Upstream Assets Divestment In Nigeria: Update, Outlook And Challenges

Oil production platform and supoort ships Alaska

Oil production platform and supoort ships AlaskaThe Minister of Petroleum Resources, Mrs Diezani Alison-Madueke, while delivering a keynote address with the theme “Assets Divestment in the Nigerian Oil and Gas Industry: Opportunities and Challenges” at the recently concluded 2014 Offshore Technology Conference (OTC) in Houston, Texas, USA; highlighted that international oil companies (IOCs) in Nigeria are expected to divest over 20 oil blocks with a monetary value of about $11.5 billion before the end of 2014. This is further to the fact that there has been a total sum of asset divestment transactions worth over $6.7bn already completed between 2010 and 2013. Of these divestments which are currently in the pipeline;some stalled either as a result of the initial lack of minister’s consent or due to ongoing legal disputes. This piece looks at the current state of the ongoing divestments and also at some factors which may play a role in some of these divestments going forward.

BG, Shell, Total, Agip, Chevron, ConocoPhillips and Petrobras have led the pack of divesting majors; with these divestments forming part of their efforts to reduce their commitment to onshore and shallow water oil projects in the Niger Delta region in the face of security concerns, long delays to an uncertain Petroleum Industry Bill (PIB), as well as to transfer their resources to other lucrative regions and increase their offshore investment portfolios.

 

 

CONCLUDED DIVESTMENT TRANSACTIONS

The assets divestment drive began in 2009 when the United Kingdom gas company, BG Group, pulled  back funding for the Olokola LNG project on which it partnered with Chevron, Shell and the Nigerian National Petroleum Corporation (NNPC), and also sold rights in three Oil Prospecting Licenses (OPLs); OPL 332, OPL 286 and OPL 284. Since BG’s exit, there has been a spate of divestments, with Shell leading the way in 2010 with its “portfolio management” drive. The Anglo-Dutch oil company concluded deals with Seplat for Oil Mining Licenses (OMLs) 4, 38 and 41 and also with FHN/Afren for OML 26.

Shell and its partners, Total and Agip Oil then subsequently sold their 45 percent interests in OML 40 to Elcrest Nigeria Limited and in OML 42 to Neconde Energy respectively. Shell also sold its 30 percent interest in OML 30 to Shoreline Natural Resources Limited, while another indigenous firm; ND Western completed the asset sale drive with its acquisition of OML 34 from Shell.  Shell is said to have received cash proceeds of over $2 billion from the sale of these eight OMLs which it previously operated in the Niger Delta.

In 2012, Total of France also sold its 20 percent stake and operating mandate of its Nigerian offshore project in OML 138 to a local unit of China Petrochemical Corporation (Sinopec) for $2.5billion. In early 2013, Brazilian oil major, Petroleo Brasileiro SA (Petrobras) indicated that it would sell its mainly offshore interests in Nigeria for $5billion. It however eventually sold its stakes to Brazilian investment bank, BTG Pactual for around $1.5billion. Petrobras had an 8% stake in the offshore Agbami block in OML 127, operated by Chevron and a 20% equity in the offshore Akpo project in OML130, operated by French oil firm, Total.

 

 

ONGOING DIVESTMENT TRANSACTIONS

Other IOCs have since relinquished their stakes in shallow water oil blocks, however; some transactions are still pending due to various issues, while more have recently been put up for sale.

Oando Energy Resources – ConocoPhillips Assets Sale

In 2012, ConocoPhillips, a US-based oil group agreed to sell its 20% interests in onshore OMLs 60-63 to Oando Energy Resources (OER) for a figure of around $1.7 billion. The deal also included two offshore blocks consisting of a 95% operated interest in OML 131 and a 20% interest in OPL 214 as well as a 20% interest in the Kwale-Okpai independent power plant. The deal also originally included ConocoPhillips 17% interest in the Brass LNG project but OER eventually decided not to go through with the Brass LNG acquisition. OER terminated the Brass LNG purchase agreement and entered into an amendment agreement with ConocoPhillips in relation to the proposed acquisition of its Nigerian oil and gas business.

