Shell’s onshore oil divestment will test local operators’ capacity

Oil major Shell is divesting stakes from its troubled Nigerian onshore operation as part of efforts to douse shareholders’ angst over its inability to set binding carbon emissions reduction targets a development that will task the capacity of local oil sector operators.

Shell Petroleum Development Company (SPDC), the operator of Nigeria’s onshore oil and gas joint venture has struggled for years to contain spills in the Niger Delta caused by pipeline theft, sabotage, and its own operational mishaps. These spills have led to costly repairs, invited lawsuits, and questioned the company’s commitment to sustainability.

It is now fed up.

“We cannot solve community problems in the Niger Delta, that’s for the Nigerian government to solve. We can do our best, but at some point in time, we also have to conclude that this is an exposure that doesn’t fit with our risk appetite anymore,” said Ben van Beurden, CEO of Shell at the company’s annual general meeting on Tuesday.

At stake is the company’s onshore assets in the SPDC joint venture where it is an operator and has 30 percent participant interest in about 360 producing oil wells, 60 producing gas wells, and a network of 4,000 kilometres of oil and gas pipelines and flowlines.

The current share of Shell Nigerian subsidiary production volumes is put at 156,000 barrels per day of oil equivalent in 2020 which translates to over 10 percent of current national crude oil production.

Some of the options include a potential divestment to the Nigerian Petroleum Development Company Ltd (NPDC), a unit of the state oil company, or other local and foreign independent operations in the process according to Timipre Sylva, minister of state for petroleum.

But the NPDC is not a prolific producer. In 2016, it made headlines when it announced a target to grow equity production by 500,000 barrels per day (bpd). Citing insurgency, it trimmed the target to 250,000 bpd in 2018. It has not met that target in 2021.

The NNPC’s monthly operations and production report for January states that the NPDC wholly operated assets amounted to 37.73 percent of the total NPDC production. The rest comes from joint venture arrangements with companies like Shell where it owns 55 percent controlling interest.

This controlling interest plus the efficiency of its international oil partners account for NPDC’s relatively strong performance in the NNPC 2019 financial results.

NNPC’s financial statement shows that the corporation lost by 99.7 percent – from N803 billion in 2018 to N1.7 billion in 2019 – thanks to a significant increase in profits from its subsidiaries especially NPDC which returned a 167 percent increase N478billion profit in 2019.

Some analysts believe that local operators for whom the Federal Government designed a local content policy have an opportunity to prove their mettle.

“For me, I believe that the local content policy in the Nigeria Oil and Gas industry was designed to prepare Nigerians to play a major role in the industry,” said Chuks Nwani, an energy lawyer based in Lagos.

Nigeria’s oil and gas industry content development act was created in 2010 to promote indigenous participation in the sector.

The law has made it mandatory for any foreign-owned company seeking to carry out operations in the upstream sector of the economy to do so by involving Nigerians in the composition of the company, project execution, and procurement of equipment.

Ayodele Oni, another energy lawyer, and partner at Bloomfield law firm said the net effect of Shell’s divestment when it materialises is that more indigenous companies may be able to participate in the sector.

“Although, Shell’s departure will also lead to the lose of jobs and I’m not sure that whoever takes over will then be able to keep the number of people in those operations,” Oni said.

However, the Nigerian government doesn’t seem to share this optimism. The local content requirement does not guarantee access to capital, technical expertise nor can it placate a hostile host community.

Timipre Sylva, minister of state for petroleum resources, told reporters in Abuja that the government feels that Shell should not hurriedly divest and to at least stay” onshore, To have a situation “where Shell has completely divested from a sector is not good for us,” the minister said.

Shell companies in Nigeria directly employ around 2,700 people and more than 9,000 contractors in Nigeria, 97 percent of which are local Nigerians.

In 2020, 100 percent of Shell companies in Nigeria contracts, worth $800 million were awarded to Nigerian companies.

“Shell companies in Nigeria have also provided access to nearly $1.5 billion in loans to 764 Nigerian vendors under the Shell Contractor Support Fund since 2012. These loans help improve tendering opportunities,” the company said in its briefing notes for 2020.

Local oil companies lack this kind of capacity. Some still owe banks for loans to acquire their assets and a forced merger was the only way to get the current marginal oil field bids off the ground.

Seplat Production Development Company and a few other local companies have been successful in managing divested oil assets but many have failed. This is why the government is uneasy.

Shell has suffered humiliating losses at local and international courts compelling it to pay millions of dollars in fines for its onshore assets. While its actions were reprehensible in some, in many others, the host communities have victimised the company.

In 2020, more than 90 percent of oil spills amounting to more than 100 kilograms from the SPDC JVs’ facilities were due to third-party interference and other illegal activities, the company said.