The Split over Afren’s Assets

Ralph Akpan writes on the feud between the UK-based administrators of liquidated Afren Plc and the company’s creditors and former partners

The ongoing liquidation of Afren Plc has taken a new turn as the feud between the UK-based administrators of the company and the company’s creditors and former partners continues to deepen, following the creditors’ claim to the funds meant for the environmental clean-up of Nigeria’s Ebok oilfield.

The collapse of Afren Plc, which declared over $1.6 billion of debt, has left partners, contractors, shareholders and bondholders scrabbling for any value they can get.

In July 2015, the FTSE-listed company decided to call in administrators, having failed to tackle its huge debt pile and stem massive losses. This decision was said to follow months of wrangling to raise $200 million to refinance the company.

“The board believes that all the possible routes have now been explored during the course of this process,” the company reportedly said, in a statement to the London Stock Exchange.
Before administrators were called in, Afren had revealed pre-tax losses of $1.95 billion, which it attributed largely to a $900 million impairment charge against falling oil prices and the write-off of its Barda Rash reserves in Kurdistan. The company’s revenue also fell from $1.64 billion to $946 million.

The new administrators, Alix partners, said in a statement: “The board explored a full range of options with a view to identifying a restructuring solution to mitigate the impact of this shortfall but regrettably such a solution could not be found. Our role now as administrators is to work alongside all stakeholders to determine the best possible route forward under these challenging circumstances.”.

Since Afren’s demise, the company’s UK administrators have been aggressively seeking to recover value for their ‘secured creditors,’ that is, the bondholders, who funded Afren’s capital investment for many years.
Today, they are made up of a group of hedge funds, who bought the debt cheap as Afren was collapsing, in the hope that they could make a return from the company’s demise; and have turned their attention to assets that should, under normal circumstances, be protected.

The best example is the current dispute over the Ebok field abandonment account.
Under Nigerian environment law, as well as the Petroleum Act, an operator in Nigeria’s oil and gas sector is required to secure funds for the eventual abandonment and remediation of the field after oil and gas production operations have ceased.

As part of the procedure for the approval of oil and gas project establishment in Nigeria, the Department of Petroleum Resources (DPR) requires a percentage of funds from production to be allocated to a specific, ring-fenced account to fund the safe, clean and sustainable abandonment of the project once the field reaches the end of its life.

While the parent company guarantees of International Oil Companies (IOCs) are considered sufficient, the DPR requires that sole risk and marginal field operators make provisions throughout the commercial production period.
Due to the prolific nature of the Nigerian oil and gas fields, operators and the DPR have not had cause to activate these funds as most fields remain either in production, or have potential to continue production.

In Afren’s case, their international creditors, in their desire to recover value, are said to be targeting these funds (approximately $23million), which have been held in a project account in BNP Paribas in Paris Afren’s administrators filed a claim over these funds in 2016 but Oriental Energy Resources (Oriental) opposed the claim on the grounds that these funds were no longer Afren’s, but were owed to Nigerians for the remediation of the field at the end of commercial production.

The legal basis for this are the Petroleum Drilling and Production Regulations (PDPR) Regulations 36 (2) as well as the guidelines for the farm out and operations of marginal fields in Nigeria, which state that the “farmee shall set aside an agreed percentage of its budget (in an escrow account, trust fund or similar security), or put in place a performance bond to provide security for eventual abandonment.”
Amidst the ongoing legal process in Paris, a court has ruled that the funds must be placed in an escrow account, pending dispute resolution.

The current billion-dollar expenditure being spent to decommission the giant structures in the North Sea at the end of the life of the North Sea fields showcases the model scenario for oil and gas producing countries.
While this is a problem that will ultimately manifest in the future in Nigeria’s oil and gas industry, the Afren case may set dangerous precedents.

The case will set the basis for how international courts interpret the ability of international investors to access these funds, not just in this Afren case, but from all the producing assets in the Nigerian oil and gas industry.

The federal government and other operating companies need to pay close attention to this process, and identify how to ensure the protection of these funds in future transactions.
The balance between the security needed for international investors to fund Nigerian oil and gas projects, and the sovereignty of Nigeria’s laws and regulations, and sustainability of the environment, must be improved.
This dispute between international hedge funds and local partners and contractors has clearly exposed the vulnerability of Nigeria’s current system, hence the need for collaborative efforts by the federal government and the operators to protect these funds.
– Akpan, a petroleum analyst, writes from the UK
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