Co-authored by Osinachi Akanegbu

Introduction

Divestment (or divestiture) is the sale of an interest in an asset or investment. The sale can be 100% or a portion of the interest. This happens for reasons that can range from financial, ethical, strategic, or political. Companies also periodically review their portfolios to ascertain risky investments or those that are not meeting the stipulated average internal rate of returns relative to the inherent risks. It can also be driven by the need to align current portfolios with core business strategies. However, in recent times, divestment is driven by the need to comply with green energy transition or climate action.

In Nigeria, the International Oil Companies (IOCs) own and control assets within the Oil and Gas Industry. However, issues such as climate change, oil theft, pipeline vandalism, and sabotage by the petroleum host communities have driven IOCs to selling off their oil and gas assets in the onshore, swamp and shallow waters.

This article explores the history of divestments in Nigeria, the issues arising from divestment and what the future holds for the country.

History of Divestment in the Oil and Gas Sector.

The International Oil Companies (IOCs) dominated the Nigerian oil sector from the start of production (when Oil was discovered in Nigeria) in the 1950s. However, in the last 30 years, two broad waves of divestments have increased Domestic Oil Companies' (DOGs) participation in the country's oil and gas ecosystem.1

First Wave

The first wave came with the sale of marginal fields in 2001, which opened the door for increased participation of DOCs in onshore operations. The marginal field program involved 24 small fields, which were undeveloped by the original leaseholders for at least ten (10) years. The IOCs did not develop those fields because they were thought to contain more of gas than oil and were considered unattractive under the prevailing fiscal and market conditions, A marginal field is a field carved out of an existing lease. Thus, the IOCs had to sign a farm- out agreement with those companies that successfully participated in the program. The expectation was that the opening of the industry to locals would help Nigeria grow its reserves and production.

However, the successful bidders could not raise the necessary finance to develop those fields. Only Five (5) of those fields reached first oil. Notwithstanding, it provided the DOGs with the experience required to take oil assets to production. The jury is still out on whether the 2000 marginal field program has been a success. The government announced a second round with thirty-one (31) marginal fields in 2013, but the program was never concluded.

Second Wave

If the first wave could be said to be mandatory, the second wave was voluntary. This wave resulted in the divestment of major onshore assets by the IOCs. The major trigger for this wave was driven by the need by the IOCs to rationalize their asset portfolio, especially because of increasing sabotage of their petroleum operations. The first notable divestment was in 2010 when Shell divested four onshore oil blocks2. This kickstarted a wide range of divestments within the Nigerian oil and Gas industry. At the end of 2015, major divestments, which would change the trajectory of the Nigerian oil industry, had taken place. This wave led to the growth of Nigerian independents such as Seplat Energies, Shoreline Natural Resources, Neconde, Eroton, ND Western, Elcrest, First Hydrocarbon, Newcross and Aiteo.

The sale of the oil assets to domestic oil companies was understandable given the enactment of the Nigerian Oil and Gas Industry Content Development Act (NOGICD Act) in 2010. This law mandates the International Oil Companies to give priority to DOCs when it comes to selling off their Oil Assets.

Triggers for Divestment in Nigeria

As noted previously, there are several reasons why the IOCs have been divesting. We discuss these reasons below:

