Onshore operations in Nigeria have long been a challenge for operators, with a laundry list of problems including political challenges, sabotage, bunkering and foreign exchange.
Shell’s decision to sell off its stake in its onshore joint venture, Shell Petroleum Development Co. (SPDC), and TotalEnergies plans to follow suit are a clear continuation of a trend. For large international companies, the challenge of staying is not worth the reward.
Shell set out its plans on January 16. A local group of E&P companies, Renaissance, will acquire its 30% stake in SPDC.
From the reported values, Renaissance has struck a good deal.
Shell has a booked value of its SPDC stake of $2.8bn, as at the end of 2023.
The group of five Nigerian companies will pay $1.3 billion to Shell, with another $1.1bn for receivables and cash balances.
Shell said it expected to take an impairment on the sale. The company said it would provide a term loan of $1.2bn to the buyers. It will also provide another $1.3bn to fund SPDC’s spending on gas projects.
Shell is not alone in selling down its assets onshore in Nigeria. ExxonMobil has struck a deal, although it has become bogged down by regulatory challenges. Equinor agreed to sell its stake in a Nigerian offshore field to Chappal Energies in November 2023, while Eni is selling a parcel of licences to Oando under a September 2023 deal.
Deal dynamics
Much of the deterrent around investing in Nigeria, in addition to the operating problems, is the challenge of completing an asset sale.
ExxonMobil struck a similar deal to sell off its onshore assets to Seplat Energy in February 2022. The sale has not completed, with Nigerian National Petroleum Corp. (NNPC) playing a seemingly disruptive role.
“I don’t think Shell’s previous successful divestments will directly correlate to faster deal closure. I think most of the blocked/delayed deals are a result of a clash of interests between the government/NNPC and the buyer/seller pair,” said Welligence Energy Analytics analyst Ifeanyi Onyegiri.
“With NNPC’s transition to a commercial entity now I think that will help align interests better and should smoothen future deal making.”
The new regulator, Nigerian Upstream Petroleum Regulatory Commission (NUPRC), leads oversight of sales. The head of NUPRC, Gbenga Komolafe, has set out six criteria. He defined these as the evaluation of the environmental impact, social responsibility, governance practices, financial performance, labour relations and the legal framework.
In January, the NUPRC told Nigeria’s The Guardian that despite a number of sale plans being in the offing, none had yet been able to meet the requirements of the six-step “divestment template”.
Welligence’s Onyegiri said the government and regulator were “aligned and keen to approve the SPDC deal”. As such, he said, it was unlikely that the process would take as long as the Exxon sale.
The government is pushing for progress on all the pending sales processes, he continued. “So we expect to see some movement on all these. Deal closure is seen as a key stumbling block to increased investment so the government wants to change that narrative.”
FX squeeze
Challenges around extracting gains from Nigeria have been highlighted with the news last week that Nigeria has become ordered new controls on the proceeds of sales. The Central Bank of Nigeria (CBN) said exporting cash from oil sales “has an impact on liquidity in the domestic foreign exchange market”.
The CBN acknowledged that the IOCs must be able to meet their obligations. However, it said this must be achieved with “minimal negative impact on liquidity in the Nigerian foreign exchange market”.
As such, the CBN said banks would be allowed to provide 50% of proceeds in the first instance. The outstanding balance, though, would only be available 90 days after it arrived.
It was one of President Bola Tinubu’s key policies to simplify forex dealings when he took over in 2023. The International Monetary Fund (IMF) supported the move, but has noted that the official rate depreciated by 60%, converging with the illicit rate.
Part of the government’s plan to stabilise the rate, though, involves securing currency inflows. With inflation nearing 30% in January, and pressure on the government mounting, there will be little appetite to loosen forex rules.
Environmental impact
Among the concerns outlined on Shell’s sale to the Renaissance group are those of civil society. One of the reasons the company has struggled in Nigeria is because of the history of oil spills – and legal claims from local communities.
Leigh Day, lawyers representing the Bodo community, are pursuing Shell over a claim that an oil spill was not satisfactorily cleaned up. The trial is due to take place in February 2025.
Stakeholder Democracy Network (SDN) has also raised concerns about whether the sale is a “responsible divestment process”.
SDN highlighted oil spill problems in the Niger Delta. The group cited National Oil Spill Detection Agency (NOSDRA) figures attributing more than 2,200 oil spills to Shell during the last 10 years.
These sales, SDN warned, will see new owners inheriting potential liabilities. There is environmental damage, it said, but the infrastructure also needs “extensive repairs and replacements to bring it in line with industry standards”.
SDN country director Florence IbokAbasi said the SPDC raised “critical questions about the divestment process in Nigeria, where companies can leave without addressing the damage to the environment from which they have reaped enormous profit”.
The SDN official said the government should not approve the sale until the company has agreed to abide by principles for responsible industry divestment.
Any claims filed for spills or problems before the sale will fall on Shell. After completion, though, liabilities will be held by the new group, Renaissance.
According to a legal analysis by SOMO, an NGO, “an acquisition of a company results in the transfer of all the assets and liabilities of the acquired company to the acquiring company”. The group noted how communities have pursued international action as being more efficacious, over local courts.
Investment need
Welligence’s Onyegiri noted that Shell’s plans to exist had been held up for some time by legal claims.
The announcement in January “would mean they have probably reached a settlement. Shell has also committed material capital to decommissioning and restoration liabilities, which we believe was a key component to the deal progressing.”
It is clear Nigeria will need to attract additional investments in its onshore. Shell’s decision to remain committed to onshore gas plans – to support its LNG projects – is a positive sign for the sector. The question remains about local capacity, though.
Proof of local support for the gas market came earlier in February when SPDC took final investment decision (FID) to develop the Iseni field. The field in OML 35 will provide feedstock to the Dangote fertiliser plant in Lagos State.
Some local companies have access to more financial resources than others. Aiteo Eastern E&P acquired assets from Shell in 2015. The local company struggled to pay its bills. This widened into a number of legal cases and it also suffered a blow out at OML 29.
The withdrawal of the IOCs from the onshore Niger Delta remains a clear trend. More focused operators have some advantages, but most of the challenges remain.
Previous sales came at competitive prices. Local companies paying lower prices should start their operations on a more sustainable basis. This is particularly true when combined with operational and financial support from exiting Shell.
The NUPRC’s six criteria for sale should provide some certainty over the viability of the sale process – and resolve some of the trickier obstacles. The suspicion remains around the challenge of political hurdles, but there is a clear need and opportunity to invest in Nigeria’s onshore opportunities.
Updated at 9:38 am to alter headline to highlight the sale is of Shell’s onshore assets.