A core problem which has dogged this transaction however, has been the constant extensions to the outside date for the completion of the proposed ConocoPhillips acquisition which was supposed to have been finalized in mid 2013 but which has been continuously extended, with the latest date being an extension by OER to June 30, 2014. These extensions have meant OER recently had to stump up a pre-agreed $25 million deposit following the inability of the parties to close the deal prior to April 11, 2014. Certain sources highlighted that the initial delay was mainly due to OER’s inability to raise funds for the acquisition of the assets. OER paid an initial deposit of $450 million, it then also received additional funds through debt commitment letters received from financial institutions ($815 million), private placement of shares ($200 million), as well the sale of its EHGC asset to Seven Energy for $250 million.

Another reason for these extensions has been put down to the inability of OER to obtain the consent of the Honourable Minister of Petroleum Resources on time. The Department of Petroleum Resources (DPR) on its own part had some months ago disputed the claims by OER that its efforts to acquire the assets from ConocoPhillips were being threatened by the delay in granting the required consent by the Minister of Petroleum Resources. The Director of DPR, George Osahon insisted that reports alleging that Alison-Madueke had deliberately refused to consent to the deal were untrue, especially in the light of the processes and timeframe involved in the transaction as well as the submission of documents to the DPR. He further stated that government had to follow the process of due diligence before signing-off on the deal and could not just “rubberstamp” the transaction.

Thankfully, this impasse seems to have been overcome as the ConocoPhillips transaction now looks set to be completed. OER stated recently in a press release that it had finally received consent from the Minister of Petroleum Resources for the acquisition of ConocoPhillips’ assets. The company made it known that it is now set to work with ConocoPhillips towards completing the acquisition by the long stop date of June 30 or shortly after.

 

Chevron Assets Sale

In 2013, Chevron put up 40% of its interests in OMLs 52, 53 and 55 up for sale and it received initial bids from almost 20 oil and gas firms from which Chevron then eventually chose its preferred bidders. However, its plan to close the transaction for the three blocks has been hampered by a legal battle, following the allegation that it planned to sideline the highest bidder for the blocks.

Nigerian independent Brittania-U, which is ironically run by former Chevron executive Catherine Uju Ifejika, claimed that it emerged as the highest bidder in the competitive bid for the blocks, with an offer of over $1 billion for OMLs 52, 53 and 55 and had began discussions with Chevron over the sale of the blocks. It was then alleged that Chevron had subsequently decided to sell the largest block OML 53, to Seplat; OML 52 to Amni Petroleum and the smallest, OML 55, to a Delta community run company; Belema Oil after it felt that Brittania-U did not show sufficient evidence that it could muster the amount promptly.

These moves prompted Brittania-U to head to the Federal High Court, which then issued an interim injunction in December stopping Chevron from selling the blocks to Seplat and others. The Federal High Court also recently ruled that it should have jurisdiction over theassets sale dispute, causing Chevron which had hoped to have the case dismissed, to appeal the ruling at the Court of Appeal. As it stands, between $700 million and $900 million is currently locked within this legal dispute; the purported value of the three blocks which are said to have proven reserves of 555 million barrels of oil equivalent, with the biggest block, OML 53 holding 310 million of those reserves according to industry insiders. Given the length of time it takes for legal disputes to be resolved in Nigerian Courts, there is the real danger that these deals may be in serious jeopardy of being scuppered completely.

On a lesser note, Chevron also unveiled plans in 2013 to auction its stake in OMLs 83 and 85 offshore Nigeria. It apparently agreed to sell the two smaller blocks to Nigerian oil independent; First Exploration and Petroleum (First E&P). However, it appears that one of the rival bidders also considered disputing the deal. In particular, Petroleos De Geneve (PDG) apparently went to the Federal Government, alleging manipulation of the transaction over some issues relating to its Letter of Credit and also claimed to have submitted higher bids than First E&P in the OMLs 83 and 85 deals. It is appealing to the government not to give final approval to the deal. An unnamed source at First E&P however noted that the transaction is moving ahead without any issues.

