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…Merger and acquisition done for energy transition, strategic alliances for operational efficiencies.
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…Divestment by the majors creates opportunity for indigenous players in the industry.
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…Squeezing out the last barrel for the independents.
Divestment has shown that the International Oil Companies (IOCs) are leaving shallow water and concentrating on deep water. How does the industry survive and move forward?
This was a concern to the Centre for Petroleum Information (CPI) at its 24th edition of the Petroleum Policy Roundtable (PPR).
The chairman CPI Board of Governors, Engr. Afolabi Oladele, asserted that the 24th year of CPI’s existence is marked with significant events which are the architecture of ownership and operations of the hydrocarbon industry in Nigeria. Nearly three decades after ceding a number of marginal fields within the leases held by the IOCs to indigenous oil and gas companies, “We have come full cycle in 2024, the year that sees the IOCs selling their interests in the JV operated land, swamp and shallow water leases to Nigerian independent producing companies.”
Oladele stated that those that were recently announced as having obtained government consent are ExxonMobil shallow water leases which was sold to Seplat, a company quoted on dual exchanges both in Nigeria and the United Kingdom (UK).
TotalEnergies has also sold to Chappal LNG related gas supply assets. The company sold its share operator JV leases.
Similarly, Eni has sold its interest in Shell operated JV leases to Oando. It is expected that Nigerian Upstream Petroleum Regulatory Commission (NUPRC) will soon make a pronouncement on the fourth entity that SPDC has announced on parties that have been selected as possible buyers of its interests.
This is an earth shaking event seeing that the core of the nation’s reserves are actually held by Shell.
“It is a milestone development which has far reaching implications on our country and forms the choice of our theme today; Sustainably Powering Forward the Nigerian Petroleum Industry as IOCs back pedal.”
The concern of the industry and stakeholders is that companies that have been selected have what it takes to properly transfer transition as they takeover the roles of ensuring sustenance of the nation’s economy as a leading source of foreign exchange. Apparently, security of the nation’s oil reserves is being held by Nigerian owned entities. Can they wear the shoes of the IOCs which had been for decades?
Now that the table has turned, it is in the hands of these companies.
These companies also have the onerous challenge of piloting the nation to safe landing in the dynamic world of energy transition in the face of climate action. These are critical issues that must be taken seriously.
Leveraging Mergers and Acquisition in Nigeria’s Upstream Oil and Gas
Delivering a paper titled: ‘Leveraging Mergers and Acquisition (M&A) in Nigeria’s Upstream Oil and Gas; lessons learnt from global economy’ Pedro Omontuemhen, Partner PWC, gave an insight on the global upstream oil and gas and its trend on divestment.
Omontuemhen said, taking a look at the globe in 2024, acquisition started in the United States, a major oil producer with robust economy. There are big transactions and it has come to Nigeria. It took Seplat almost two and half years to complete some of its transactions. These transactions transcended Nigeria and Africa and involved billions of dollars to acquire assets either by buying for cash or use as equity combination of debt and equity.
Key drivers of mergers and acquisitions around the world
The first driving point is security of supply of value chains, partnering for strategic alliances for operational efficiencies. Corporate governance and compliance must be secured. Merger and acquisition is done for energy transition.
The PWC helmsman explained that the divestment by IOCs is driven not by their local companies in Nigeria, but propelled at their corporate headquarters and where they believe there is a return for investments.
These are the reasons ExxonMobil, Shell, Chevron and TotalEnergies are considering return for investment, and the move to some African countries.
“The IOCs have not left oil business; they only relocate to countries that will give them returns after investments leading to more activities in the future.”
Divestment by the majors creates an opportunity for indigenous players in the industry. It gives local companies room to take advantage and prepare for the future. “Every darkness creates an opportunity.” In the 1970s government came up with indigenisation policy, which gave room for job opportunities. Nigerians will play significant roles in the divestments and exit of the IOCs. Nigerians buying these assets understand the local terrain.
Key challenges
Omontuenwhen added that the impact on offshore oil and gas activities in Nigeria, security concerns about frequent theft and vandalisation, attacks, disruptions leading to shut downs and expensive barging are key challenges.
Regulatory uncertainty is a big bane of the country. For instance, it took the country years to pass Petroleum Industry Bill (PIA) and it lost a lot of money with huge consequences. There are decayed infrastructures with funding constraints; the country has not been investing in the industry. Acquisition done in foreign capital due to the push in the West for lower carbons emission and green capital has become a challenge to get money to invest in Africa. Market volatility and crude oil swings with difficulty to predict price.
These constraints affect mergers and acquisitions hence regulatory bottlenecks should be removed for ease of doing business in the industry.
Managing Inherited Assets: Rising to the Challenge
On his part, Chief Executive Officer (CEO), Seplat Energy PLC, Mr. Roger Brown, in his keynote address titled: ‘Managing inherited Assets: Rising to the Challenge’ called for prudent management of oil and gas assets in Nigeria in the country’s quest to drive growth in the energy sector and encourage expansion.
