A Review of the Nigerian Energy Industry

Indigenous partnership of oil assets increases NPDC production

NPDC-operationsEpa Stevens

19 May 2014, Sweetcrude, Lagos –
Nigeria’s oil and gas sector has recorded a rash of divestments by International Oil Companies (IOCs), over the twin problems of internal insecurity of investment and the delay in the enactment of the Petroleum Industry Bill (PIB) in the country’s parliament.

Nigeria’s crude oil reserve estimated at nearly 40billion barrels and over 600trillionn cubic feet of gas reserve may now be explored by local players with financial muscle and technical capacity as the IOCs divest their equity due to various reasons. Shell, Total, ConocoPhillips and Agip have sold over a 45 per cent stake in the seven oil concessions in five transactions.

For instance, Shell Petroleum Development Company (SPDC), a subsidiary of Royal Dutch Shell reportedly sold its 30 per cent interest in Oil Mining Lease (OML30) with share production of 11,000 barrels per day (bpd) in the Niger Delta to Shoreline Natural Resources Limited, while French energy company, Total has also sold 20 per cent stake and operating mandate of its Nigerian offshore project to a local unit of China Petrochemical Corporation for $2.5billion.

Conoco Philips, a United States oil company, also ceased from oil exploration in Nigeria and thereby disposed of its assets in the country.
Brazil’s national oil Petrobas is yearning for buyers for its $5billion valued assets in Nigeria’s oil industry. Petrobas controls 8 per cent of Agbami offshore oil block operated by Chevron, an asset that holds estimated reserves of 900million barrels and 20 per cent of Akpo offshore lease, which produces 175,000 barrels daily and is managed by French oil major, Total.

Petrobas is embarking on aggressive divestment push aimed at funding a $237billlion five-year investment plan that would shrink its international interests and consolidate a local presence. It expects to recoup $9billion from the Nigerian assets sale.

The decision to divest such equities findings indicate, resulted from what the industry players referred to as unfavorable profit-sharing agreement, high royalties, taxes and insecurity, considering the production output of the field, while informed analysts alluded to the fact that such rash divestment by the IOCs was a ploy to escape maturing onshore liabilities by hiding behind the indigenous firms to re-buy sold oil blocks in order to pay lesser royalties. Old and new investors have however been cautious expressing reservations on the Petroleum Industry Bill) PIB) that they consider not competitive due to the legal, regulatory and fiscal framework issues embedded in its provisions.

The development came on the heels of the inauguration by the federal government of a committee for the 2014 oil and gas trade and investment with a mandate to attract more investment to the oil and gas sector.

Oil companies in Africa investigate offshore production as an alternative area of production. Deepwater production mainly involves underwater drilling that exists 400metres or more below the surface of the water, and by expanding to deep water drilling the possible sources for finding new oil reserves is expanded.

Nigerian government has very little share in the deep water drilling activities and it is more difficult for the government to regulate offshore activities of oil companies.

The deepwater extraction plants are less disturbed by local militant attacks, seizures due to civil conflicts and sabotage; hence these advancements offer more resources and alternatives to extract the oil from the Niger Delta, with hopefully less conflict than the operations on land.

Nigeria Petroleum Development Corporation (NPDC) a subsidiary of the Nigerian National Petroleum Corporation (NNPC) can benefit from a transfer of its participating interest in the Oil Mining Leases based on the paragraphs 14(16) of the First Schedule to the Petroleum Act. CAP p10 LFN 2004/NNPC Act.

The Attorney General of the federation and Minister of Justice, Mohammed Bello Adoke averred that the NNPC got involved in the management of Oil Mining Licenses (OMLs) following the divestment of some international oil companies and as such no law precludes a transfer.

By implication, the divestment of Total, Agip and Shell of close to 45 per cent participating interests in some OMLs in the joint venture arrangement could be given to some indigenous companies to encourage and build local capacity.

NNPC will require more than financial muscle to successfully navigate the divestment challenge and also penetrate new markets. It is therefore imperative that it should muster courage to collaborate with local oil companies to actualize any exploration intent, achieve risk reduction; get technology complements by accessing technical competence from companies such as Atlantic Energy participate in the operation of the OMLs to extractive maximum value. Granted that the 55 per cent equity interest in OMLs 26, 30, 34 and 42 allocated to NPDC and not Atlantic Energy, the strategic alliance experiment clearly shows that Atlantic Energy has demonstrated proven capacity to execute any funding arrangements needed to facilitate any eventuality.

The strategic alliance between Atlantic Energy and NPDC which owns 55 per cent oil mining assets has improved the crude oil production of NPDC Atlantic Energy has demonstrated capacity by pumping funds into the replacement ad upgrade of Utarogu Gas plant, up to the tune of $135million entry fee and $500million investment respectively. The NPDC is to begin production of 250,000 barrels of oil daily in 2015.

The Nigerian Petroleum Development Company Limited, NPDC(a subsidiary of Nigerian National Petroleum Corporation (NNPC) in partnership with Atlantic Energy has increased production from OML 42 from 25,500 barrels per day it recorded before it took over the operatorship from Shell Petroleum Development Company (SPDC) in 2012 to 35,500bpd.

According to The Manager, External Relations Department of NPDC, Ugo Atugbokoh, on taking over the operatorship, NPDC focused on the restoration of production by the replacement of corroded in field flowlines, refurbishment of the 30,000barrels of liquid per day production flow station and the repair of the 36km oil export pipeline, including the replacement of all corroded and damaged sections.

Atlantic Energy does not presently own an oil well, but its involvement on the OMLs has increased production at the oil fields, guarantee generation of direct and indirect jobs in line with the local content Development policy.

The ceding of the OML assets not only helps in the management of oil fields, but strengthens oil production by filling the lacuna caused by usual funding gaps in the upstream sector based on Atlantic Energy’s antecedents and pedigree.

The divestment by IOCs may not have much dire consequences after all if firms such as Atlantic Energy are allowed to manage a chunk of divested oil assets and the OML.

It is getting abundantly clear that the International Oil Companies might be pulling out of Nigeria due to insecurity of onshore assets, and uncertainty of the operating environment, thus paving way for indigenous firms, such as Atlantic Energy, with its pedigree to ramp up productions and become a beneficiary of the divestment due to its clearer understanding of local communities.

These divestments, lost to international players like Petrobas and Oil India, represent the largest opportunity for indigenous firms with the requisite expertise, partnerships and capital to ascend the league of major upstream players.

Indigenous firms can even take the bold step of exploring deepwater drilling for oil which is attractive to international oil companies’ ab initio, because of low government revenue accretion, and less disturbance by local militant attacks, among others.

Locally-owned firms such as Atlantic Energy will expand from the 10 per cent of output to 20 per cent of the nation’s oil resources, by raising funds to run deep water operations in view of their secured nature.

Atlantic Energy with its tested capacity to manage bigger acreage will boost the maximum reserves of about 10 million barrels and daily production capacity of about 5,000 barrels per day, marginal fields considered uneconomical by the International Oil Companies.

Portfolio optimization process in the Oil and Gas industry will be put to test with the transfer of marginal assets to indigenous operators.

Nigeria holds some of the richest and lowest cost of production of oil deposits in the world, new Investments Fund, Engota working internationally within the finance industry to build a portfolio of oil exploration and production assets is taking advantage of offers of attractive investments.

More opportunities have opened in recent years as the playing field has become more level and indigenous companies like Atlantic Energy are stepping up to fill needs met by International Companies.

Atlantic Energy would offer a significant risk to reward investment profile, as an indigenous company with local understanding and competence which would target additional opportunities that overseas firms may not have access to.

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