments viable in the long term.

A case in point is the recent massive oil spill from Aiteo Eastern Exploration and Production Company (AEEPC) Limited’s Nembe facility which they procured in an apparently defective state from Shell not too long ago. In 2014, Aiteo bid for and acquired Shell’s OML 29 and the Nembe Creek Trunk Line for $2.7 billion.

With its acquisition of Royal Dutch Shell Plc’s 30 per cent stake as well as Total SA of France and Eni of Italy’s minority stake in OML 29 and the Nembe Creek Trunk Line, Aiteo holds the controlling 45 per cent stake in both assets, for which it paid $569 million for Total SA’s stake.

OML 29 includes Nembe, Santa Barbara and Okoraba oil fields, with a combined production averaged around 43,000 barrels per day of oil equivalent in 2014.

However, experts believe that Aiteo bought the asset at an exorbitant price and without considering the risks it was going to face on them, hence the oil spill disaster that took it unaware.

According to an oil and gas expert and Managing Director of ARISE NEWS CHANNEL, Ms Ijeoma Nwogwugwu, Nigeria’s weak regulatory environment and inability of the authorities to strengthen environmental and petroleum laws for the deactivation of abandoned wells and aging oil facilities have not helped matters.

She said as a result, oil multinationals that want to avoid spending several millions of dollars on decommissioning, have taken advantage of the loopholes by selling their oil assets, including aging and rusting infrastructure, to local oil firms.”

“Since the late 2000s, Shell, Chevron and ConocoPhillips have sold their stakes in about 20 to 25 oil blocks to local oil operators at ridiculously exorbitant prices.

“All the acquisitions were leveraged buyouts that left several Nigerian banks with massive exposures to the oil and gas sector. Many of the loans are yet to be repaid to date and in several instances contributed to a spike in non-performing loans and impairment charges on the books of the banks,” Nwogwugwu had stated in a recent article.
THE N800BN JUDGEMENT

Added to that, in the light of the N800 billion judgment of the Federal High Court Owerri Division delivered on November 27, 2020 against Shell in favour of the Egbalor Eleme Community of Rivers State, would these assets not become another toxic acquisition?

Will it not just be offloading liabilities on hapless local investors with semi-informed offshore financial partners? Shell is in the process of selling off $3 billion worth of its onshore assets in Nigeria in a strategic push to move further offshore and deep water where they will have little or no interactions with host communities
The N800 billion judgment against SPDC and its offshore parent companies in the Hague and the UK should be a huge eye opener that the Nigerian courts are no longer timid in determining environmental claims.

The time to caution would-be investors about the toxicity of these Shell’s assets is now. And for those investments to be viable, Seplat Energy, Sahara Group, Famfa Oil, NDEP, Troilus Investments Limited and other Nigerian independents that are bidding for these assets must carry out detailed due diligence.

They must insert clauses in the acquisition agreements, which absolves the new investors of liability in the event that claims arise from defective or over-aged pipelines and production assets, otherwise they will be acquiring liabilities rather than assets.