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NNPC’s cash-call failures, crude theft, poor environment fingered as oil majors exit Nigeria

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..but it provides opportunity for local oil firms

THE gradual divestment of oil majors from Nigeria have both positive and negative consequences on Nigeria’s economy, ICIR analysis have shown.

Nigeria has been witnessing gradual divestment of key international oil companies in the country whose investment is worth billions of dollars.

Shell, ExxonMobil, Chevron, and Total have divested their operations to other regions, despite Nigeria being Africa’s biggest producer of oil in the region.

The divestment has seen Nigeria fail to meet up to its Organization of Petroleum Exporting Countries (OPEC) quota of 1.6 million barrels per day, doing currently between 1.3 million and 1.4 million barrels per day despite oil price hovering around $100 per barrels due to Russian-Ukraine war.

The Nigerian National Petroleum Company Limited Chief Executive Officer Mele Kyari had, at the ongoing International Energy Summit (NIES 2022)  said oil majors were leaving Nigerian and shifting their portfolios to where they could add value to their journey towards carbon net-zero commitment.

He noted that major oil companies were leaving Nigeria not primarily because there were no opportunities in the country but because of the push from fossil fuels in the last 10 years.

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However, analysts say there are several other critical issues that have also contributed hugely to the divestment.

As of November 2020, the NNPC had paid $3.1 billion to five international oil companies (IOCs) for cash-call obligations, but the oil company still owed $1.5 billion debt to the IOCs. BusinessDay quoted an anonymous oil executive saying that the IOCs turned down NNPC’s proposal to pay them in naira in 2021.

As of late last year, the NNPC owed Shell Petroleum Development Company (SPDC) an outstanding balance of $917 million while Total E&P Nigeria Limited and Nigerian Agip Oil Company were owed $252 million and $370 million respectively, BusinessDay reported.

 

Analysts say the oil company’s inability to meet up with cash-call obligations on joint ventures could be partly responsible for the divestment.

“There has been issues with NNPC not meeting up with cash-calls payment obligation, and shoddy implementations of the Petroleum Industry Act worries the oil majors,” Former President of Nigerian Society for Petroleum Engineers (SPE) Joe Nwakwue told The ICIR.

“Week in, week out, the Nigerian government has been pushing through for an amendment of the Petroleum Industry Act with the legislature. The oil majors are not comfortable with that development, they are worried of uncertainty that characterises the amendment.”

Available data show that the NNPC is poorly managed, with huge losses often recorded in its refineries and political interference a key reason why it does not meet up with its cash-call obligations with most oil majors.

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The ICIR has analysed its financials here, here,  here and here. These financials show high level of financial recklessness on the part of the NNPC.

Industry watchers say the delay in cash-call repayments will serve as further discouragement to IOCs who are cutting billions in spending after taking hits to their profits, shifting money to renewable fuels and focusing only on the most cost-effective markets.

In line with the afore mentioned concerns , Seplat Energy Plc, a leading Nigerian energy company listed on the Nigerian Exchange and the London Stock Exchange, in a major divestment step, has entered into an agreement to acquire the entire share capital of Mobil Producing Nigeria Unlimited (‘MPNU’) from Exxon Mobil Corporation, Delaware (‘ExxonMobil’).

Seplat said the completion of the transaction was subject to ministerial consent and other required regulatory approvals.

The deal is worth $1.283 billion plus up to $300 million contingent consideration, subject to lockbox, working capital and other adjustments at closing relative to the effective date.

Shell selling assets valued at $2.3 billion, while Eni could sell as much as $5 billion.

The Guardian cited an international research body, Rystad Energy, as estimating assets to be sold off, including that of Total and ConocoPhillips, at $27.5 billion.

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Speaking on the development, Chief Executive Officer(CEO) of the Centre for the Promotion of Private Enterprise(CPPE) Muda Yusuf said the fragile operating environment had forced many oil companies to divest their producing assets while some others had opted for offshore explorations.

Yusuf said the oil sector had consistently contributed less than 10 per cent to the nation’s Gross Domestic Product(GDP), adding that, “as at the third quarter of last year, 2021, the sector was one of the few that contracted.”

Oil theft is also a major issue. Available data indicate that Nigeria lost 42.25 million barrels of crude oil in 2019 and 53.28 million barrels in the prior year, owing to oil theft.

Industry operators are of the view that oil theft in Nigeria is aided mostly by obsolete infrastructure such as old oil pipelines, making it easy for third party infractions

President of the Petroleum Products Retail Outlets Owners Association of Nigeria (PETROAN) Prince Billy Harry noted that prevalence of oil theft was driving international and local investors away, saying that oil majors were taking their money to more favourable climes with better monitoring and surveillance practices.

He added that petroleum products theft in the downstream petroleum sector was equally discoursing investors.

However, some oil sector experts say the development had both positive and negative consequences.

“Exit of oil majors has positive consequences for the Nigerian indigenous oil firms. For instance, there is massive opportunities in Seplat-Exxon Mobil acquisition deal which gives indigenous firms opportunities to prospect oil on their own, engaging host communities properly. Technology know-how transfer is also very feasible,” Najim Animashaun, a research specialist in Fossil energy, with deep knowledge on energy transition told The ICIR.

“Also, adaptable technologies from fossil fuel to renewable energy is an achievable one with energy transition in mind. It is even an area that I am a specialist in.”

He insisted that indigenous oil firms would deepen their opportunities to focus on energy transition, combining it with innovative technology transfer.

But general underinvestment across the sector and poor security of the country’s waterways show nothing much is being done to tackle the crime while, in some cases, security agencies even collude with cartels for the pay-out.

Yusuf, expressed reservations over ability of the country meeting its OPEC quota of 1.68 million barrels a day, bpd of crude for January 2022.

Findings show that in the last few months, Nigeria has been producing closer to 1.25 million bpd, an indication of difficulties ahead in meeting this target.

 

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