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Nigeria loses N159trn as IOCs divest

By on July 2, 2013

Is the spate of divestments in the oil and gas industry a healthy development for Nigerian economy? This has been the question on the lips of many Nigerians, as the country has suffered capital flight in excess of $10 billion or N159 trillion in the last four years as a result of divestments from the oil and gas industry by some international oil companies, IOCs.

While some argued that such divestments portend a bad omen for an industry undergoing reforms and in search of new investments, others maintained that it is in fact healthy for the economy as it would bring in new players and even more foreign investments.

Divestment is a normal business decision taken by companies to reduce some kind of assets for financial, ethical, or political objectives or sale of an existing business.

However, in the last few years, it has become a regular occurrence in Nigerian due to what stakeholders described as unfavourable operating environment.

It is believed that the divestments by some of the IOCs were linked to the uncertainties surrounding the Petroleum Industry Bill (PIB), which has also made oil majors hold back on future investments.

For example, Shell, the leading oil producer in Nigeria last year said that it was holding back a planned investment of about $30 billion in two offshore deepwater projects.

Factors fuelling divestment
Analysts argued that the recent divestments could be linked with the fact that the IOCs considered some of the onshore assets as not commercially profitable, as some of the oil fields are gradually drying up.

In addition, they noted that incessant crises between host communities and oil firms could have prompted the divestments and the shift in focus to deepwater prospects where there are fewer crises and less financial outlay on conflict resolution.

According to them, divestment allows companies to prioritize the most attractive opportunities, and reconfigure or exit from less attractive ones.

Chairman, Society of Petroleum Engineers, SPE, Mr. Osayande Igiehon, said divestment and acquisition are normal business occurrences.

“What we are seeing is a normal course of business. It is just that we have not been seeing it in this part of the world. Acquisitions and divestments are normal in business. Companies acquire and divest.

“It just happens that in Nigeria, we were not seeing much of that in the past, but we are beginning to see that now. I really don’t think it is a big cause for concern in my personal view because if somebody divests, another person acquires, he said.

Heralding new playersIgiehon however argued that the divestments have paved the way for other players to also come into the industry, particularly indigenous companies.

“What has been divested and what has been acquired remains in this country. It is just an opportunity for growth. That is the way I see it and there shouldn’tbe any cause for concern,” he said.

Similarly, Managing Director of Emval Group, Mr. Valentine Obidi, who is also Publicity Secretary, Petroleum Technology Association of Nigeria (PETAN), argued that divestments should be encouraged to boost local content development.

He said: “If past performance is to be used to determine future results, I would say that the nation’s production would certainly increase. For instance, in the case of OMLs 4, 38 and 41, production was below 10,000 barrels per day prior to the divestment, but currently, production has increased to well over 50,000bpd. I believe that in the long run this trend will be replicated in all divested assets.”

Obidi also explained that contrary to expectations, divestment would have positive impact on foreign investments. “It is almost certain that all the divested assets would require some form of foreign investments in order to purchase and develop these assets.

“Again, if we are to follow the trend, I expect an increase in development activities in these divested assets as the acquiring companies seek to re-enter and increase production. This will lead to a corresponding increase in investment required to carry out these activities,” he said.

Running from responsibilities
Coordinator of Oil Watch, Mr. Nnimmo Bassey, said the ongoing divestment of assets by the IOCs is a smokescreen. According to him, the foreign oil companies designed such divestments as a strategy to escape from taking responsibility for the rot they caused in host communities.

“There is generally a deep displeasure by the communities whose environment they have damaged without redress. This dislike or disdain portends a peculiar risk to companies that had entered those communities on the crest of expectations and promises,” he said.

Bassey also said the companies were eager to shake off accountability for the damage they have done and their unwillingness to clean up their mess. For instance, he noted that rather than stop gas flaring, they prefer to move offshore or elsewhere.

He further argued that the IOCs may not be ready to adjust to a regime that requires that they publish what they pump.

He argued that, “A situation where oil theft and frequent leakages do no result in reduction in official oil production level clearly shows that far more than officially acknowledged volumes of crude oil are being extracted from these fields. So, these companies are trying to avoid responsibility.”

He insisted that the oil companies are playing games with a government that relies heavily on oil rent. “Threats of divestment can affect the passing of the Petroleum Industry Bill (PIB), and if passed, its implementation. These fellows are playing games. They cannot run away from the incredible gains they make here,” he expressed.

