Opportunities in IOCs’ divestiture for local capacity development

With growing demand from Western environmental campaigns to curb petroleum production as part of a journey to net-zero carbon emissions, the pressure is on international oil companies (IOCs) to cease exploration and production (E&P) activities in Africa. One could assume that if these majors do stop all their E&P on the continent, independent indigenous producers and national oil companies (NOCs) will pick up where they left off. While giving indigenous companies a chance to step up their game in the African energy market is critical, can these firms fill the void left by the IOCs? FEMI ADEKOYA writes.

Almost 66 years after commercial oil discovery in Oloibiri Oilfield, the current wave of divestment hitting the nation’s oil and gas industry has been deemed necessary to allow smaller entities contribute to economic activities in areas that have become less attractive to international oil companies (IOCs).

To achieve this, the government had, at several times, leveraged marginal bid rounds and production licences to ensure that indigenous firms are given the opportunity to develop their capacity in the upstream sector.

Currently, five IOCs operate in Nigeria and they include SPDC and TotalEnergies, Chevron and ExxonMobil as well as Eni. These five IOCs are also responsible for 45 per cent of Nigeria’s oil production and 40 per cent of gas.

The 113 OMLs are split almost in half with 57 located onshore and 56 located offshore. 47 per cent of those are operated by IOCs while DOCs operate 45%. That ratio is about to be skewed more in favour of the DOCs with SPDC set to sell off 19 more assets, which are expected to fetch the Anglo-Dutch giant an estimated $2.3bn, another significant windfall for a company that just pocketed $1.1bn from the TNOG deal.

While the IOCs may have maintained some dominance on Nigeria’s oil assets, their grip began to relax in 1991 when indigenous players made their entry, thanks to Professor Jubril Aminu’s deliberate policy of encouraging indigenous participation in the Nigerian oil and gas sector, under military president, Ibrahim Babangida.

The move in 1991 led to the emergence of Muhammadu Indimi’s Oriental Energy and Mike Adenuga’s Conoil recipients of OPL 124 and OPL 113.

The 2001 marginal field round would introduce more indigenous players to the sector with the likes of Platform and Midwestern stepping up to stake their claim.

The marginal field round superintended over by Funsho Kupolokun in his capacity as Special Assistant to Rilwan Lukman, who was Special Adviser to President Olusegun Obasanjo, did not just deepen indigenous participation, it also helped get ready some local players who would take advantage of asset divestments by the IOCs, 10 years in the future.

Beginning in 2010 and led by SPDC, IOCs operating in Nigeria have divested 26 assets. Seplat (formed as an SPV by Shebah and Platform) took OML 4, 38 and 41 off Shell in 2010 for a reported $340m.

Other transactions have happened subsequently; Neconde (OML 42) in 2011, Eroton (OML 18) in 2014, First E&P (OML 83 and 85) in 2014, Aiteo (OML 29) in 2015 and just last year, Trans-Niger Oil and Gas (TNOG) (OML 17).

With the wave of new divestment announcements, at least five Nigerian oil and gas companies are reportedly planning to submit bids for Royal Dutch Shell’s oil assets in the country this month.

A potential sale of the onshore oil fields could be worth up to $3bn, according to agency reports, citing three sources involved in the process.

The five companies are Sahara Group, Seplat Energy, Famfa Oil, Nigeria Delta Exploration and Production (NDEP), and Troilus Investments.

Nigeria-focused Africa Bridge Capital Management has also been appointed by Troilus Investments to raise up to $3bn for the oil fields, according to sources and documents seen by the news agency.

Indeed, partnerships with IOCs offer indigenous companies countless advantages, from capacity-building to technology/knowledge sharing to investments in communities. If IOCs succumb to Western pressures and cease operating in Africa, local producers will certainly step up to fill the void. But it’s uncertain whether they will succeed in the long term without these advantages.

