By Donu Kogbara
My friend, Gbite Adeniji, a lawyer and foremost gas expert, has written an article about an important and alarming development that everyone, including Vanguard readers, should be aware of. It is too long to squeeze onto this page, so I am serialising it.
Part 1 was published last week. If you didn’t see it, you can find it on the Vanguard website. Please find Part 2 below:
IT is indeed an irony and a point of curiosity that these majors worked with the different administrations in Nigeria over the last 20 years on the reform of the legal and regulatory framework of the petroleum sector, leading to the improved fiscal terms and innovations entrenched in the recently enacted PIA.
More concerning is that there is nary a conversation at any meaningful level about these historically significant transactions moreso, as the other IOCs in the NNPC/SPDC and NNPC/MPNU joint ventures will almost certainly follow suit as soon as these initial transactions are concluded. Rather, there is a disconcerting air of comfort in the hallowed portals of Abuja about these impending exits whilst Nigeria’s oil barons and potentates are wringing their hands at the prospect of being successors-in-title, warts and all, to these majors.
Indeed, the news wires recently reported a possibility of a “preemption” by the national oil company, NNPC Limited, of the Exxon Mobil sale, presumably on the basis of the provision in the joint operating agreement which entitles a party to acquire the interest of another party in the event of a proposed sale of its participating interest in the joint venture (asset sale).
Whilst lawyers will no doubt debate the validity of a preemption to a corporate sale as opposed to an asset sale, the rating agencies will have a view on any acquisition of upstream assets on this scale by NNPC as Nigeria would be exposed to a concentration risk from its national oil company which would be a daunting prospect in today’s new era where international financial institutions are resolved to limit funding for the development of upstream assets. In effect, Nigeria might end up strangulating itself. The maxim, caveat emptor, springs to mind.
The cover for the divestments by the majors is the need to rationalise assets in their global asset portfolio, especially in light of the energy transition. This means that for Shell, Nigeria’s land-based assets that significantly contributed to its balance sheet for decades are no longer as important to the corporation in comparison to its other opportunities elsewhere. For Exxon, its joint venture assets are also not as exciting as the other opportunities within its global portfolio, such as Guyana where it is poised to spend billions of dollars on developing giant oil discoveries. It is, however, worthy to note that both companies will retain their interests in assets held under production sharing contracts which are largely located in Nigeria’s deepwater terrane, which must necessarily mean that these are more profitable assets than joint venture assets and safer to operate. In that case, we should expect similar divestments by Total and Chevron at some point in the near future.
What is really going on, one might ask? Is this merely a case of asset rationalisation or are these partners more doubtful of the redeemability of Nigeria’s political risk and have reconciled themselves with a flight to safer harbour? Or, is this more about the non-sustainability of Nigeria’s uncomfortable fissures, or could this be about the likelihood that the 2023 elections might not yield any game changer to Nigeria’s current capture by its insatiable potentates?
One cannot, however, ignore the possibility that the intractable “above ground risks” that have been a subject of angst by operators over the years might have contributed to these exits. These range from industrial scale theft of crude oil, unabated kidnaps of oilfield personnel, an unnecessarily painful administrative process for project approvals, long-running disputes with the national oil company, and issues with the quality of sector governance. If we were to be objective, all we have to do is to try to understand why other petroleum provinces are able to still attract investment from these same players.
Whatever the case, the impending exit from significant portfolios by Nigeria’s most important investors reminds one of the allegory of the canary in the goldmine or of rats and rodents scurrying out of the ground before an earthquake. To be clear, it is unusual for two, and probably, five IOCs to exit proven assets in a mature province and, to drive home the point, there are very few countries anywhere in the world that host these five majors at any one time.
When concluded, the divestments will mark a significant reduction in Nigeria’s economic ties to the United Kingdom (Shell) and to the United States of America (XOM). In trade terms, it signifies a loosening of an important economic relationship with both the United Kingdom and the United States of America. It is a winding down from the various epochs in the trade and export of such commodities as groundnut, cocoa, hides and skins, cotton, rubber, palm oil, humans, crude oil and natural gas. To the extent that it was, in any event, an imbalanced relationship over the centuries, it is not necessarily a bad thing if Nigerians effectively assume the commanding heights of the oil industry and can drive it responsibly. On this latter issue, the evidence alas, has been a mixed bag of charlatans, buccaneers and a smattering of pure breeds.
As the fortunes of the country’s 200 million people literally rests on these transactions, those at the supervisory helm of the industry have a responsibility to ensure that the successors to these interests are able to operate these massive assets based on a demonstrable track record of activities and success in the industry. The point is that a large part of Nigeria’s economic lifeblood rests so much on these assets. As such, it will be a significant failing by the government if they end up in the hands of investors who are literally learning the business. One may learn on one asset but given the interest of the government and people of Nigeria in continued oil production from such a large swathe of assets, this is not a game for learners.
Neither must the exits be approved by the government in the absence of a technically astute and bankable operational plan for production of all discovered oil and gas reserves, a clear plan for continued exploration, clarity on the remediation of environmental issues in the communities and, importantly, a clear and committed line of access to funds to work the assets. On the latter, the point is that it is not sufficient, as has unfortunately happened in some previous transactions, to just have the funds for the acquisition; there must also be funds demonstrated to the government and preferably backed by financial guarantees, that assure the people Nigeria of a commitment to immediately work the assets…