• Friday, June 21, 2024
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Seplat’s bid for ExxonMobil assets meets NNPC brick wall

Seplat-ExxonMobil $1.2bn deal delayed on politics

While Seplat Energy Plc, a major energy company in Nigeria, has agreed to buy the shallow-water assets of ExxonMobil in the country, the crucial green light from the Nigerian National Petroleum Company Limited (NNPC) could come at a heavy cost.

Mele Kyari, the group managing director of NNPC, has said International Oil Companies (IOCs) divesting from Nigeria’s upstream sector must address issues of abandonment and decommissioning of oil assets.

Decommissioning, which is the general term for returning an oil production site to its pre-lease condition at the end of the useful life of the oil asset, can be a costly exercise for the companies involved. Many fields abandoned in Nigeria are not decommissioned largely because the local companies who acquire them don’t have the required funds to do so.

“We will not end the 2012 situation in Nigeria; it will be done in a manner that brings value to Nigeria,” said Kyari at a panel session during the Nigerian International Energy Summit in Abuja on Tuesday.

He had said on Monday that to sustain a prosperous business environment for Nigeria, the national oil company would pay particular attention to abandonment and relinquishment costs, severance of operator staff, third-party contract liabilities, and competency of the buyer of any divested asset.

The completion of the Seplat/ExxonMobil deal is subject to ministerial consent and other required regulatory approvals. It is usually at this stage that such deals emerge whole or come out bleeding in every opening.

While the NNPC has not hidden its intention to snap up the assets, it has struggled to raise financing. Only last month, the NNPC and the African Export-Import Bank agreed to raise $5 billion as corporate finance to fund major investments in Nigeria’s upstream sector.

It is not clear if the NNPC has obtained this financing but there are fears its cooperation would be harder to secure.

Some analysts say that for the deal to get to this stage, NNPC may have already provided some support or laid conditions that must be met.

Ayodele Oni, energy lawyer and partner at Bloomfield Law Practice, said there are pre-emption rights for NNPC’s joint operating agreements.

These pre-emption rights usually give the NNPC the right to match the best (financial) terms for any such acquisition and acquire the said asset, according to him.

“Usually, one condition to closing such deals is a document evincing the waiver of pre-emption rights by the NNPC and other joint venture partners, if any. Thus, generally speaking, and depending on the stage they are at and whether a waiver has even been obtained from NNPC, it may be able to scuttle same,” Oni said.

According to the terms of the Joint Venture (JV) contract, the NNPC, which holds a 60 percent share in the Mobil Producing Nigeria Unlimited (MPNU) JV, has the right of first refusal in any asset sale agreement.

Some analysts have said that NNPC could throw a monkey wrench into the deal because its views would be taken seriously before the deal secures ministerial blessing.

Read also: Seplat Energy grows full-year pre-tax profit by 321.1% to N71bn

A source close to the government said it might be hard to get this blessing on account of “the issues NNPC is throwing up.”

The costs involved in decommissioning assets and volatile oil prices are major concerns. Oil prices have risen to over $100, and there is no telling if it would sell for half this price when the assets are due for decommissioning.

“This is further complicated by the reality that the full extent of the decommissioning work to be done may not have been fully known at the time of the asset transfer, and the accurate decommissioning costs may not have been factored into the negotiations,” Adebowale Adeniyi, a senior manager at Andersen Tax LP, said in a note.

The Nigerian tax laws do not allow the tax deductibility of any provision/estimate for decommissioning or cost of abandonment, except when incurred or when such an expense is set aside in a funded sinking fund.

According to Adeniyi, given the capital-intensive nature of oil and gas operations and the consequent requirement of funds to finance other investments, it becomes a business challenge for an oil company to leave idle its cash in a sinking fund, to support a decommissioning exercise that may be years away.

Onshore and shallow waters assets in the country are bedevilled with challenges such as agitations from host communities and sabotage, forcing the IOCs to move offshore.

The Petroleum Industry Act provides attractive options to develop deepwater assets, removing the 85 percent tax but now requiring that companies only pay their company income taxes and royalty.

According to the transaction document seen by BusinessDay, Seplat Energy has agreed to buy the entire shallow-water business of ExxonMobil in Nigeria for $1.2 billion.

The company said it had entered into an agreement to acquire the entire share capital of MPNU from ExxonMobil Corporation.

The transaction agreement also includes potential additional contingent consideration of up to $300 million in total, payable over the period 1 January 2022 to 31 December 2026, and contingent upon average Brent crude oil prices exceeding $70 per barrel and subject to MPNU’s average working interest production exceeding 60,000 barrels per day (boepd) (joint venture -150,000 boepd) in such calendar year.

Roger Brown, CEO of Seplat Energy, said, “This transaction underpins Seplat Energy’s drive to be a leader in the growth of the indigenous independent energy sector in Nigeria.

“The acquisition is a perfect fit with our strategy to build a sustainable business and deliver energy transition in Nigeria. Our financial strength has enabled us to attract high quality local and international capital providers to fund this transaction without diluting our existing shareholders and reflects our deliberate approach to capital allocation.”

The transaction will create one of the largest independent energy companies on both the Nigerian and London Stock Exchanges, and bolster Seplat Energy’s ability to drive increased growth, profitability, and overall stakeholder prosperity

Based on 2020 working interest volumes for Seplat Energy and MPNU, the transaction delivers 186 percent increase in production from 51,000boepd to 146,000boepd, 170 percent increase in 2P liquids reserves, from 241 MMbbl to 650 MMbbl, 14 percent increase in 2P gas reserves from 1,501 Bscf to 1,712 Bscf, including the significant undeveloped gas potential of 2,910 Bscf (JV: 7,275 Bscf).

It will also add an 89 percent increase in total 2P reserves from 499 MMboe to 945 MMboe1 and Includes offshore fields with dedicated, MPNU-operated export routes offering enhanced security and reliability.

The MPNU asset portfolio in Nigeria primarily consists of 40 percent operating ownership of four Oil Mining Leases (OMLs) 67, 68, 70 and 104 as well as the associated infrastructure (NNPC is the 60 percent partner); the Qua Iboe Terminal, one of Nigeria’s largest export facilities; 51 percent interest in Bonny River Terminal and Natural Gas Liquids Recovery Plants at EAP and Oso.

It does not include ExxonMobil’s deepwater assets in Nigeria.

MPNU will operate as a standalone subsidiary of Seplat Energy and upon closing and following receipt of requisite regulatory approvals, Seplat Energy will align MPNU with its overall strategic goals and ESG objectives, the company said.