Growing Oil Assets in a Low Price Regime

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Following their over-priced acquisitions, growing production from oil leases in a low price regime has been quite challenging for indigenous firms. Ejiofor Alike reports

A worrisome feature of some of the recent divestments of assets by the International Oil Companies (IOCs) in the country was the excessively high bids submitted by Nigerian companies and consortia that acquired some of the assets.
In their apparent desperation to out-bid competitors, some of the bidders had submitted high bids, which led to the over-pricing of some of the oil blocks and other assets.

For instance, in one of the deals, which is a subject of litigation, an IOC had requested one of the bidders to revise its bid downwards because it was perceived to be too high.
The string of divestments commenced when Shell Petroleum Development Company (SPDC) in 2010, announced the transfer of its 30 per cent interest in OMLs 4, 38 and 41 to Seplat Petroleum Development Company Plc.
Total (10 per cent) and Eni (five per cent) subsequently sold their stakes in the three leases to Seplat, thus making the indigenous company to own 45 per cent.

In 2011, Neconde Energy paid $585 million to Shell, Total and Eni to acquire their 45 per cent stake in OML.
Shoreline Energy Resources paid $850 million to Shell and its partners for their 45 per cent stake in OML 30; Eland Oil paid $154 million for Shell, Total and Eni’s 45 per cent stake in OML 40; ND Western paid $600 million for OML 34; while First Hydrocarbon Nigeria, partly owned by Afren paid $98 million to acquire Shell’s 30 per cent interest in OML 26.

Also First E & P paid $300 million to Shell and partners for 45 per cent stake in OML 71 and 72.
Under the more recent divestment, Erotron Consortium paid $1.2 billion to Shell, Total and Agip for 45 per cent stake in OML 18; Pan Ocean paid $900 million for OML 24. Creststar Consortium paid initial deposit of $100 million of the $500 million bid price for OML 25 before the NNPC came forward to exercise its right of first refusal, an action being challenged in the court by the Canadian firm-backed consortium.

Of greater significance in the wave of divestments was the $2.562 billion paid to Shell, Total and Agip by Aiteo-led consortium for the plum OML 29 and the Nembe Creek Trunkline.
Chevron also sold its 40 per cent stake in OML 83 and 85 to First E & P for $68 million and its 40 per cent stake in OMLs 52, 53 and 55 to Seplat Petroleum; Belemaoil and Amni Petroleum.
However, the bid value of OMLs 52 and 55 was not made public but the entire transaction was said to be worth about $900 million.

Seplat was said to have paid $259.4 million for OML 53 and additional $132 million to acquire 22.5 per cent stake in OML 55 from Belemaoil; while Amni acquired OML 52.
Feelers from the oil and gas industry had indicated that some of the assets were over-priced in view of the high expectations of early returns on investment as a result of the high oil price at the period.

The high cost of crude oil during the bidding process- average of $105.87 in 2013 and $96.29 in 2014, apparently gave the bidders hope of early returns on investments, hence the high bids submitted for some of the transactions.
Before the divestments of assets by the IOCs, indigenous players were restricted to marginal assets on account of lack of capacity – financial and human.

So, the desire to own deeper acreages also encouraged indigenous operators to up their bids to beat competitors.
At the end of the string of acquisitions spanning half a decade – 2010 to 2015 – the IOCs and their shareholders raked in about $8.717 billion, or about $7.5 billion by Wood Mackenzie’s estimates.
After the investors had bought some of the assets above the expected market prices, oil prices crashed averaging $49.49 in 2015 and $40.68 in 2016, potentially dashing the hopes of early returns on some of those assets.

The escalation of the crisis in the Niger Delta, which reduced output from some of these divested assets to zero, also crashed the investors’ hope of early returns.
These challenges also put repayment plan for the bank loans in jeopardy, worsening the energy sector’s exposure to the banking sector, currently estimated at over N3 trillion.

Post-acquisition performance
Despite the high costs of the acquisitions and the slump in oil prices, some of the operators have demonstrated capacity – human and financial – to raise production far above the pre-acquisition output levels.
But a fellow of the Nigerian Association of Petroleum Explorationists (NAPE) and retired Shell’s senior joint venture manager, Mr. Jasper Nwachukwu said the most important thing was sustainability.
He told THISDAY at the weekend that the problem with many indigenous producers was their inability to embark on relevant studies to sustain future production.

