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Some International Oil Companies (IOCs) operating in the country recently revealed their decision to sell off some of their assets in the upstream sector. Consequently, the Federal Government has listed conditions they must meet before such divestments will take place. Specifically, two oil giants – Shell and ExxonMobil – have reportedly launched divestments of some of their stakes in the country on account of operational cost challenges arising from insecurity, constant agitation from host communities as well as destruction of oil pipelines and the huge costs involved in replacing them.
However, the GMD of Nigerian National Petroleum Company Limited (NNPC), Mele Kyari, has explained that while the government understands the right of the oil companies to freely divest their assets, it will ensure that the right thing is done to avoid possible disruption in the upstream sector. Some of the conditions to be fulfilled by the affected companies include issues of obligations related to abandonment and decommissioning. These issues, he says, must be fully addressed in line with global best practices and regulations. For instance, decommissioning entails that the oil majors must return all production sites to their prelease condition. This is a costly exercise that will require huge funds to implement.
According to available statistics, the cost involved in decommissioning assets and the volatile oil prices in the international market are major issues to contend with. Currently, oil price has risen above $120 per barrel in the international market due to the Russia/Ukraine conflict. The implication is the lack of certainty of what the assets to divest will be. Besides, the capital-intensive nature of the oil and gas operation presents another hurdle for the divesting oil companies. The position of the NNPC boss came six months after he gave key guidelines for the evaluation of would-be replacement of divesting partners in the sector. Kyari had, in August last year, stated that based on previous experience, NNPC had developed requisite divestment policy that would provide seamless guidelines and criteria for divestment of oil companies’ stakes in all their Joint Ventures and production-sharing contracts.
He also explained that for the corporation to sustain a prosperous business environment for Nigeria, the newly established National Oil Company will pay particular attention to abandonment and relinquishment costs and other matters. However, the divestment by IOCs from the onshore and shallow waters may not bode well for Nigeria. There is need for the government to dialogue on all the issues at stake. For the divestment to occur at this point in time shows that something is wrong with management of the oil sector. Nigeria needs the oil majors’ funding capacity to develop the asset. These issues around divestment have been on for sometime now. In August last year, Shell launched divestment of its 30 per cent stake in Shell Petroleum Development Company (SPDC) Nigeria. About a month ago, SEPLAT Energy Plc announced an agreement to acquire the entire share capital of Mobile Producing Nigeria Unlimited from ExxonMobil, Delaware, US, for $1.28billion. It is not only Shell and ExxonMobil that are exiting Nigeria’s onshore fields. Chevron and others are reportedly in talks with local operators to divest their assets.
The planned transaction of SEPLAT involves the acquisition of ExxonMobil Nigeria’s entire offshore shallow water business. It also include potential additional contingent consideration of up to $300 million payable over four-year period (2022-2026), contingent upon average Brent crude oil of $70 per barrel, and subject to Mobile Nigeria Producing Unlimited average working interest production exceeding 60,000 barrels per day and Joint Venture 150,000 bpd running through a year. On paper, the deals, if successful, could give the economy a boost, as more indigenous players participate in the upstream exploration and substantially improve indigenous oil companies’ capacity to become more active in the sector. This will produce economic benefits from ancillary services.
However, these are not small transactions that will pull through without putting the Petroleum Industry Act (PIA) into use. That is why having a relationship dialogue with the oil majors has become expedient. While this can be a boost for SEPLAT to be a major player in the sector, the PIA could stymie such prospects. Although the divestment could signal a new era of improved local participation in oil production, the divestment by oil majors should be handled with utmost caution. Above all, the parties involved in the deal must not lose sight of the need to build a sustainable oil sector.
