Investor Apathy Causes Oil Deals To Shrink Seven Times

Investor Apathy Causes Oil Deals To Shrink Seven Times

The scale of corporate deals between privately held businesses and their investors in Nigeria’s oil and gas sector is at the lowest ebb in eight years, with transactions shriveling seven times to $3 billion in 2023 from $20 billion in 2015.

The spate of deals in the oil and gas sector is critical as it determines the trajectory of the oil and gas sector and the economy at large.

Oil and gas sector deals such as mergers, acquisitions, asset sales, debt financing, among others, are drivers of investments and economy. They improve infrastructure, technical expertise and improve living standards, experts say.

According to PricewaterhouseCoopers (PwC)’s upstream investment trends in the oil and gas industry from 2015 to the first quarter (Q1) of 2024, investment levels were relatively high pre-2015, peaking at $20 billion in 2015.

This was followed by a period of stability between 2016 and 2018, with investments remaining at $10 billion annually. Subsequently, a decline occurred, with investment dropping to $8 billion in 2019 and 2020.

A more significant downturn followed in 2021, with investment plummeting to $3 billion. This level persisted through 2022 and 2023.

“Frequent theft, vandalism, and militant attacks disrupt production and cause financial losses, deterring mergers & acquisition activity, as seen with Shell’s pipeline shutdowns in the Niger Delta,” Pedro Omontuemhen, partner at PwC, said.

He noted that frequent regulatory changes and lack of transparency create uncertainty and deter investment in M&A activities.

“Infrastructure deficit forces costly alternatives like barging, complicating efficient production and transportation, thus reducing the attractiveness of M&A deals,” Omontuemhen said.

He added that stringent local content policies add complexity and costs to international deals, exemplified by Oando’s acquisition of Eni’s NAOC company, increasing transaction costs and complicating the process for foreign investors.

For Joe Nwakwue, former chairman, Society of Petroleum Engineers (SPE), securing financing is challenging due to perceived risks and economic instability, hindering local companies’ ability to acquire and develop assets.

“Fluctuating global oil prices and demand impact asset valuations, complicate M&A activities, as seen during the COVID-19 pandemic when oil price declines made high acquisition valuations difficult to justify,” Nwakwue said.

Data from PwC showed a slight uptick is observed in first quarter of 2024, reaching $4 billion. This development is driven by shifts in asset ownership within the Nigerian onshore assets.

In Q1 2024, there have been four large asset sale announcements of onshore and shallow water JVs by oil majors such as Exxon Mobil, Equinor, Eni and Shell to domestic players such as Seplat Energy, Chappal Energies, Oando and Renaissance consortium.

“As oil production begins to recover, indigenous players may contribute up to 70 percent of production given that there is no change in strategy from new operators or changing investment priorities,” Omontuemhen further said.

Last month, Nigerian Upstream Petroleum Regulatory Commission (NUPRC) said it has approved long-awaited divestment deals by Eni and Equinor, allowing local players Oando and Chappal Energies, respectively, to acquire their oil-producing assets.

Nigeria’s oil production has fallen well below its capacity of over 2 million barrels per day (bpd) of crude and condensate due to rampant oil theft and sabotage in the restive Niger Delta, as well as underinvestment and sluggish exploration activity.

The country produced 1.25 million bpd in June, according to BusinessDay findings.

Shell is in the process of selling its onshore business to Renaissance, a consortium of mostly local companies, while ExxonMobil’s $1.3 billion sale to home-grown Seplat has faced regulatory and legal hurdles.

On July 3, however, Gbenga Komolafe, head of NUPRC, said the Shell divestment deal with Renaissance was currently being reviewed, while that of ExxonMobil had reached an advanced stage of approval.

In June, NNPC withdrew its legal challenge to the ExxonMobil-Seplat deal, which will increase London- and Lagos-listed Seplat’s output from 51,000 bpd of oil equivalent currently to 146,000 boepd.

Komolafe previously said approvals of divestment deals would speed up if IOCs agreed to shoulder the burden of oil spills and clean-up, potentially prolonging the process.

Yet representatives of local oil companies said they were capable of boosting Nigerian output by 200,000 bpd within two years if the government sped up the approvals of the deals.

Major transaction

Eni’s deal with Oando, estimated at $500 million, includes the major’s interests in four onshore oil licenses, Oil Mining Licenses 60, 61, 62 and 63, as well as stakes in the Brass terminal, onshore exploration concessions and power plants.

The Italian company currently holds a 20 percent operating stake in the joint venture, alongside Oando with 20 percent and state-owned Nigerian National Petroleum Company with 60 percent.

Oando, which is run by President Bola Tinubu’s nephew, is producing 25,000 bpd, Alex Irune, chief operating officer at Oando plc, told S &P Commodity Insights in a March interview, and is set to double its output to 50,000 boepd with the Eni deal.

Equinor’s deal with Chappal will see it hand over its 53.85 percent stake in block OML 128, including a 20.21 percent interest in the Agbami oil field, which is operated by US major Chevron and produces just under 100,000 bpd of oil, according to the NUPRC.