Concern for workers
For the oil workers, concern for members’ welfare should be paramount in taking decisions on divestment. The Petroleum and Natural Gas Senior Staff Association of Nigeria, PENGASSAN said all stakeholders must be carried along before the IOCs pull out.

PENGASSAN President, Mr. Babatunde Ogun, said: “We are not saying that multinationals should not divest, but the Federal Government should screen the processes to protect workers in the oil industry and by extension Nigerians. If they are to divest, due process must be followed.”

Spate of divestments
It is estimated that IOCs operating in Nigeria may have sold close to 50 per cent stakes in about seven concessions with huge financial returns.

Under the Yar’Adua/Jonathan administration, the BG Group, the United Kingdom’s third-largest natural gas producer, started the divestment move, when in August 2009 the company said it was reducing funding for the Olokola liquefied natural gas, OK LNG export project. BG, Chevron, Shell and the NNPC were in partnership on the gas project located in Olokola, Ogun State.

While that had been delayed amid surging costs and government’s plans to divert gas to the domestic market, BG shifted focus. Consequently, the company switched investment to develop newly acquired assets in Australia.

BG, which invested over $500 million in its exploration activities on the offshore blocks Oil Prospecting Licences (OPLs) 332, 286, 284 and Olokola Liquefied Natural Gas (OK LNG), pulled out of Nigeria in May 2010. Since BG’s exit, it has been a divestment galore, as Chevron Corporation, recently announced plans to divest its 40 percent interests in five Nigerian oil blocks.

The affected acreages include OMLs 52, 53, 55, 83 and 85. The oil blocks to be disposed are known to hold oil reserves in excess of 250 million barrels of oil and over 3.5billion cubic feet of gas.

Also, the prospective buyers and the amount to be realised from the sales could not be ascertained.In March, Brazilian oil major, Petroleo Brasileiro SA, Petrobras, started selling off its stake in some Nigerian oil blocks valued at $5 billion or N795 billion.

The sale of the oil blocks is expected to bring about an increase in the presence of Asian oil majors in Nigeria, following interest in increasing their portfolios through acquisition of additional production assets.

The divestment is about 16 per cent of Nigeria’s 2013 budget, which is N4.98 trillion. The amount is more than the sum allocated to power, works, health and agricultural and rural development.Petrobras had eight per cent stake in the offshore Agbami block in OML 127, operated by Chevron and a 20 per cent equity in the offshore Akpo project in OML130, operated by French oil firm, Total.

Petrobras explained that divesting from the oil blocks would help the company concentrate more on exploration activities in a vast deep sea region off the coast of Brazil known as the sub-salt, believed to contain dozens of billions of barrels of high quality oil.

Before the Brazilian company sold out, Houston, United States-based ConocoPhillips, had earlier sold its Nigerian business unit for $1.79 billion to Nigeria’s Oando Plc.

ConocoPhillips’ 2012 net production in Nigeria averaged 43,000 barrels of oil equivalent per day, made up of about 60 percent natural gas and 40 percent liquids.

This includes two offshore properties consisting of a 95 percent operated interest in OML 131 and 20 percent interest in OPL 214, as well as a 20 percent interest in onshore OMLs 60-63, a 20 percent interest in the Kwale-Okpai Independent Power Plant, and a 17 percent interest in the Brass LNG project.

The sale of its Nigerian business unit was said to be part of ConocoPhillips’ plan to increase value for shareholders through portfolio optimisation. It was also meant to focus on capital investments that deliver growth in production and cash margins, improved returns on capital, and sector-leading shareholder distributions.

Total of France sold its 20 percent stakes and operating mandate of its Nigerian offshore project in OML 138 to a local unit of China Petrochemical Corporation for $2.5billion.

In 2010, Shell began its “portfolio management” campaign with the Seplat and FHN/Afren deals. Later, the Anglo-Dutch oil company and partners, Total and Agip Oil sold 45 percent interest in the onshore Oil Mining Lease (OML) 40 to Elcrest Nigeria Limited.

Shell also sold its 30 percent interest in OML 30 with oil production of 11,000 barrels per day in the Niger Delta to Shoreline Natural Resources Limited for total cash proceeds of $567 million.

So far, Shell is said to have received cash proceeds of over $2 billion from the sale of eight OMLs, which it operated in the Niger Delta.

These include OMLs 30, 34, 40, 26, 42, 4, 38 and 41. The assets include most of the Trans Forcados major crude oil pipeline from OML 30 to the Forcados River manifold.

 

 

 

 

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