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Hasty international divestments confirmed oil sector lost its allure

By on May 28, 2015

Diezani Alison-Madueke, the outgoing oil minister, loves to put a brave face on the unprecedented divestments from Nigerian assets by international oil majors, often characterising them as a chance for indigenous firms to grow, and a triumph of the 2010 local content act.

The truth, however, is that such exits in droves by international oil companies (IOCs) rarely occur in countries whose oil sectors are experiencing rapid growth, and they are mostly symptoms of the deep malaise in which Nigeria’s oil and gas industry has found itself under her watch.

Oil majors, including Shell and Chevron Corp., are selling fields as they scale back Nigerian operations following unrest, violence and crude theft in the Niger delta.

Other IOCs such as Total, ConocoPhillips and Petrobras, have also divested assets recently.

With more divestments in the pipeline, Allison-Madueke, the outgoing Minister of Petroleum Resources has said that the value of divested assets by the IOCs from onshore, shallow water and offshore terrains, would reach about $11.5bn by the end of 2014.

IOCs are leaving Nigeria with their technology, knowhow and capital, to other locations with friendlier operating environments (like North America), which the current oil minister was unable to provide during her five year stint in the position.

“Private capital, which is increasingly flowing into unconventional North American plays, seems to be willing to chase the lower financial returns available there, since they come with almost no political risk,” said Ildar Davletshin and Temiade Esho, Renaissance Capital energy analysts, in an October 2014 research report on Africa’s oil and gas sector.

“Nigeria…can nevertheless change conditions in its oil sector, to gain an edge in the competition with tight oil projects.”

Nigeria’s oil output has stagnated as IOCs retrench.

The country’s oil production has been stuck at the 2.0 million barrels per day (bp/d) mark since the 2008 oil price peak, as (a) failure of leadership needed to undertake critical reforms meant about $350 billion of proposed investments into the sector were deferred or cancelled.

Estimates of losses to the country include reserves decline, annual JV cash call gaps, capital expenditure proposal versus actual tax revenue loss due to low activity, planned but undone final investment decisions (FIDs), and cost of capital on project delays.

Nigeria’s reserves replacement ratio is currently at 70 percent, due to lack of investment in exploration by oil majors, data from the Department of Petroleum Resources (DPR) show.

Analysts say no companies outside the U.S. and Europe have the specialised techniques for extracting crude from deep-sea fields, which has meant Nigeria’s considerable potential reserves in its offshore basins that mirror huge presalt finds in offshore Brazil have been left mostly undiscovered.

Countries with a focused and investment friendly oil sector often tend to boost output, while dysfunctional ones with difficult operating environments often manage to achieve the opposite.

Venezuela’s production has plummeted as companies like Exxon Mobil Corp. and ConocoPhillips “pulled out, while Iraq, OPEC’s biggest producer after Saudi Arabia, plans to boost crude exports by 26 percent to a record 3.75 million barrels a day in June, as oil majors boost output.

Nigeria’s oil minister, Diezani Alison Madueke failed to pass the Petroleum Industry Bill (PIB), and move ahead with reforms of the oil and gas sector, despite repeated assurances.

Since Nigeria failed to incentivise oil majors to invest in exploration of assets when oil prices averaged $100 per barrel, it may find it hard to attract investments now, even if progress is made on reforms, as the recent fall in oil prices to $60 and global supply glut pressure oil companies to curtail investment to protect profits.

The problem of oil theft which various experts estimate to be in the range of 100-200kbp/d is also a major reason for the divestments by IOCs.

“We have seen a marked escalation in security problems and theft in Nigeria, which could lead to a loss of “$12 billion for the Nigerian government on an annualised basis,” Peter Voser, Shell’s former CEO said.

 

 

[Business Day]