BEHIND THE FIGURES by Ijeoma Nwogwugwu; Ijeoma.nwogwugwu@thisdaylive.com

Messrs Emeka Offor and Les Blair, respectively, chairman and CEO of Elcrest Exploration and Production Nigeria Limited, must be terribly anxious men. Elcrest is a special purpose vehicle formed as a joint venture between Eland Oil & Gas Limited and Starcrest Nigeria Energy Limited to bid for the working interests held by Shell Petroleum Development Company of Nigeria Limited, Total E&P Nigeria Limited, and Nigeria Agip Oil Company Limited in Operating Mining Lease (OML) 40.

The interests in OML 40 are currently held as follows: Nigerian National Petroleum Corporation – 55 percent; Shell – 30 percent; Total – 10 percent; and Agip – 5 percent. The three international oil companies jointly offered their working interests totalling 45 percent in the block under a tender process that started a year ago.

OML 40 has proven and probable reserves (2P) of 225.7 million barrels of oil equivalent and historically produced at less than 5,000 barrels per day before it was capped. It, however, has the potential to produce 10,000 barrels per day, after the revamp of a pipeline vandalised by militants a few years ago.

Before their anxiety set in, both gentlemen were elated almost six months ago. Elcrest had emerged successful from the tender that featured several other bidders for OML 40. Unconfirmed media reports stated that Elcrest was selected by Shell and its partners to execute a Purchase Sale Agreement (PSA) and an Agreement for Assignment (AFA) after it had paid $154 million to acquire their interests in the block.

Following the selection by Shell, which was responsible for the tender, Shell - also the operator of the block - in compliance with Clause 19 First Schedule of the Petroleum Act and Clause 19.1.1 of the Joint Operating Agreement for OML 40, wrote to the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke and the group managing director of NNPC, Mr. Austen Oniwon, respectively, seeking their consent to assign the 45 percent to Elcrest. Without their consent, Elcrest has no deal. It also stands the risk of forfeiting 10 percent of the bid price for OML 40 which was escrowed with J.P. Morgan in the UK under the terms of the tender.

In the letter written to NNPC, other than seeking for the corporation’s consent to assign 45 percent to Elcrest, it requested NNPC to waive its preemptive rights to the participating interest under Clause 19.4 of the JOA. Seeing that NNPC could not match the price offered by Elcrest, it waived its preemptive rights to take over the participating interest held by the IOCs. Obtaining the consent of the minister and NNPC will also trigger the execution of new JOA for Block 40, in which NNPC shall retain 55 percent and Elcrest 45 percent.

But Elcrest wants more than just the acquisition of 45 percent in the said block. The company wants operatorship of the oil block to be transferred to Elcrest. To achieve this, NNPC will have to waive it rights to take over operatorship in the block, as Clause 2.6.2 in the JOA states, “In the event that the operator (in this case, Shell) resigns, unless the parties agree to appoint a third party as operator, the parties shall appoint one of the non-operators as successor operator to take over the operatorship upon the effective date of the operator’s resignation or any earlier date as may be mutually agreed by the operator and non-operators.”

NNPC, however, has made it clear both in newspaper adverts and verbally to Shell and the bidders that took part in the tender that it shall not transfer its rights to operate the oil block. NNPC has embarked on an aggressive acquisition programme to grow its oil and gas reserves and production through its exploration and production subsidiary Nigerian Petroleum Development Company. NNPC’s target is to increase NPDC’s reserves and production to over 1.5 billion barrels and 250,000 barrels of oil equivalent per day by 2015.

The snag with NNPC/NPDC’s insistence on taking over the operatorship of OML 40 is that Elcrest’s financing banks will not permit the company to sign a JOA which gives operatorship to NPDC. Owing to its track record, Elcrest and its banks have no confidence in NPDC to operate the block efficiently and in a cost-effective manner. Elcrest is also contending that the price it offered for the 45 percent working interest in OML 40 includes a premium for the company being made operator of the block. Without operatorship, Elcrest will be forced to cancel the transaction, forfeit $15.4 million, and OML 40 will revert to status quo, with Shell as operator.

Elcrest is therefore torn between the devil and the deep blue sea. It has very little time to decide on its next course of action, as the execution of the PSA that Elcrest signed with Shell, Total and Agip, triggered a 180-day period during which time the government approval to the transaction must be obtained. That 180-day period shall expire on September 30, 2011, hence the sleepless nights being experienced by Offor and Blair at the moment.

Offor, Blair and Elcrest’s story is not unique to them alone. It cuts across the entire transaction chain for the assets sale started by Shell a year ago for OMLs 30, 34, 40 and 42. All the bidders that emerged through that process, having escrowed 10 percent of the bids for the respective blocks, shown capacity to pay the balance of 90 percent, and signed PSAs and AFAs, cannot get consent from the minister and NNPC to close their deals.

