The 2015 global oil outlook for major exporters like Nigeria may appear bleak as prices plummet to below $70/b in June 2014 after a five-year stability at $110/b; but peer further into the horizon and the fortunes for Nigeria and indigenous energy firms in the country are looking promising.
This is just as international oil companies in Nigeria continue to lose their grip on the industry with major divestments expected to hit $11 billion in 2015, and local oil giants are mopping up the opportunities, moving up the ladder and changing the cityscape. The interesting scenario is also opening up new vistas for other small and middle-power Nigerian oil companies.
Some eight years ago, international oil majors – headlined by Shell and Chevron – began a trend that has seen them retreating from their dominance of the Nigerian oil industry. The divestments have increased in subsequent years as they continue to shed their controlling interests, enabling local giants like Oando, Sahara Group and Seplat to expand their stakes in the industry
The new reality is that for a motley of reasons, international energy companies are now disinclined to continue their grip on the oil-rich Niger Delta and giving up the onshore and shallow water fields; just as indigenous firms are filling the emerging vacuum and taking up increased ownership of the oil fields.
The trend is expected to climax in 2015 with several rounds of divestments estimated at about $11 billion worth of oil blocks anticipated to be concluded; thus presenting a significant year for indigenous oil firms to dominate the industry, through acquisition of these relinquished assets.
A recent report by Bloomberg quoted figures made available by the Nigerian National Petroleum Corporation (NNPC) as saying that for more than five decades, Royal Shell Plc, Exxon Mobil Corporation, Chevron Corporation, Total SA and Eni SpA pumped about 97 percent of Nigeria’s oil output. The figure is said to have fallen to 90 percent in 2006 and is set to shrink further to about 60 percent in five years as more International Oil Companies sell off their oil fields.
New Oil Field Landlords
The trends of divestments by international oil majors represent the single most important window of opportunity for indigenous energy giants with the requisite expertise, partnerships and capital – towards becoming global brands with firm footprints in the upstream sector and investments even outside of Nigeria’s shores. At a national level, the change of guard will be instrumental in Nigeria meeting its output target of 3Mbbl/d by 2020.
In June 2014 in the latest asset disposition by IOCs to indigenous players, US-based ConocoPhillips successfully concluded the sale of its Nigerian oil and gas business to Oando Energy Resources, the upstream business of Oando plc, valued at $1.5 billion. The assets purchase was the largest single upstream acquisition done in the country’s industry by an indigenous company last year.
Also last year, local oil and gas firm, Seplat made a stock market debut in Lagos and London in preparation for an IPO and expansion of its capacities to join the ‘Takeover’ fray in what analysts have described as a defining moment for the sector in 2015. This is just as a few deals are currently awaiting ministerial consent which could see big indigenous players control 20 to 25 percent of the nation’s oil fields, up from about 10 percent.
While delivering a keynote address titled: Assets Divestment in Nigerian Oil and Gas Industry: Opportunities and Challenges at the 2014 Offshore Technology Conference (OTC) in Houston, Texas, USA, the Minister of Petroleum Resources, Mrs Diezani Alison-Madueke, represented by the Group Managing Director of the NNPC, Engr. Andrew Yakubu informed that the IOCs are expected to divest over 20 oil blocks with not less than 4 billion barrels of oil equivalent and a monetary value of about $11.5 billion before the end of 2014.
Madueke said the Department of Petroleum Resources is currently compiling a list of all assets that had been neglected by the IOCs to begin a round of bids and make the assets available to local investors. The petroleum minister and current OPEC Chairperson added that the government would continue to draw up policies and laws that build the capacity and capability of indigenous operators in the upstream sector of the industry.
Emerging local brands like Petrolex and Zone 4 Energy have also been busy in the beehive of, albeit, quiet activities in the Nigerian petroleum industry while keeping an eye on the future. These firms are part of a cluster of new ‘heavy weights’ acquiring major assets and forming strategic alliances with OICs and major local firms like Oando, who are inching more towards a preference to play largely in the upstream sector and become international investors in the mould of the retreating Shell, Chevron and Total.
In a statement last October on its planned divestment of some of its downstream assets, CEO of Oando, Abayomi Awobokun stated that the indigenous energy giant has “procured shareholders’ approval… for the partial divestment of our downstream assets,” adding that the move is to “enable the Oando Group unlock value and inject liquidity which would enable us explore the best growth strategy.”
Other major divestment in the last three years, according to a research by Ecobank, include nine onshore and shallow-water oil leases worth 3Mbbl/d; 13 other fields jointly sold by Shell, Total and Eni, with most of them bought by smaller Nigerian companies including Seplat Petroleum Development Co., First Hydrocarbon Ltd. and Neconde Energy Ltd.
In mid-2013, 11 local companies including Seplat, South Atlantic Petroleum Ltd., Seven Energy Ltd., First Hydrocarbon and Sahara Energy Field Ltd. Were shortlisted to buy the Chevron fields on sale; while British Gas sold its Nigerian oil assets and invested the returns in gas production.