“Every barrel of oil released from the ground has its production challenges. Sometimes water comes in; sometimes sand comes in. Somebody may be producing 10,000 barrels per day today and after six months, water begins to come out and water may be 6,000 bpd per day, while oil is 4,000bpd. So, the most important thing is sustainability. That depends on whether there are proper studies to sustain production. But many indigenous producers do not like to invest money for the future. That is the difference between the IOCs and indigenous producers. Nigerian producers are contended with what they are producing today. So, before they know it, production will go down and before they carry out studies to drill more wells or reposition the wells to get more crude, the company is already in deep crisis,” he explained.

Also speaking, the Chief Executive Officer of International Energy Services, Dr. Diran Fawibe said the success of many of the indigenous players that acquired assets from the IOCs was a strong indication that Nigerians have acquired the technology and the ability to access finance to fund upstream projects.

He, however, charged those who are not yet successful to put their acts together and avoid being too greedy.
“One has interacted with a number of these people and some of them appear to be too over-ambitious. You can take it from a small beginning and grow it. We (indigenous players) have to be seen to be reliable; we have to be seen to honour agreements. Some of the people who have not made progress should build confidence to attract international financiers. These foreign financiers want someone they can trust so that when they put their money, it will not disappear,” Fawibe told THISDAY at the weekend.

Of course, Seplat, which pioneered the acquisitions of deep acreages among Nigerian independents, had demonstrated competence in the operatorship of its blocks before the company and many others suffered setbacks as a result of the resurgence of militancy, which shut down their crude evacuation line – Forcados pipeline.
However, under the latest divestments, one of the companies that attracted the confidence of financiers to develop the required financial and human capacity and emerge as the leading Nigerian independent is Aiteo Eastern E & P, a subsidiary of Aiteo Group, which operates OML 29.

Despite the challenges in the operating environment, the group embarked on the most audacious acquisition in a deal worth $2.562 billion to acquire OML 29 and the Nembe Creek Trunkline, which was executed in September 2015.
From a modest pre-acquisition level of 23,000 barrels per day, Aiteo Eastern E & P grew production in the acreage to 90,000 barrels within one year.

Basking in the euphoria of his company’s success, Chief Executive Officer and Vice Chairman of Aiteo Group, Mr. Benedict Peters said his company tripled the pre-acquisition output, “leveraging the diversity and skills of its work force and bona fides as a dynamic international energy conglomerate”.
He also highlighted several existing projects that could potentially grow Aiteo’s asset production to over 150 kbopd and 200mmscf/d.

“Our outlook is bright with three producing oil fields and viable crude exports via Bonny terminal. We also have contingent resources to appraise and prospective ones to explore in the medium-to-long term, including full 3D coverage and 2P NNS reserves at 1.6bn bbl. Put simply, we have a clear vision for the future with the experience and assets crucial to providing oil and gas consistently on a regional and global scale,” Peters added.

According to him, Aiteo’s ambitious five-year objectives include tackling the power challenges in Nigeria head-on through its legacy investments in the gas-to-power value chain.
“This is a testament to our commitment to the transformation of the entire oil & gas value chain into a world-class landscape,” Peters said.

Aiteo’s Group Managing Director, Mr. Chike Onyejekwe, who is a former Managing Director of Shell Nigeria Exploration and Production Company (SNEPCo), enumerated the company’s growth drivers to include “strong leadership, high commitment and motivation, technical and commercial excellence and superior asset base”.

“In the next five years, our operations will continue to be guided by these qualities as we leverage our capabilities comparable to oil majors elsewhere in the world. Indeed, the future is Aiteo,” Onyejekwe added.
While Onyejekwe hinged his company’s success on “strong leadership, high commitment and motivation, technical and commercial excellence and superior asset base,” Fawibe said the success of Aiteo was based on the company’s ability to “access funding and buy technology at the right price.”

“Some Nigerians now have the muscle to raise finance to do upstream projects. Some competent Nigerians who worked for the NNPC and the IOCs are now working for the indigenous players,” he said.
Fawibe however charged the operators to maintain high ethical standards and avoid cutting corners, “so that people who work with them do not have a tale of woes to tell”.

Nwachukwu also charged them to invest in sufficient studies for sustainability.
“Nigerian operators have improved significantly since the past 10 years but the problem with most of them is that they do not invest in sufficient studies for tomorrow. Nigerian players are focused on short term. That is the difference between them and the IOCs. Aiteo has a lot of former employees of Shell. So, they understand this thing better,” he added.