What ExxonMobil’s proposed asset sale means for Nigeria’s economy

With Brent rallying more than $20 a barrel since the start of the year, the decision of Seplat Energy to splash $1.6bn on Mobil Producing Nigeria’s assets may signal an era where Nigeria’s economy will ride on the gains of the energy sector to develop other industries and grow local capacity.

Analysts say the transaction is a major example of how indigenous oil companies can position themselves for growth, and to play a bigger role in 90 percent of Nigeria’s exports and provide the bulk of foreign exchange for the economy.

“Local companies’ dominance in the market share of Nigeria’s upstream sector boasts of a very long chain of embedded services that umbilically derive economic life from its continued existence,” Ademola Henry, former team leader at the Facility for Oil Sector Transformation (FOSTER) said.

He noted that in this list are 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,” Henry said.

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

Based on 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% 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.

In Nigeria, the oil and gas business is a drug most big banks find difficult to resist, including the most catholic.
Nigerian banks find the oil and gas business attractive because of their huge capital outlays, large intraday cash flows (in case of downstream companies), sizable foreign currency inflows (in case of upstream and midstream companies).

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 offtake 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 disclosed in its 2021 half year Investor Presentation that 29.9percent of its non-performing loans are 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 37percent of its oil and gas loans.

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