Brown said in managing inherited oil/gas assets, cash generation should be ensured with the operators drive growth and development of the assets.
Referencing the Seplat Energy case, he said from the company’s 14-year experience in managing inherited assets, production has been increased across its portfolio of acquired assets; of which acquiring and managing assets has driven the company’s journey to becoming Nigeria’s leading independent energy supplier.
Brown said: “At Seplat Energy, 2P reserves rose 9 per cent Year-on-Year to 478 MMboe with a 47 per cent:53 per cent split between liquids and gas. The increase in reserves was due to discovery of new reservoirs in OML 40, booking of volumes from the Abiala marginal field, and conversion of 2C resources to 2P in OML 53 2P + 2C reserves and resources 540 Mmboe at end 2023.
“Post-IPO (Initial Public Offer), our investment in gas infrastructure has yielded fruits with oil and gas production mix now at 59 per cent and 41 per cent respectively (at the end of Full-Year 2023) from 83 per cent and 17 per cent pre-IPO. Investments in alternative evacuation routes have helped to stabilise production at >44.0 kboepd. Aggregate production has grown at a CAGR (Compound Annual Growth rate) of 5.4 per cent post-IPO”.
The Seplat Energy CEO added: “Tax contribution to Nigeria stands at $2bn (Royalties, PPT, PAYE, NCD. $2.8bn total since company incorporation); $1.6bn capex invested in Nigeria ($2bn total since company incorporation); $535m total IPO raised (all at IPO); $575m total dividends paid (total of $616m including $41m pre-IPO dividends). Clearly, strong cash generation from prudent management of our assets has supported growth and expansion”.
Seplat Energy business has continued to generate strong cashflows reflected in its strong FCF (Free Cash Flow) and NCFO (Net Cash from Operations) generation. Post-IPO, the company generated $1.7bn in FCF. Excluding 2014 and 2015 where it made significant capex investments post-IPO, the company has generated an average annual FCF of $264m.
The Seplat Energy CEO further called for strong collaboration between operators and their communities, stressing that working closely with host communities is essential to future success of acquired assets. “As a matter of importance, the communities where you operate should grow as the company grows; as well as the nation at large,” he added.
Squeezing Out the Last Barrel
Speaking on squeezing out the last barrel due to IOCs divestment, Austin Avuru, Chairman and CEO of AA Holdings and former CEO of Seplat, extolled his successor, Roger Brown for modern asset which cost $373 million and the company has invested over $3 billion given to government while shareholders of the company has been given almost $600 million.
“This is quite commendable and it doesn’t happen by chance.”
Avuru said squeezing out the last barrel is about core IOC divestment. They have financial muscle with access to research and development.
“They go to frontiers and make big discoveries deploying resources to develop them. The opportunities of squeezing out the last barrel simply means that when the IOCs are moving out the independents are stepping in.”
“Every credible, well-managed and run independents as the biggest opportunity comes, it is better to step in, as Seplat has clearly demonstrated that there is money to be made.”
Since independents don’t have financial muscle to take exploration risk frontiers, those that are growing need to apply prudence in management, technology and financial might in squeezing out the last barrel. Right decision has to be taken to get expected results.
Some successful independents over ten years have returned billions of dollars to their shareholders. This has attracted private equity firms supporting independent companies by giving them fund for returned investments.
According to Avuru, the exit of the big boys is the biggest opportunity for the independent. They should be efficient, low cost operators. Depending on the margin, is either swim or sink.
“Borrow money for the acquisition of the asset. If you cannot increase production in first six months, you run into trouble.”
Seplat was able to pay acquisition debt in three years, but companies that couldn’t pay off debt in five years still owe in twelve years. This is how it works.
IOCs not paying attention to Gas
Avuru said over a long time, the IOCs operating in Nigeria didn’t pay attention to gas. Shockingly, Nigeria has abundant of gas resources and its monetization gives value.
Part of the challenges is technology and the communities including issues on pipelines which can be handled by an efficient operator. Some independent companies have kilometers of pipelines running through communities without issues thus the problems had been abandonment by operators.
Some operators are divesting leaving the pipelines in the hands of those who can’t manage them. They were originally designed to work depending on how it is being managed.
“The IOCs claim they are not leaving in spite of divestment and heading to deep offshore, but if production gets to $30,000 barrels per day, they will leave the same way they left onshore. Independent operators should get ready.”
The former Seplat boss added that the greatest opportunity available to an independent is in squeezing out the last barrel when the IOCs leave.
“You don’t inherit it, pay for it, get involved in production and make money out of it.”
The biggest challenge, is how to ensure that an independent maintains low cost operation with certain key niches that have been mastered. Water handling, Gas monetization and Commercialization with Heavy oil development are significant.
These three niches are needed in Nigeria’s matured basins for an operator to be successful with positive financial impact.