 

Shell “2013”Assets Sale

In 2013, Shell announced its plan to sell at least four more oil blocks in Nigeria’s onshore and shallow water areas. The blocks are OMLs 18, 24, 25 and 29. Shell is divesting its 30% share of the four blocks, while Total and ENI are set to sell 10% and 5% respectively. There were over 20 serious bidders involved in the bidding process mostly in consortiums which had Nigerian operators and overseas operational, financial or operational backing.

Several reports have put forward winners of the bids for the four oil blocks although there is no official confirmation of the winners yet. Shell has also given till end of June for the winners to show their commitment to pay for the assets both in the form of equity and debt. Prior to this deadline, the bidders are reported to have already paid 10% of their bids to Shell and stand to forfeit their deposits if they fail to pay the balance for the assets within the given timeframe.

According to reports, OML 18 is believed to have been won by the Erotron consortium, made up of Suntrust Oil, Mart Resources and Midwestern Oil & Gas. Pan Ocean, operator of the NNPC/Pan Ocean Joint Venture, is said to have captured OML 24 while an indigenous consortium made up of Essar, Lekoil, Crestar, GreenAcres/CCC/Signet Petroleum and NDPR/SAPETRO is understood to have won the bid for OML 25. Finally, the prolific OML 29 and the Nembe Creek Trunkline were won by a consortium consisting of Aiteo and Taleveras in conjunction with four other companies.

Some concerns surrounding the assets sale are grounded in the fact that similarly to previous asset sales, NNPC, which retains ownership of the remaining 55 per cent in each of the four OMLs will insist that the operatorship of the four oil blocks shall not be transferred to the new buyers but rather to the Nigerian Petroleum Development Company (NPDC), a subsidiary of the NNPC in accordance with the governing Joint Operating Agreement (JOA) between it and the international oil companies (IOCs). The bidders, on their own part remain optimistic about structuring a new arrangement that would enable them operate the assets themselves.

Other concerns with regard to quickly wrapping up the sale include obtaining the necessary approvals from government, Minister’s consent and an approaching election year. Shell’s Chief Financial Officer (CFO) Simon Henry recently said; “What is slightly more challenging and difficult to predict is how we can get the overall approvals across the whole of the stakeholder environment including the government, because in previous transactions that has taken … up to a year.” Furthermore, an election planned for 2015 could have an impact on the sale process, he also said, without particularly specifying in what way.

It is also instructive to note that Shell put four more oil blocks on offer in 2013. The blocks are OMLs 13 and 16 onshore Niger Delta, and OML 71 and 72, which are in shallow water. Shell had been discussing renewing these licences with the federal government for years but has yet to reach a deal. As at the time of writing not much is known in open circles with regard to the progress of these asset sales.

 

 

OUTLOOK AND CHALLENGES GOING FORWARD

Increase in Indigenous Participation and Local Production

The Minister of Petroleum Resources recently stated that the divestment of assets has inadvertently become a key success of government’s local content policy in the upstream sector. “Today, local Nigerian companies own majority of the blocks sold by the IOCs with the likelihood of an increase in the next few years, thereby creating new opportunities for local contractors and their respective financiers,” she said. Also, indigenous production which currently accounts for about 10 per cent of total production in Nigeria is further expected to grow as the asset divestment process continues to gather momentum according to an Ecobank Report. Total production by indigenous companies is forecast to rise to 250,000 bpd in 2015, of which marginal field operators are expected to produce about 50,000 b/d, based on current work programmes.

 

Increase In Local Financing

An Ecobank Report on IOCs Divestments in Nigeria states that at least 19 local banks in Nigeria have access to tier 1 capital worth more than US$1bn, and the opportunities presented by the growth of local upstream players and contractors has spurred the development of multiple sources of local funding for oil and gas projects as well innovative financing structures within local banks. It goes further to state that “in the early phases of these divestments, acquisition financing will feature prominently. The funding cycle is likely to mirror global industry practices, with equity financing and multilateral lending featuring prominently for assets at exploration phase, while equity-linked debt financing structure and project financing structures together with partial risk guarantees are likely to be required at the development phase for assets that have yet to produce any hydrocarbons. However, Further down the upstream value chain, once the reserves base of exploration assets have been certified or when these assets commence production, local financing opportunities in project as well as trade finance and other types of structured products which Nigerian banks are increasingly capable of participating in, could emerge”.