Their problem can be traced to a number of factors. The first was the precedent set by Seplat Petroleum Development Company, which last year acquired the working interests held by Shell, Total and Agip in OMLs 4, 38 and 41. In that deal, not only did NNPC waive its preemptive rights in the blocks, it also transferred operatorship to Seplat. 

After the acquisition of the three blocks and execution of the JOA with NNPC, the state oil company elected to assign its 55 percent to NPDC, which in turn entered into a Strategic Alliance Agreement with Septa Energy Nigeria Limited to fund NPDC’s interest share of petroleum operation costs and provide technical expertise to the NNPC subsidiary. Septa paid $54 million as entry fee for participation in the development of the 2P reserves in Blocks 4, 38 and 41. Operatorship of the blocks, however, was retained by Seplat, not Septa, as was once erroneously reported in the media.

The second reason the current assets sale by Shell is threatened, arose from the multinational’s handling of the transactions. Shell, from all indications, went out of its way to identify, encouraged and urged bidders which it believed had the capacity to raise their bids and the political clout to convince the powers that be in government into influencing NNPC to waive its right to operatorship. In so doing, it gave them false hopes that they could get operatorship, which it lacked the power to cede.

In fact, one bidder, Vertex, accused Shell of notifying the company of its selection as the preferred bidder for OML 40, only for Shell to turn around to encourage Elcrest to increase its offer for the same block, in order to give the latter the edge over Vertex. Obviously, Shell was banking on Emeka Offor leveraging on his clout within the government to swing the operatorship Elcrest’s way.

Another factor stemmed from the exorbitant amounts offered for some of the blocks. For instance, the bids for OML 30 – the most prolific of all the blocks - were staggeringly high. Conoil was believed to have offered $1.29 billion; Oando, in conjunction with Petrofac, submitted a revised conditional bid for $1 billion; while African Petroleum and Midwestern Energy offered to pay $850 million for the block. It was not surprising that the deal unravelled when Dr. Mike Adenuga, the chairman of Conoil, elected to withdraw from the bid process, especially after repeated attempts to get the government to transfer operatorship in OML 30 to his company failed. Adenuga’s Conoil, today, could potentially lose the $129 million that was escrowed several months ago.

A fourth reason revolved around the excuse given by the petroleum minister for the non-transferability of operatorship. In an interview in June, Alison-Madueke identified Blocks 30 and 34 as too strategic to be handed over to “certain” oil companies because of the gas reserves they hold, and that the gas is needed as fuel for the country’s power programme. Both blocks hold an estimated 6.1 billion standard cubic feet 2P gas reserves and the Utorogu gas processing facility operated by Shell. The minister also argued that the JOAs do not allow the transfer of operatorship of the blocks to a third party assignee.

The minister’s argument, nonetheless, contradicts the position of the ministry and NNPC which ceded operatorship to Seplat in OMLs 4, 38 and 41, and assigned the funding rights for the same blocks to Septa Energy. It further turns the federal government’s local content policy on its head, because by withholding consent or allowing the companies that won the blocks to cancel the deals and forfeit their deposits, the purpose of encouraging indigenous participation in the oil and gas sector would have been defeated.
Curiously, NPDC, which lacks the funding capacity and expertise to operate the blocks, may have to enter into another strategic alliance with other parties to finance the blocks and provide the technical expertise.

Today, neither Shell nor the bidders have been able to move forward with the deals. The Neconde Consortium comprising the Polish firm Kulczyk Oil Ventures Inc and indigenous operators, Nestoil and Folawiyo Energy, which executed a PSA for Block 42, faces the same dilemma as Elcrest. It has till next month to execute a JOA with NNPC/NPDC which accords operatorship to NPDC.

Another bidder, ND Western, for OML 34, is only slightly better off because it has till January to decide whether to close the deal or abandon it. Its preference also is to get operatorship, but if consent is not obtained, it shall lose its 10 percent deposit. ND Western is wholly owned by an indigenous company, Niger Delta Petroleum Resources Limited and Petrolin Group of Switzerland.

Obviously, the ministry, NNPC, Shell and the bidders, have to find some middle of the road solution that all the parties are comfortable with. The deposits made by each of the winning bidders and those that lost out have been domiciled in escrow for several months.

Such deposits might have been funded by banks on which interest is accruing and possibly being paid by the bidders. Even where the deposits were funded by the bidders, there is an opportunity cost for keeping the funds domiciled without a resolution in sight.

Shell’s management of the tender has certainly left a lot to be desired. But the time for recrimination can come later. The most important thing is to either salvage what’s left of the messy transactions, where possible, or have them cancelled with the minimum losses to the bidders.

NNPC is not entirely blameless either. By setting a precedent with Seplat, it also gave the bidders false hopes that they will be appointed operators, only for it to change its mind mid-stream. It should have stuck to the original terms of the JOA which does not permit the transfer of operatorship to a third party assignee.

Hopefully, this whole mess will serve as a lesson to Shell and NNPC on how to stick to laid down rules and agreements in the future.