What proposed sale of ExxonMobil assets means for Nigeria’s economy

Seplat Energy Plc’s bid to buy up ExxonMobil’s onshore and shallow water assets signals an era of improved local participation in oil production, even as more oil majors are angling to shed their onshore assets at a time oil prices are surging.

Sources with the knowledge of the deal told BusinessDay that the transaction of $1.2 billion fell way below the initial asking price of over $2.5 billion, underscoring ExxonMobil’s desperation to shed the assets.

But it isn’t just ExxonMobil that is fleeing Nigeria’s onshore fields. Shell, Chevron and others are in talks with local operators to divest their assets.

This is why Ibe Kachikwu, a former minister of state for petroleum resources, said the asset sales happening at the same time does not bode well for Nigeria.

“We need to have a relationship discussion with the IOCs, if they are not doing crude, they can do gas,” he said, in remarks at the 5th Nigerian International Energy Summit held in Abuja on Tuesday.

Oil majors have capacity unavailable to local producers to finance big-ticket projects. These assets contribute to Nigeria’s production, tax revenue, and oil sales. They also have better terms than deepwater oil fields where oil majors have shown preference.

If local operators like Seplat buying up these assets are unable to turn a profit from operating them, the government’s earnings will shrink as petrodollars constitute half of revenues.

The wholesale departure from onshore fields portrayed to shareholders, including the Nigerian government as “portfolio shift”, by oil majors is in response to the difficult operating environment in Nigeria marked by sabotage, communal agitations, and environmental degradation.

As the NNPC had indicated, unless some of the issues involving abandonment and relinquishment costs, severance of operator staff, third party contract liabilities, and competency of the buyer of any divested asset are addressed, the deal may not close.

However, some analysts say divestments, including ExxonMobil’s, could give the economy a boost if successful.

Ademola Adigun, a former team leader at the Facility for Oil Sector Transformation (FOSTER), said more participation of local players in upstream exploration would produce economic benefits from ancillary services set up to serve their needs.

These services are offered by construction engineers, health and safety organisations, training and consulting firms, lawyers, and a host of other dependent industries.

“The local content policy amplified this dependency and created far-reaching skill development as well as job opportunities for the Nigerian people,” he said.

Based on the 2020 data, the deal will boost Seplat’s production to 146,000 barrels of oil equivalent per day (boepd), and see its proven and probable liquids reserves jump from 241 million barrels to 650 million barrels.

Its proven and probable gas reserves will increase 14 percent from 1.5 trillion to 1.7 trillion cubic feet, with a further 2.9 Tcf to be tapped.

Once this transaction is wrapped up, Seplat will become the second-largest E&P independent on the London Stock Exchange after Harbour Energy. Its shares also trade on the Nigerian exchange.

Other experts say that Seplat Energy’s latest move will thrust local Nigerian oil companies to substantially improve indigenous companies’ capacities and capability to become more active in the sector, by scaling up production capacity and flexing their financial muscles when necessary.

“Dollar revenues earned by indigenous producers feed into the local banking system through savings and loan repayments,” Luqman Agboola, head of energy and infrastructure at Sofidam Capital.

Nigerian banks find the oil and gas business attractive because of their huge capital outlays, large intraday cash flows (in the case of downstream companies), sizable foreign currency inflows (in the case of upstream and midstream companies).

Read also: Service-Sector led structural change and the Nigerian economy

According to Seplat, the cash consideration payable under the transaction will be funded through a combination of existing cash resources and credit facilities of the company along with a new $550 million senior term loan facility and $275 million junior off-take facility.

Global financing syndicate comprising Nigerian and international banks, as well as commodity trading companies will also play a role in the funding of this transaction, while contingent payments, details of the transaction seen by BusinessDay showed.

In Africa’s biggest oil-producing country, indigenous energy companies’ ability to service debts is extremely vital to Nigeria’s banking industry.

Nigeria’s largest bank by net assets, Zenith Bank Plc, disclosed in its 2021 half year investor presentation that 29.9 percent of its non-performing loans were oil and gas-related loans.

The bank also reported that foreign currency loans as of June 2021 were $2.8 billion, a drop from $3.1 billion reported in the same period in 2020. Again, oil and gas-related loans make up its largest chunk with about $1.4 billion, though down from $1.6 billion a year earlier. Zenith Bank has also restructured about 37 percent of its oil and gas loans.