  1. Regulatory
    The launch of the Marginal Field Program in 2000 forced the IOCs to give up undeveloped fields, given Nigeria's desire to encourage the participation of DOGs in the sector while also growing its reserves base and annual production. Consequently, the IOCs had to enter into Farm-Out Agreements with the successful bidders in respect of those fields that met the definition of 'marginal field' under the program. It is doubtful that the IOCs would have given up these fields then if the program did not mandate it.
  2. Operational Risk Management
    One of the foremost concerns the IOCs have openly decried is the mounting instances of sabotage by the petroleum host communities that have led to disruptions in oil production and distribution networks. In the early days, the employees of these IOCs were kidnapped for ransom. This led to a situation where the IOCS had to move their headquarters to Lagos. These deliberate acts of sabotage did not only result in significant financial losses but also posed serious environmental risks3. The resulting oil spills and leaks had devastating consequences on the ecosystems and the host communities.
    The IOCs have continued to express deep apprehension regarding the escalating community crises that have erupted in the Niger Delta, where they operate. These crises often stem from disputes over land rights, resource allocation, and the environmental impact of oil extraction activities. These conflicts have disrupted operations, strained relationships with local communities and resulted in legal disputes which take forever to settle. In fact, it is alleged that Shell is unable to conclude its divestment program because of ongoing litigation problems.
  3. Portfolio Rationalization
    Oil is now being discovered in many countries. These countries are offering various tax and regulatory incentives to attract the oil producing companies. It is a fact that capital will only flow to where it is appreciated and where it will generate high rate of returns. In addition, the oil companies have limited funds to invest. They, therefore, must periodically evaluate their investment portfolio with a view to rationalization. Currently, Guyana and Mozambique have proved to be attractive given the low cost of production and low risks. It is, therefore, not surprising that oil investments are flowing to these counties. In Nigeria, the cost of production per barrel is one of the highest in the world due to issues such as bureaucratic bottlenecks and long contracting cycles.
  4. Uncertain Fiscal and Regulatory Regime
    It took Nigeria 20 years to enact the Petroleum Industry Act (PIA). During that period, some of the IOCs had taken decisions to exit the country because of uncertain fiscal and regulatory regime. The PIA's key objectives are to foster a business environment that is conducive to petroleum operations and promote transparency, good governance and accountability in the administration of the country's petroleum resources. It is still early to determine whether the PIA has had any impact in achieving its stated objectives.
  5. Climate Change
    Perhaps, the prevailing force is the transition from fossil fuels to more climate-friendly forms of energy. The IOCs have found themselves grappling with a growing global decline for the financing of fossil fuel activities. As nations and financial institutions commit to reducing carbon emissions and transitioning to cleaner energy sources, IOCs have faced increased pressure to adapt their business models and invest in more sustainable and environmentally friendly technologies.

The Good and the Bad Aspects of Divestment

As already discussed, there are reasons for every divestment. However, government should properly scrutinize every divestment program to ensure that any potential negative implications can be managed. This section of the article will discuss the good and the bad aspects of divestment programs in Nigeria.

The Good

The Divestment in the Oil and Gas Industry is crucial for the development of the Nigerian local oil and gas industry as well as other aspects of her economy. The quest for the diversification of the Nigerian economy dates to its first National Development Plan for the period 1962-68. Succeeding national development plans from the 1960s to the 1980s focused on promoting local production and indigenous businesses through import substitution.4

Since the turn of the last century, agriculture self-sufficiency, power, energy, and transport sector development, as well as private sector growth, have been at the forefront of the minds of successive governments, as embodied in their development strategies from NEEDS and Vision 20: 2020 in the early 2000s to ERGP10 more recently in 20175.

Some of the good aspects of divestment are discussed below:

  1. Promotion of Local Content:
    Nigeria, in a bid to promote local content development, enacted the Nigerian Oil and Gas Industry Content Development Act 2010. This Act has aided the development of the Nigeria domestic oil and gas industry by giving priority to domestic companies in the acquisition of oil and gas assets. The prioritization of Local Content development in Nigeria has, therefore, led to more Domestic Oil Companies taking the forefront in the development of the Oil and Gas Industry.
    Local Content development is the development of local skills, oil and gas technology transfer, and use of local manpower and local manufacturing. It has become a critical issue because every country would like its citizens to capture the commanding heights of its economy and thus assist to keep its wealth within its borders, as well as providing jobs to the ever-increasing population. This is often achieved through capacity building, creating Small and Medium Scale Enterprises (SMEs) as well as offering products and services locally; though very few countries have been able to achieve a successful local content policy so far, except for Norway.
  2. Increase in Gas Production:
    The Nigerian companies that have taken over the assets being divested by IOCs have focused on growing gas reserves and production. Based on available research, the share of their contribution to gas production has increased significantly. The companies supply gas to power companies, gas-based industry, commercial companies that use gas as fuel. In fact, some also supply gas to the Nigerian LNG Company for exports.
  3. Better Management of Disputes with Local Host Authorities:
    Domestic companies seem to have a better understanding of the host communities and are, therefore, able to resolve potential conflicts quicker than the IOCs would have done. The country has seen fewer conflicts with respect to the assets taken over by the Nigerian independents. This is understandable given the special attention that these companies give to host community relationship management. The flexibility in the Memorandum of Understanding executed with the host communities has also helped them in managing potential conflicts.
  4. Promotion of integrated petroleum operations
    Unlike the IOCs that are primarily focused on the upstream sector, the domestic oil companies are interested in developing integrated petroleum operations, involving upstream and midstream/downstream operations. The key driver is to extract value from every barrel of crude oil produced in the country. Therefore, some of the Nigerian independents have invested significantly in gas processing plants and modular refineries. The investment in gas processing plants has helped to reduce gas flaring while the operation of refineries has contributed to the local production of naphtha, kerosine, gas oil and fuel oil. In fact, some of these companies that could not export their crude because of pipeline disruption have depended on the local refineries to generate revenue.

