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Oil asset sales to rise amid price slump

By on February 15, 2015

The Nigerian oil and gas industry is expected to see more asset sales by International Oil Companies and smaller firms this year as the steep fall in prices continues to take a toll on revenue.

IOCs including Shell, Chevron and Total have over the past few years divested some of their onshore assets in the country, largely as a result of operational risks.

This trend of asset divestment is expected to be exacerbated by the plunge in oil prices, which has forced companies to cut their capital expenditure budgets, according to industry analysts.

The Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, in an emailed response to questions by our correspondent, said, “While the IOCs could make cuts to their capital expenditure budgets due to the size of funds involved, the smaller independents and indigenous oil companies are likely to consider farm-outs and divestments.”

He noted that South Africa’s SacOil was looking to reduce its Nigeria exposure and could sell its two assets in the country.

“There are other companies that could potentially put up their small stakes in Nigeria for sale as a way to improve their cash flow position.

“The IOC divestment programme, on the other hand, is likely to continue in 2015 after the election. We expect more IOCs to join the sale as they look to position offshore and improve shareholder value. The likes of ExxonMobil, ENI and Total could have more assets to sell as well,” Oni said.

On Thursday, French oil giant Total said it had launched an ambitious mitigation plan in response to the recent fall in the oil price, adding that the plan included significant reductions to organic investments, operating costs and the exploration budget, as well as an acceleration of its asset sale programme.

The oil major said it would sell $5bn worth of assets globally in 2015 as it plans to accelerate its asset sale programme of $10bn from 2015 to 2017.

Last year, Total concluded the sales of some assets, including the divestment of interests in Nigerian fields.

The oil major, in its 2014 results and outlook presentation, said, “Asset sales in the fourth quarter of 2014 were $1.269bn, essentially comprised of the sale of the cardinal midstream assets on the United States, interests in blocks in Norway and Nigeria, and CCP composites business in refining and chemicals.

The Director, Emerald Energy Institute, University of Port Harcourt and Professor at LSU Centre for Energy Studies, USA, Wumi Iledare, said, “I do expect to see more divestment as the industry becomes more matured and the business environment improves. Selling off assets to companies, be it indigenous or not, is a normal business practice in a mature economy. The key is whether the asset can be developed at a lower operating cost by the new company.

“Nigeria should be a prime market for such to occur thereby creating local wealth for local investors. To me this is one reason to encourage the divestment phenomenon and not stiffened it.”

According to Iledare, the key factors to drive this phenomenon include the price dynamics, fiscal systems with emphasis on incentives in the form of tax breaks or holiday, access to finance with lower capital cost, and technology acquisitions and local man power skills.

Asked if the indigenous companies have the capacity to snap up more assets, he said, “I think many indigenous companies are capable of participating with less government interference or preference. We have six or so producers that have proved themselves in this business that need to be encouraged by making more assets available to them.”

Oil companies across the globe have announced billions of dollars of capital spending cuts to strengthen their books while facing lower profits.

Earlier this month, Shell and Chevron, which have significant assets in Nigeria, announced cuts in their capital spending. But they did not state whether their investment in the country would be affected.

Shell said it was deferring spending in many areas, and this should result in reduction of potential capital investment for 2015-17 of over $15bn.

Chevron Corporation also announced a $35bn capital and exploratory investment programme for 2015. The budget is 13 per cent lower than total investments for 2014.

 

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