Foreign and local banks are reducing available financing to indigenous companies seeking to acquire International Oil Company (IOC) divestitures in Nigeria’s onshore Niger-Delta, leaving a majority of bidders stranded in their attempt to acquire such assets.
Banking and oil industry sources tell BusinessDay that a majority of the indigenous companies had bid above the market price for the IOC assets. However, amidst domestic political uncertainty and the unfolding emerging markets (EM) currency crisis, the reality of a pullback in bank credit is slowly sinking in.
Analysts say with this development, it is now obvious that bidders are making “crazy bids” for these assets and that they will have to re-asses their approach to the game, especially by making reasonable bids.
Last week, Shell announced an extension to the bid deadline by a week because buyers for the giant OML 29 and the other bigger blocs could not raise the capital needed to close the deal in time.
“In fact, with a 50/50 debt-to-equity ratio, buyers are struggling to access sufficient international equity, as the local banks are at their lending limits,” one banking source told BusinessDay.
“International banks, on the other hand, have reduced their lending limits significantly for risky onshore Nigerian assets,” the source added.
International oil companies including Shell and Chevron Corp. are shifting production in Nigeria, Africa’s largest producer, from land-based operations to offshore fields, where the risk of kidnapping, sabotage and crude theft is lower.
According to banking sources close to the process, some of the bidders for the smaller OML 25 bloc intended to bid a “high” number but, on closer scrutiny of the bloc’s financials, the lending banks found that such bids could not be financed.
All this has allegedly “sobered up” the bidders as they now recognise that financing is not so readily available and only a “sensible” bid can be financed.
Added to this is the political uncertainty as the 2015 elections fast approach. Sources say that this singular fact has caused great concern amongst international banking syndicates and equity investors.
Many would-be investors also think that Shell has deliberately rushed the sale process through to dispose of its assets ahead of the beginning of the election season.
Sources in the oil industry tell BusinessDay that after the Brittania-U saga with Chevron, even Shell is reluctant to accept just any bid and has structured its sale process in such a way that it can review bid prices before accepting any cash deposits.
“Furthermore, Shell is insisting on a guarantee for 90 percent of the purchase price before they sign with the preferred bidder,” said a second source. “This has taken away the leverage opportunity where a bidder could get ‘preferred bidder status’ and then run around looking for the necessary financing.”
Assets divestment by IOCs (mostly Shell and Chevron) is expected to create between $4 billion and $8 billion in value within the next two years, according to research and investment firm, CBO Capital Partners.
There was one completed deal ($1.5 billion) and one uncompleted deal ($1.79 billion) in 2013, with 13 potential transactions to be completed between 2013 and 2014.
“The bids on Chevron’s share in OML 53 (Ohaji South), 52 (Tunu) and 55 (Robertkiri) are being followed with great interest by the global exploration and production (E&P) community,” CBO Capital said in a report released in November 2013.
“Local firm Brittania-U outbid all other buyers with a factor of two but could not secure initial financing, considering the steep price: $1.6 billion of which $1.2 billion was sought to be financed by debt.”
Deep-water offshore oil fields that first began production about 10 years ago now account for more than half of Nigeria’s production, with the land-based fields accounting for the rest, according to data from the Ministry of Petroleum Resources.
Average exports averaged 1.9 million barrels a day in 2013. Bonny Light crude, the country’s main export grade, priced at $111.6 a barrel as at February 14, according to data from the Central Bank of Nigeria (CBN) website.
PATRICK ATUANYA
