Co-published project finance guide: Nigeria


Lessons from Shell


Ken Etim and Dipo Okuribido of Banwo & Ighodalo describe the challenges and achievements of a formerly struggling oil and gas industry


embarking on a strategy of refocusing its onshore interests in Nigeria, in line with the Federal Government of Nigeria’s aim of assisting Nigerian companies to develop their capacity in the upstream oil and gas business. Accordingly, SPDC commenced the process for the assignment of participating interests in several onshore oil mining leases to exploration and production companies, most of which have majority Nigerian interests (the Divestment Programme). As of November 2012, six transactions have closed in what has been a revolution of sorts in Nigeria’s typically change-resistant oil and gas industry.


A


Background The Nigerian oil and gas industry has historically been criticised for its low contribution to GDP. Despite sometimes accounting for up to 95% of all government revenues, the industry has seldom contributed more than a meagre fifteen per cent 15% to the Nigerian GDP, consistently ranking no better than third behind


few years ago, the Shell Petroleum Development Company Limited (SPDC) announced that it would be


agriculture, which contributes up to 40%, and wholesale and retail trade which contribute around 19%. This low contribution to national GDP is generally attributed to the fact that the bulk of oil and gas production is carried out by foreign oil companies which tend to rely mainly on foreign sources for finance and consumption of their production in Nigeria. Thus the defining sector of the Nigerian economy is left with little or no opportunity to benefit from the industry. To counteract this trend, various


measures have been introduced by successive governments, including a marginal fields programme in 2003, according to which dormant fields within portfolios of international oil and gas companies were auctioned to indigenous Nigerian companies. More recently, in April 2010, the enactment of the Nigerian Oil and Gas Industry Content Development Act aims to compel greater consumption of Nigerian goods and services. Despite all of these measures, indigenous companies still generally account for only around 10% of oil and gas production, and contributions of the oil and gas industry to GDP have remained generally low. The SPDC divestments are significant because they are likely to serve as a major game changer to this situation. The majority of onshore oil and gas


“Six transactions have closed in what


has been a revolution in Nigeria’s typically change-resistant oil and gas industry


” 82 IFLR/December/January 2013


production in Nigeria is undertaken by SPDC and a handful of other international oil companies (IOCs), with joint venture arrangements between the NNPC (Nigerian National Petroleum Corporation) and the IOCs. The Joint Operating Agreement (JOA) between the NNPC and SPDC also has Total E & P Nigeria (Total) and Nigerian Agip Oil Company (NAOC) as parties, with SPDC serving as operator of the fields covered by the JOA. The JOA accounts for the largest share of oil production in Nigeria. Participating interests under the JOA are shared as follows: (i) NNPC – 55%, (ii) SPDC – 30%; (iii) Total – 10%; and, (iv) NAOC – five percent.


Under the Divestment Programme,


SPDC, Total and NAOC have thus far assigned their aggregate 45% participating interests in eight producing oil mining leases (OMLs). Participating interests in OMLs 4, 38 and 41, which have a combined production capacity of 91,000bpd of crude oil and 40MMscfd of natural gas and current production of 30,000bpd of crude oil, were sold to Seplat Petroleum Development Company (Seplat) which is majority owned by the Nigerian exploration and production companies, Shebah E&P and Platform Petroleum. Interests in OML 26, which currently has production of 5,000bpd of crude oil and capacity to increase to 40,000bpd, were sold to FHN 26, a wholly-owned subsidiary of First Hydrocarbon Nigeria. OML 42, which has a current production of 12,000bpd of crude oil, was sold to Neconde Energy, a special purpose vehicle (SPV) owned by a group of investors, including the Nestoil Group of Nigeria. OML 34, which has a current production of 15,000bpd of crude oil and 300 million cubic feet of gas, was acquired by ND Western, which is majority owned by Niger Delta Exploration and Production. OML 40 was acquired by Elcrest Exploration & Production Nigeria, a joint venture between two independent exploration companies, Starcrest Nigeria and Eland Oil & Gas. Finally, OML 30 which has a current production of 35,000bpd (the largest of the eight OMLs) with potential to achieve 55,000bpd in the short term (and 100,000bpd in the long term) was sold to a joint venture of Heritage Oil and its Nigerian partner, Shoreline Power. Banwo & Ighodalo was involved in three of these transactions.


Financing oil and gas acquisitions The combined production of the eight OMLs which is in the region of 100,000bpd of crude oil is expected to significantly increase the proportion of Nigerian production under the control of indigenous companies. Other benefits of the divestments to the Nigerian economy are already becoming apparent. For instance, Nigerian commercial banks including Access Bank, First City Monument Bank, Guaranty Trust Bank, and Stanbic IBTC Bank, contributed a substantial amount of the over $2 billion required to fund the acquisitions and future operations of the various parties. More activity is still expected in this respect as foreign financing parties look to offload portions to Nigerian banks, and other indigenous companies look to acquire


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