The Bad

Though divestment by the IOCs has had positive impact on the country, it has also resulted in some unintended consequences as discussed below:

  1. Limited compliance with local content regulations
    Surprisingly, the Nigerian independents tend not to pay adequate attention to local content regulations and laws. At the same time, the regulators do not appear to have the will to enforce the regulations and laws because of the connections that the owners of these Nigeran independents have with government. Consequently, standards are lowered, and noncompliance is very prevalent.
  2. Reduced Tax and Royalty payment.
    Given the laxity in the implementation of applicable laws and regulations, there is a negative impact on revenue generation. The Domestic Oil Companies seem to have entitlement mentality. They do not see any compelling reasons why they should pay taxes and royalty as and when due. Available evidence shows that the tax/royalty payment on the same fields/assets previously owned by the IOCs has declined significantly. In some cases, the reduction in tax payment is due to the actions and policies of Government. For example, pioneer status incentives were erroneously granted to those assets that the IOCs had previously paid taxes on before they were subsequently withdrawn.
  3. Funding still a challenge:
    As a result of transition to green energy, funding for fossil fuel has become particularly challenging. Banks that would have provided the necessary finance to develop these assets are facing still opposition from shareholders and climate rights agitators. Unfortunately, Nigerian independents do not have the deep pockets that the IOCs possess. Subsequently, they are unable to comply with the provisions of their field development plans. Inability to access foreign exchange has also constituted a big challenge as the bulk of finance required in oil and gas operations are foreign currency denominated.

Case Study of Successful Divestments through local content6

In Norway, exploration for oil began as far back as mid 1960s. In the 1970s, her ministers started implementing policy to protect the interests of communities and the economy. Interestingly, their strategies included:

  1. Awarding contracts to Norwegian companies when they proved competitive in terms of price, quality, delivery time and service. The rationale behind this was to promote the establishment of local industry and this objective was achieved through cooperation with international oil companies.
  2. Promotion of Research and Development Partnerships: When foreign operators started entering the Norwegian industry in the late 1970s, they were strongly encouraged to form research and development (R&D) partnerships and joint development programs with Norwegian companies and institutions, thus engaging in local content growth.
  3. Overseas firms' commitment to and strategies for technology transfers were made a crucial and determining factor in the licensing process by the Ministry of Petroleum and Energy; thereby putting local content program at the heart of investments.
  4. Governmental policy meant that Norwegian oil and gas supply companies developed leading class, state-of-the-art technologies. As a result, many international companies have located part of their R&D chain in the country.

Thus, the Norwegian oil and gas local content developed as strongly as the industry because the government placed emphasis on local content through policies. Competencies and technological expertise developed because of Norway's local content policies. It would be interesting to note that the Country has been passing down its expertise in local content development through the Norwegian Oil Development Initiative and Nigeria is one of the beneficiaries of this initiative.

The Future Outlook of Divestment in Nigeria

Certainly, divestment in the oil and gas industry will continue to happen, especially given the current operating and regulatory environment. Interestingly, Nigeria is also witnessing the exit of international oil service providers. However, because of the implications on the country's economy, environment, and social well-being, it is important that the process is streamlined and transparent. This may explain why the PIA prescribes that the Minister(s) must give their consent within 60 days of the recommendation by the Nigerian Upstream Petroleum Regulatory Commission. Where the ministerial approval is not given with the statutory period, it is deemed to have been given. However, the issue is what will happen where the President is also the Minister!

Some of the potential implications are discussed below:

Economic Impact

Nigeria is heavily dependent on oil revenue. Oil exports account for about 90% of export revenue and 60% of total revenue. Despite these huge contributions, the oil industry only contributes 6% the country's GDP. Therefore, any divestment program that does not go well or is stalled for whatever reasons will have significant impact on the country. The implications of divestment on the economy becomes extremely critical and raises the need to diversify the economy away from oil.