Brazil oil giants, Petrobas also notified Nigeria to auction 8 percent stake of its Agbami block and 20 percent of the offshore Akpo project for N795billion; just as Total, the French giant, sold its 20 percent stake in the Usan field in the Niger Delta. Shell also sold its stakes in eight of its onshore interests to local players in November 2012, as it began the process to divest its stakes in four additional onshore oil blocks.
But it isn’t just local players that are boosting their stakes in the oil industry; also taking advantage of the wave of operations scale-down by OICsare a few small foreign firms, like Afren and Chinese state oil company, Sinopec Corp which in November 2013 bought $2. 5 billion-worth Total stakes in an offshore block.
PIB and Other Factors Changing the Cityscape
While offering its entire 40 percent stake in oil fields to a group of 11 local Nigerian companies in 2013, the US spokesperson for Chevron stated that the deal was to “enhance capital efficiency,” and for the buyers “an opportunity to grow their own assets.”
Giving her own explanation why the landscape is changing to welcome new indigenous brand majors, petroleum minister, Allison-Maduekwe informed that the divesting IOCs were not leaving the country but only shifting their focus from onshore to the more challenging frontiers of deep offshore which currently accounts for 60 per cent of Nigeria’s production.
“The IOCs remain very much present in Nigeria. Shell still retains ownership of 34 onshore blocks while Total, ExxonMobil, and Chevron are still committing large amounts of capital to assets offshore Nigeria,” she stated.
Also, in a 2014 research titled: Divestment of Nigerian Oil and Gas Assets by IOCs by Akintola Williams Deloitte, the respected accounting firm stated matter-of-factly that “The rationale for the divestment decision is founded on pure economic and quasi-economic reasons.”
But observers believe these executive analyses are political-speak for industrial-scale oil theft, insecurity, sabotage to infrastructure and spills that have plagued onshore operations of OICs in the oil-rich Niger Delta region of the country, with consequent diminishing output of marginal fields. In contrast, they believe local operators would fare better with some of these challenges especially with regard to security as it is easier for them to communicate and relate with indigenous communities with greater empathy.
But the biggest disincentive to the IOCs may be the current uncertainties surrounding the introduction and operation of unfavourable industry policies and reforms, especially the Petroleum Industry Bill (PIB). This plays out well with regard to government’s long-term interest as public policies have been geared towards ending decades of industry control by foreign majors and increasing the role of local players through reforms like the PIB and the National Content.
The bill itself has dragged on for over five years because of conflicting political and economic interests,
thereby denying Nigeria about $37 billion in private sector investments in the oil and gas industry in the last five years, according to data released by Wood Mackenzie in 2013.
If passed, the law will further incentivise local operators for more active roles in the industry and increase government earnings; but international energy companies say the fiscal terms of the law would make oil exploration, including offshore, unprofitable.
The recent crash in world oil prices may have cast dark clouds on the Nigerian oil industry prospects this year, but there are silver linings, says a new report titled: Nigeria’s renewal: Delivering inclusive growth in Africa’s largest economy by the McKinsey Global Institute (MGI). Oil prices are also expected to bounce back by the end of second quarter of the year.
According to the 124-page report, although the Nigerian economy entered 2015 on precarious economic conditions as a result of falling price of crude oil and consequently falling revenue into the federation account (in addition to other negative economic indices), with the right reforms and investments the country could become one of the world’s leading economies by 2030.
The report states that should Nigeria reach its full potential, the nation’s annual GDP would exceed $1.6 trillion in one and half decade, and the country could be a top-20 economy. This would be a significant leap from the current GDP of $510 billion, which already ranks Nigeria as Africa’s largest economy.
The promising economic forecast is based on a bottom-up analysis of the potential for five major sectors of Nigeria’s economy, viz trade, agriculture, infrastructure, manufacturing and oil and gas.
The document projects that with renewed investments – as is currently ongoing led by big and competent indigenous energy brands – , and the right reforms, production declines of recent years will be reversed and liquids production could increase from an estimated 2.35 million barrels a day, on average, in 2013 to a new high of 3.13 million by 2030.
This will see the sector contributing 108 billion annually to the economy, compared with $73 billion in 2013 and enabling the rise of a new economically-empowered middle class and triggering growth in other sectors.
The biggest beneficiary by sector would be trade which would feed off the anticipated expansion of the consumer class, thereby tripling consumption to almost $1.4 trillion a year in 2030, at an annual increase of about 8 percent.
“This would make trade the largest sector of the economy and provide a particularly good opportunity for makers of packaged foods and fast-moving consumer items such as paper goods; categories that could grow by more than 10 percent a year,” the MGI report forecasted.
Article written by Kelvin Keshi- Senior Strategy Manager, Zenera Consulting.