Shell’s recent announcement about divesting its participating interests in several Oil Mining Leases and Joint Venture Assets through its Nigeria subsidiary – Shell Petroleum Development Company (SPDC) – has been met with various mixed feelings and analysis of its impact on the Nigerian Oil and Gas industry and indeed, the Nigerian economy.
It is safe to say there is no looking back on the global giant’s decision, which is a consequence of a combination of circumstances including disputes, harsh operating environment, internal divestment strategies and the global environmental considerations given that the SPDC assets have some of the highest emissions in the Shell portfolio.
While this can be viewed as a loss to the Nigerian Economy, it can also be seen as a huge opportunity for sustainable growth and liberation of Nigeria’s indigenous oil and gas industry.
Subject to several stakeholder considerations including government consents, once the divestment is cleared to proceed, a system of acquisition either via competitive bid or direct sales among others would be initiated, and these assets would change ownership, and in some cases, operatorship would also be reconsidered.
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The bottom-line consideration for the ensuing transaction would largely depend on the valuations ascribed to each of the assets under consideration. In a widely read publication this week, one of the foremost oil and gas research bodies puts the entire SPDC portfolio exclusive of infrastructures like Export Pipelines and Terminals at $2.3Bn.
While the granularity of the basis of the valuation has not been published, it alluded to “the current sub-optimal, business-as-usual investment profile under existing fiscal terms”. Once these assets change hands, the continued operability and business case realisation would be highly dependent on various factors including operating community relations, technical competence of the new owner(s) and appointed operators, the availability of funding to maximise the asset’s potential. Government incentives and policies like the Petroleum Industry Bill among many other factors.
We can conclude that the ascribed valuation of the assets, which would inform the bids and the final selling price, remains the most important point for consideration by the potential bidders, buyers, investors, and financiers alike.
It is no news that similar divestment in recent past was fraught with several indiscretions with economics consideration, such that many of those assets today struggle to break-even or meet their financing obligations to investors and financiers.
The first consideration should be for potential investors not to pay beyond what the assets are truly worth. The value paid for an asset dictates the progression of the asset on a going-forward basis, especially in a period where oil price volatility remains high. While upsides are rightly realisable, potential bidders should avoid being carried away by the promises of jumping on an “ex-shell” asset.
There are several factors to consider including identifying the quick wins, production profiles, joint venture provisions and requirement for further field development to realise the upsides. It is also very important to consider the facility condition by looking at the maintenance history and Asset Integrity records, historical risk management regimes, Well condition and the oil-field chemistry requirements.
A seller would mostly value their asset based on the optimism of the subsurface potentials; it is the buyer’s job to consider surface realities from a knowledge standpoint.
At Cynthian Consulting, we advise our clients to look beyond the sub-surface. We have seen many instances where buyers have paid too much for an asset, and that immediately skews the economic realities of that asset. We have also seen instances where they paid too little for an asset without proper consideration of the facilities and FDP required producing the reserves.
Getting various opinions on valuation factors and paying the right price for the Shell divested assets would be the first step in the right direction of sustaining production efficiency and realising the upside potentials they may present. The life-of-field economics is highly dependent on the ascribed valuation at inception, the FDP and maintenance considerations would determine the level of CAPEX and OPEX required over the life of field, the oil field chemistry, Well conditions among others would input into the production profiles, and regulatory frameworks remain a key driver, especially as we await the signing into law of the PIB. All these factors would impact the Asset’s ability to meet its technical, commercial, and economic obligations.
Adeboye is a director and principal consultant at Cynthian Consulting Limited.