Environmental Concerns

Oil is currently produced from 323 fields, which are connected to 265 production processing systems. However, there are fields that the operators have abandoned but not plugged. Under the enabling law, the relevant operators need to implement an abandonment program to restore the area back to its original state. However, there is no evidence that any abandonment fund, prior to the PIA, had been set up to address this problem. In fact, the allegation against some of the IOCs is that they are divesting their mature assets to avoid the statutory obligations in respect of decommissioning and abandonment of the related facilities. The implication, therefore, is that the new owners of those assets may not be able to fund the abandonment when the need arises. This will certainly contribute to the degradation of those areas with the resultant effect on the health and means of livelihood of the local communities. The PIA has sought to address the issue of avoidance of the IOC's obligations by making it mandatory for every operator to set up an abandonment fund. The IOCs are also jointly and severally liable for decommissioning abandoned wells and facilities.

Climate Change Mitigation

Nigeria, being a signatory to the Paris Agreement on climate change, has an obligation to promote activities that positively help to reduce greenhouse gas emissions. In fact, the country has committed to achieving net zero by 2060. To facilitate this objective, Nigeria has set targets for its Nationally Determined Contribution (NDC).

Under the revised NDC, Nigeria plans to reduce its emissions by 20% unconditionally and 47% conditionally below business as usual by 2030. To demonstrate its commitment, Nigeria enacted the Climate Change Act in 2021. Consequently, government will critically evaluate every divestment in respect of alignment with its climate policies.

As of today in Nigeria, we have fewer Major International Oil Companies operating in Nigeria - Chevron, Eni, Equinor (Formerly Statoil), ExxonMobil, Shell, Savannah, Prime Oil and Gas BV and TotalEnergies. Collectively, they have equity participation in over 110 Oil Mining licences (OMLs) and are responsible for 45% of Nigeria's oil production and 40% of gas sales7. The key question is whether Nigerian independents have the experience and the financing to deal with negative consequences of petroleum operations such as oil spillage. Only time will tell.

Currently, there are four (4) investments that are pending – Seplat-ExxonMobil, Oando-Agip, Chappal Energies-Equinor and Shell Assets. Apart from the Shell divestment, the other three are awaiting regulatory approval. It is imperative that Government urgently addresses the uncertainty caused by the stalled approval to help unlock value. If the approval continues to be delayed, the sellers will not make the necessary investment required to grow production.

Conclusion

As a result of divestment, the Nigerian Oil Industry is undergoing a significant transformation. Nigerian independents are emerging and working onshore and shallow water oil and gas assets that were hitherto managed by the IOCs. This has resulted in increased contribution by Nigerian independents in oil and gas production. This trend will continue as the IOCs continue to rationalize their portfolios and government continues to implement the marginal field program.

However, it is important that regulatory approval be timely given within the period stated in the PIA to avoid unintended consequences. To ensure that the divestment is beneficial to the country, the regulators must carefully review the credentials of the buyers to satisfy themselves that they have not only the financial resources but also the managerial and technical competency to grow the assets. The regulators must imbibe leading practices in other countries in ensuring timely and effective conclusion of divestment applications. The country may also need to review its local content policies to enhance its competitiveness and attract the much-desired investments.

Footnotes

1. NairaMetrics, Available at https://nairametrics.com/wp-content/uploads/2013/01/History-of-Oil-and-Gas-in-Nigeria.pdf Accessed November 14th 2023.

2. SDN, October 2021, Available at https://www.stakeholderdemocracy.org/wp-content/uploads/2021/11/Full-report-Delta-Divestments.pdf 4 Accessed November 14, 2023.

3. Isaac Olawale Albert, Nathaniel Danjibo and Olumayowa Albert, 'Back to the Past: Evolution of Kidnapping and Hostage Taking in the Niger Delta, Nigeria' Beijing Law Review, Vol. 11, No. 1, March 2020. Available at https://www.scirp.org/journal/paperinformation.aspx?paperid=98926 Accessed 18th November, 2023.

4. Oguntoye, Mary & Oguntoye, Adenike. (2021). AN APPRAISAL OF THE IMPACT OF THE OIL SECTOR ON THE NIGERIAN ECONOMY. Available at https://www.researchgate.net/publication/355042696_AN_APPRAISAL_OF_THE_IMPACT_OF_THE_OIL_SECTOR_ON_THE_NIGERIAN_ECONOMY . Accessed November 14, 2023

5. Nigeria Selected Issues, IMF Country Report No. 21/34, February 2021.

6. Oil and Gas, 2010. Norway, a Local Content Success Story https://www.oilandgasiq.com/strategy-management-and-information/articles/norway-a-local-content-success-story

7. https://www.woodmac.com/news/opinion/why-investors-may-have-nigerian-upstream-assets-in-their-sights/#:~:text=There%20are%20five%20international%20oil,and%2040%25%20of%20sales%20gas.

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