BusinessDay
Nigeria's leading finance and market intelligence news report.

Local firms eye assets as Shell, others exit onshore operations

… Seplat, Chappal among top contenders

The decision of oil majors led by Shell to divest stakes from troubled Nigerian onshore operations is attracting interest from several indigenous firms led by Seplat Energy and Chappal Petroleum Development Company.

In Africa’s biggest oil-producing country, a wave of divestment by oil majors who account for more than 70 percent of Nigeria’s daily crude oil production is expected to ignite interest from different stakeholders in the Nigerian oil and gas industry.

The development presents a unique opportunity for firms like Seplat Energy plc, Aiteo E&P Limited and at least 50 small- to mid-sized Nigerian producers pumping between 1,000 and 100,000 barrels each day to play a more influential role in Nigeria’s energy sector.

Unlike their international counterparts with huge balance sheets, Nigerian indigenous oil firms will be looking for opportunities in oil fields with lower valuations, flexible payment structures or struggling underutilised fields.

For instance, Shell’s decision to divest stakes from its troubled Nigerian onshore operations attracted highly competitive bids from the likes of Seplat Energy and Austin Avurru’s led Chappal Petroleum Development Company.

However, sources say significant political pressures from the Nigerian government on Shell not to sell all of its assets to a single entity pressured the oil major to backtrack on assessing the offers from Seplat and Chappal.

Assets from Shell Petroleum Development Company (SPDC) alone account for about 40 percent of the West African country’s total crude and condensate output capacity of 2.2 million bpd.

Read also: Oil majors’ divestment: How local operators can finance deals

“Shell’s assets will be sold in different fragment deals but it is unclear if Seplat and Chappal will still be submitting bids due to recent development,” a senior oil executive told BusinessDay.

He said, “Whoever the final winners are will have to demonstrate capacity to deliver gas.”

SPDC is one of Nigeria’s biggest gas explorers boasting over 60 producing gas wells (11 land, 4 west, and 45 central assets) alongside a growing world-class gas transmission and distribution network of over 138km in Nigeria.

Shell also operates several distribution systems including Agbara-Ota in Ogun State, the Aba Cluster in Abia State, and the Port Harcourt Cluster in Rivers State. It recently increased its gas distribution capacity by over 150 percent, ensuring its gas distribution networks are capable of distributing over 150 mmscf/d of dry processed gas to over 300 industrial customers.

Bamidele Odugbesan, media relations manager of Shell Nigeria, confirms to BusinessDay that discussions are still ongoing on the next steps for the oil major onshore business in Nigeria.

“We are in the early stages of reviewing the options,” Odugbesan says.

Shell has already sold a handful of its onshore oil blocs over the past 10 years. These blocs had been snapped up by Nigerian indigenous operators like Seplat, Aiteo E&P, First Hydrocarbons, and Nigerian Petroleum Development Company Limited (NPDC).

Apart from Shell, ExxonMobil is also planning to sell some of its shallow offshore licences in Nigeria four years after exiting its downstream sector.

The Texas-based company, which is also one of the largest oil and gas producers in Nigeria, with 106 operated platforms, has held talks in recent weeks with several indigenous companies to gauge their interest in the fields.

“Exxon is actively divesting in Nigeria,” a source briefed on the divestment plans said. “Trident Energy, Seplat and Chappal are among the top contenders for these assets.”

American oil giant, Chevron, has also divested its last stake in old assets located in Nigeria’s shallow waters; Oil Mining Licenses (OMLs) 86 and 88, selling its 40 percent stake to Conoil Producing Limited.

Sources say Conoil had already paid a deposit of $250 million for the purchase of the assets located in the Niger Delta basin, having been acquired by Chevron following its merger with Texaco 22 years ago.

For Africa’s biggest oil-producing country, oil majors’ divestment would have big implications on the country’s company income tax, and the hunt for fresh foreign direct investment to provide adequate jobs for an economy struggling with rising poverty and increasing unemployment.

Most experts explain that some of the most over-leveraged domestic firms have not recovered from last year’s price collapse due to bad debts, while other conservatively managed oil companies are still negotiating the debt restructuring process with Nigerian banks.

“The financial approach used by indigenous oil companies will determine their chances in taking advantage of the current wave of oil major divestment,” Niyi Awodeyi, CEO at Subterra Energy Resources Limited, says.

Adeoluwa Eweje, an international oil and gas analyst, says local players with good corporate governance and a strong financial network will stand a better chance in doing business deals with Shell Nigeria.

“Indigenous companies with experienced board of directors and foreign financial partners are always irresistible in upstream deals,” Eweje states.

To facilitate the departures of oil majors, Nigerian National Petroleum Corporation (NNPC) has listed various issues that have to be exhaustively addressed by oil majors to avoid fracturing the Nigerian economy.

The national oil company said special attention would be paid to abandonment and relinquishment costs; severance of operator staff; third-party contract liabilities; competency of the buyer; post-purchased technical, operational, and financial capabilities, especially in the era of activist investor’s sentiments against the funding of fossil fuel projects and alignment with Nigeria national strategic interest.

“NNPC would soon unveil a Comprehensive Divestment Policy (CDP) that will guide the entire divestment process,” Mele Kyari, group managing director, NNPC, said in Lagos at the 2021 edition of the Nigeria Annual International Conference and Exhibition (NAICE) organised by the Society of Petroleum Engineers (SPE).

Kyari admitted that the NNPC partners reserve the right to divest their interests; however, the national oil company also had a duty to provide clear-cut guidelines and criteria for such divestment to guarantee a win-win situation for all parties.

“We are seeing a wave of divestment by oil majors operating in Nigeria. The NNPC as a national oil company cannot stop partners from divesting their interest, even though it creates a challenge for us in ensuring that we get right and competent investors to take position and add value to the assets,” Kyari said.

According to Kyari, the NNPC will, in subsequent deals, tweak its rules of engagement by making clear distinctions between divestment of shares and operatorship agreements under various joint operating agreements, while leveraging its rights of pre-emption as well as evaluating the operational competency and track records of new partners.

Recall between 2010 and 2018, a number of indigenous companies including Starcrest Energy, Aiteo, Oando, Seplat, Eroton, First E&P, Neconde, Midwestern, Notore Lekoil, PanOcean, Newcross and Shoreline threw in billions of dollars cheques in their scramble for assets divested by major multinational oil firms that have recorded mixed performance.

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

BusinessDay estimates that banks’ exposure to the oil and gas sector was equivalent to N3.4 trillion, as at the end of 2019.

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