Multinational Petroleum oil and gas giant, Royal Dutch Shell, announced that it would write down its investment in the controversial Malabu OPL 245 offshore field in Nigeria, a decision that comes with huge implication for a field at the heart of protracted litigation in Italy.
According to Reuters, Shell announced the write-down during its second-quarter 2020 earnings call. The company had recorded losses in its upstream division, including a post-tax impairment charge of $4.7 billion related to write-downs of the Malabu oilfield, and assets sales in North America and Brazil.
What does a write-down mean?
A write-down occurs when a business reduces the carrying amount of an asset, other than through normal depreciation and amortization. A write-down is normally done when the market value of an asset declines below its current-carrying amount.
The above explanation means that OPL 245 purchased for $1.3 billion in 2011, which is one of the biggest sources of untapped oil reserves on the African continent with reserves estimated at 9 billion barrels has depreciated in value.
Read also: Malabu Deal: Shell to write down OPL 245 license as production tanked 7%
Higher Value
According to Barnaby Pace of Global Witness, a partner at the oil consultancy group Arthur D Little with over 30 years, Stephen Roger’s economic analysis found that the market value of OPL 245 was $3.511 billion in 2011, with $80 per barrel of oil which was the terms Shell and Eni bought the block.
Eni’s experts had valued the block higher at $4.543 billion. They argued however that despite the valuation, the price paid ($1.3 billion) was reasonable because of various risks.
Rogers in his submission criticised their position, saying Eni’s expert’s method is “double-counting the discounts for risk”.
Rogers also evaluated the values of gas, which Eni’s expert didn’t include, at $167 million.
In the run-up to the deal, Shell and Eni valued the block in 2010 and 2011 respectively at $3.268 billion ($80 per barrel) and $3.540 billion ($70 per barrel).
But using an average of price paid per barrel in other deals done in West Africa, Rogers calculated the value of OPL 245 to a range of $2.623 billion-$3.700 billion but said these are definitely too low as the terms of the 2011 deal are unusually favourable to the companies compared to other deals.
The Backstory
Shell bought the oilfield alongside an Italian company, Eni, in 2011. Together, they paid $1.3 billion. The payment was to a company called Malabu, which was owned by Nigeria’s former Oil Minister Dan Etete. However, Italian prosecutors claim that most of the payments were kickbacks to Nigerian government officials.
Prosecutors have, therefore, called for an 8-year prison sentence for former Eni CEO, Paolo Scaroni. Both companies have been fined $1.04 million and prosecutors seek the confiscation of $1.092 billion from the defendants of the case.