Local Content Act to the rescue
The Local Content Act of 2010 has been largely responsible for the emergence of a corps of technical and financially competent oil and gas asset development companies who have cut their teeth providing support largely for Domestic Oil Companies (DOCs) who have had to look inwards and away from the international service providers.

The law gives Nigerians the opportunity to be considered in the awards of oil blocks, oil field licenses and oil lifting licenses under its emphasis on increased entrepreneurship and domestic assets. The law set a target to increase the use of indigenous labour, materials and resources to 70 per cent in all oil and gas projects in the country, as opposed to the previous 28 per cent.

Contracts between IOCs and the government include local content provisions ensuring that Nigerians hold 75 per cent of managerial positions within the first 10 years from the date that the contract was granted. 15 and 20 years after the contract, the percentage should increase to 80 per cent and 85 per cent, respectively.

The Act requires all operators of oil field licenses to submit a Nigerian content plan at the time of their bidding, showing how they will give first consideration to local companies and services, as well as a training and employment plan.

With regards to procuring goods and services, preference should be given to indigenous companies if it does not exceed the lowest bid by 10 per cent. With this clause, indigenous firms hope to build their capacity for the future.

Already, local content players like Century Group, whose work with SPDC and other key players has helped it build an advantageous operational framework and strong stakeholder management systems, hope to leverage its extensive local knowledge of the terrain and people, as well as challenges that erstwhile made producing most of these assets a challenge.

According the Executive Chairman of the African Energy Chamber, NJ Ayuk, analysts predict that the wave of IOC divestitures will continue to offer “new E&P opportunities for well-capitalised, risk-tolerant buyers that are less strategically constrained by shareholder and policy pressures, including companies such as international NOCs, private equity firms, and commodity traders.”

He, however, warned that while these same analysts see openings for smaller local producers, they caution that “new players are unlikely to fully replace the technical, social, and revenue contributions of retreating IOCs, and domestic NOCs’ ability to fill the gaps will be constrained as they continue to struggle financially.”

What will the Nigerian oil and gas industry look like when the DOCs take over?
The success stories from past divestments gives an insight to what the terrain might look like. Notwithstanding the recent challenges, Seplat has been able to change the discourse as to how effective Nigeria’s gas resources can be explored for profitability.

Following TNOG’s acquisition of OML 17 from Shell for a reported $1.7billion, Tony Elumelu has unveiled TNOG plans to “triple the production of OML 17’s wells. Elumelu, recently at a meeting, stated that efforts were being intensified to ensure that production at the facility is at the optimum level, having risen to 50,000 barrels a day from the initial 27,000 barrels at the time of acquisition.

Although the industry has witnessed a surge in pipeline sabotage in recent times, especially around Aiteo’s assets, stakeholders are hopeful of indigenous firm’s ability to negotiate with local communities to provide right-of-way and access hitherto denied the IOCs.

Training and working with contractors from the host communities in line with the provisions of the Local Content Act of 2010 has also helped build indigenous capacity in the oil services and support ecosystem.

So, new and prospective owners of divested assets must evolve strategies not just for ramping up production but for avoiding the problems that dogged the IOCs. To do this requires a new approach, which will be more holistic than adhoc.

The new owners will require strategic partners who know the layout of the land and who can help with operation and technical support. These partners must have local knowledge, a good understanding of the issues, exhibit financial capacity, evince technical competence and the ability to build capacity around the business and the local community of contractors and vendors.

Other key considerations would be partners that have a firm handle on community and multi-stakeholder management as well as Standard Operating Procedures and Security Protocol that will ensure asset security and integrity post-divestment. This is critical for onshore and shallow water assets.

The Group Managing Director of NNPC, Mele Kyari, recently noted that the government would “ensure that only investors with technical, financial and operational capabilities take position of the IOCs assets, thereby adding value to the industry.”

To make this happen, he promised that the “NNPC will ensure Nigeria’s strategic national interest is safeguarded by developing a comprehensive divestment policy that will provide clear guidelines and criteria for divestment of partner’s interest.”