Divestment: Wood McKenzie Values Shell’s Equity in Nigeria JV Assets at $2.3bn

The road to the planned sale of Royal Dutch Shell’s assets in Nigeria appears clearer now, with Wood McKenzie, a leading global oil and gas consulting firm, putting the total value of Shell Petroleum Develop Company (SPDC), the subsidiary it proposes to totally divest from, at about $2.3 billion.

Last week Tuesday, THISDAY had reported the Nigerian National Petroleum Corporation (NNPC) as saying it would protect the interest of Nigeria in any transaction involving international oil companies interested in divesting from the country.

Group Managing Director of the corporation, Mr Mele Kyari, who addressed the issue in our report then had also said the NNPC cannot stop any of the oil concerns from deciding to sell off any of their assets as far as the rules are followed.

Part of the conditions for consummating the deal, Wood McKenzie, stated in a document obtained by THISDAY yesterday, also includes that the International Oil Company (IOC) must get consent as well as negotiate the Nigerian National Petroleum Corporation’s (NNPC) pre-emptive rights before the assets would be sold.

Two weeks ago, THISDAY had reported that the parent company had launched a major divestment of its Nigerian assets, especially those in the shallow-water and onshore and that the oil giant had already hired Standard Chartered to sell its SPDC, in a deal which could be one of the biggest in Africa.

A Shell spokesman had told THISDAY that the company was in talks with the Nigerian authorities to ensure a smooth transition in whatever course the company decides to take concerning its activities in the country, but declined to go into the specifics.

“Discussions with the Nigerian government are ongoing on the next steps for our onshore business in Nigeria. We are in the early stages of reviewing the commercial options,” the Shell official had stated.

In May, the company’s Chief Executive Officer, Ben van Beurden, had while speaking at the company’s annual general meeting, said Shell could no longer afford to be exposed to the risk of theft and sabotage in its Nigerian operations.

But according to the latest document, 19 Oil Mining Leases (OMLs) would be put up for sale by the oil giant in onshore locations and shallow waters in the company’s eastern and western operations in the Niger Delta.

But the company is only selling its 30 per cent equity in the Joint Venture (JV) assets, while the rest is owned by NNPC (55 per cent), Total (10 per cent), while Eni owns per cent in the NNPC-Shell JV.

Wood McKenzie, also known as WoodMac, described the move as radical, saying the decision could have seemed unlikely only 12 months ago, but was highly symbolic of what the energy transition means for IOCs in Africa, especially 63 years after the company produced its first barrel in Nigeria.

It listed the assets up for sale as OML 11, OML 20, OML 21 (Assa North), OML 22 (Enwhe), OML 23 (Soku), OML 25, OML 27, OML 28 (Gbaran-Ubie), OML 31, OML 32, OML 33, OML 35, OML 36, OMLs 43 and 45 (Forcados-Yokri), OML 46, OMLs 74 & 77 and OML 79.

Giving a background to the company’s decision to divest from the facilities, McKenzie stated that emissions from Shell’s assets in the onshore and shallow water delta are among the highest in its global portfolio.

It stated that this was due to ageing infrastructure, under-investment, vandalism, continued flaring and the harsh operating conditions, adding that until now, Shell has sold oil blocks but kept gas blocks supplying Nigeria Liquefied Natural Gas (NLNG).

It further stated that the integration of the assets with oil infrastructure coupled with the ever-present security risks may have further persuaded Shell that a clean break from the onshore delta is, on balance, preferable.

“Although Shell would rely on third party gas supply into NLNG (in which it holds 25.6 per cent), existing contracts would be novated to a buyer, while it can meet most of its Train 7 supply from OML 144, which is outside the JV.

“The domestic gas market continues to be extremely challenged as evidenced by the recent announced 13 per cent cut in gas-to-power prices. Rather than sell single OMLs, Shell is seeking buyers for asset packages in the eastern, western and shallow water delta,” the firm stressed.

However, the report stated that before any major decision could be taken, Shell must negotiate with NNPC (holder of 55 per cent in the JV assets), on the terms of a sale.

“This could cover NNPC’s pre-emption rights, treatment of outstanding JV liabilities including decommissioning, the fate of the JV’s terminals, transfer of staff, and host community approval,” it said.

According to McKenzie, Shell’s priority was identifying credible buyers and ensuring deal completion and wants to limit negotiations to hand-picked bidders only, thus avoiding a long drawn-out process, but would need NNPC’s buy in.

However, the oil and gas consulting firm raised posers over the possibility of getting buyers, although it admitted that Nigerian independents and new entrants were eager to acquire under-invested assets with plenty of volume upside.

“Playing at home, their acceptance of risk differs markedly from international E&Ps, so there will be few in the latter category. But in the energy transition era, can bidders raise enough finance to acquire, and invest in, a challenging portfolio of swampy assets?” it asked.

It noted that deal financing would be necessarily complex to mitigate risks, but pointed out that the recent OML 17 transaction highlighted that with a consortium of buyers backed by local and international lenders with multiple layers of debt, commodity traders would see off-take opportunities in return for funding and some may even consider equity.

According to the report, Shell itself may provide finance to help smooth deals and could maintain an indirect interest in the OMLs, perhaps within a special purpose vehicle, coupled with a clear exit strategy.

“This would get assets off the balance sheet, and provide more comfort to lenders. Contingent payments might also feature. Innovative solutions will be needed. A complete sell-off would be historic. However, all 19 OMLs will be extremely hard to shift in the current environment,” it said.

McKenzie disclosed that there could be as much as four billion barrels of Oil Equivalent (BOE) across the JV.

“However, we consider only 20 per cent to be commercial due to a lack of investment, crude theft, insecurity and gas market constraints. Five of the OMLs are undeveloped.

“Our valuation of Shell’s 30 per cent in the JV (excluding export pipelines and terminals) is $2.3 billion, at Net Present Value (NPV) 10, Jan 2021, $50 long-term oil price. But this is based on the current sub-optimal, business-as-usual investment profile,” it noted.

McKenzie stressed that a competent buyer/operator, giving priority to the assets, could commercialise much more than 20 per cent of the resource base, although the availability of funding for the JV partners will, as ever, dictate how much.

The firm said the recently passed Petroleum Industry Bill (PIB) overhauls the fiscal regime offering materially lower oil royalties and taxes, hence, there was much more upside than downside to its base case, which bidders would need to carefully quantify.

“Few, apart from Seplat have created value through Mergers and Acquisitions (M&A). Overpaying for resources in the ground has been disastrous for some previous buyers, so an appreciation of what is fair value given all the above-ground risks and opportunities is essential,” it added.

In February, a Dutch court held Shell’s Nigerian subsidiary responsible for multiple oil pipeline leaks in the Niger Delta and ordered it to pay damages to farmers, leading van Beurden to call its Nigerian onshore assets as a “headache”.

The company’s onshore joint venture SPDC has sold about 50 per cent of its oil assets over the past decade, with its stake in SPDC giving it 156,000 barrels per day of oil equivalent in 2020, of which 66,000 barrels were oil.

Emmanuel Addeh in Abuja

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