 

The Issue of Minister’s Consent

The majority of transfers of ownership of oil and gas licences in Nigeria require government consent. Unfortunately, this is a requirement that has caused unprecedented delays to what should be generally straightforward transactions as is evidenced by the ConocoPhillips-Oando transaction above. Furthermore, the decision in Moni Pulo vs Brass & 7 Ors where it was confirmed that a corporate restructure by an OPL or OML holder will have the effect of a transfer or takeover and will require ministers consent irrespective of the quantum of shares being transferred means that the majority of future divestments will also be unable to bypass this requirement despite some of the challenges it has thrown up in recent transactions.

 

Upcoming Election Year

There is little doubt that an election year slows down a lot of economic activity within Nigeria. This is due to the combination of the Federal Government shifting its focus away from existing and future capital projects to run campaigns so as to secure an additional term as well as foreign investors withholding any future investment till they can ascertain the stability of the political landscape going forward. Either way, 2015 is a crucial year politically for a lot of reasons and a lot of ongoing and future divestment transactions may not be concluded till after the vote next year.

 

Operatorship Issues

The issue of operatorship in recent divestment transactions has generated a lot of controversies and initially stalled the completion of some transactions in the past. For instance, the sale by Shell and its multinational partners of the four onshore oil blocks; OMLs 30, 34, 40 and 42 in 2010 was mired in controversy following the decision of NNPC to assume operatorship of the oil blocks through its subsidiary NPDC. This is however in contrast to the deals struck for OMLs 4, 38 and 41 which Shell sold to Seplat and in which operatorship of the three blocks was transferred to Seplat.

More worryingly for some of the recent winners of bids for blocks to be divested is that the NNPC recently stated that it will revoke the operating licenses of the oil blocks put up for sale by both Chevron and more recently Shell upon their acquisition by new investors. As such, prospective buyers should note that automatic operatorship will probably not come with the acquisition of any of these blocks nor any future blocks which are put up for sale. This is of particular concern as not having operatorship poses significant risks for any would be investors in the blocks going forward. The prospective investors in the ongoing divestments will therefore hope that by aggressively lobbying the federal government, they will be able to set aside the operatorship of transferred oil blocks in the NNPC.

 

Poor Dispute Resolution Mechanisms

Potential bids for blocks need to be done as transparently and to the highest standards as much as possible to avoid issues that could mean the parties would need to go to court for redress. The current spate of court cases plaguing divestment transactions in Nigeria is not favorable to investment in the upstream sector and could act as a red flag to potential buyers. The main reason for this is that court cases can drag on for years in Nigeria and the longer the delay, the less profit oil majors are likely to make from the deals and the greater the chances the sales could fall through altogether.Such litigation also slows down the potential oil and gas production increases that could be felt from new buyers exploiting assets left undeveloped by oil majors.

 

PIB Passage

Not much needs to be said to underscore the importance of one of Nigeria’s most crucial pieces of legislation which has been left in limbo and which will continue to remain there for the foreseeable future if nothing is done by the National Assembly to speed up its passage. The implications of the delay in its passage are huge for the Federal Government and the economy as a whole. The lack of its passage will only serve to continue to stifle investment in the oil sector as the commercial viability of projects under the proposed changes to fiscal terms in the PIB need to be ascertained by the IOCs before they consider any more substantial investments along the oil and gas value chain in Nigeria. Furthermore, its delay could also drive more divestments by the IOCs which ultimately might not be good for the oil sector in the short term as indigenous capacity is not yet ripe enough to fill in the potential void that may occur as a result.

 

*Noma Garrick is a lawyer and consultant with extensive experience in oil and gas and energy related matters. 

 

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