Professor Omowumi O. Iledare
PREAMBLE:
Petroleum business is not a “mom and pop” business. Neither is it for people looking for quick money who, perhaps, do not understand the differences between net revenue and income or cash surplus and profit. The profitability of an oil and gas asset is not estimated within the context of annual cash surplus or deficit as it is in manufacturing operations. Petroleum assets are exhaustible resources with intergenerational implications. Investments in such assets are significantly capital intensive with high-risked investment especially in the upstream aspect of the petroleum value chain. Thus, it is more about the mechanics of investments, reserves, and price combination with portfolio management schemes for long-run profit maximization than short term gains. So, Shell like other international oil and gas companies in Nigeria, is hesitant at committing huge amount of risked investment fund to develop petroleum resources in basins where reserves and petroleum discovery sizes are diminishing and production capacity is stagnant in a relatively open business environment. The fact that all industry indicators are running against the traffic, as evident in the Niger Delta basin lately, particularly with respect to onshore assets in Nigeria has become very frustrating even under the emerging PIA 2021 era. The purpose of this op-ed is to address misgivings and matters arising from the sales of onshore assets in Nigeria by Shell Petroleum Development Company (SPDC) to Renaissance Consortium. The op-ed argues that the divestment process engaged by SPDC is a normal business decision to restructure petroleum operations to effectively manage stakeholders’ mutuality of interests in Nigeria; and the op-ed posits, that SPDC identifies a potential and competent buyer of these assets is the global best practice.
DIVESTMENT OF PETROLEUM ASSETS — A NORMAL BUSINESS STRATEGY WORLDWIDE
Divestments are deliberate business decisions, majorly, for restructuring business operations to maximize value for all stakeholders. Of course, a forced assets divestment can also occur because of regulations or bankruptcy. Thus, it is amazing, the way people look at ongoing oil and gas divestment process in Nigeria. Quite often people seem oblivious to the capital risk and uncertainty inherent in the upstream business in terms of cost, price, and rewards. Stakeholders outside the petroleum sector and transfer payments recipients from petroleum revenue seem unable to comprehend the complexity of the market structure driving investments for petroleum resources development.
Divesting from less profitable assets and reorganizing portfolios for business longevity is a prerogative adopted worldwide in the oil and gas business; it is a global best practice usually adopted to maximize corporate value. It is an established long-term business strategy. Thus, the recent divestment decisions by Shell, Mobil, Agip and Total, are purely business decisions, and a good one for that matter for Nigeria, in terms of maximizing government access to revenue from those assets. It is also very pragmatic for Shell to have identified a buyer, Renaissance Consortium, to bid for these assets and the willingness of Shell to leverage on the funding process to purchase the assets. Usually, identifying laudable buyers is very crucial in asset divesting to minimize opportunity cost, such that any foregone value relative to the divested asset aggregate value received are, at least equilibrated.
Of course, government access to revenue from these assets must not be compromised and operating these assets with minimal environmental hazards is important as well. The Consortium sought after to buy the shares of Shell in these JV assets have the requisite skill sets and professional acumen. Technical, managerial, and financial competency of the Consortium is not in doubt to operate these assets for maximum value addition. Thus, lessons from assets divestments in the US offers a gutsy optimism that the sales of Shell’s assets to indigenous investors could add significant value to the economy of Nigeria and enhanced energy security in the evolving global energy landscape. These possibilities are evident, so far, in the contributions from the emerging indigenous players in Nigeria oil and gas industry to date.
In fact, it is difficult for people majorly to understand how difficult it is to find international companies competing to develop petroleum assets in onshore continental USA even when properly informed. Usually, the assets in US mature basins are offered for sales to independent companies with lower overheads and less desired earning powers commensurate with such company’s risked-investment profile.
SHELL ONSHORE ASSETS SALE—MISGIVINGS AND MATTERS ARISING
That venturing into upstream oil and gas business in Nigeria or anywhere else worldwide has a high likelihood of failure is not conjectural. However, that the Titans behind Renaissance Consortium have the requisite competency to effectively manage the likelihood of failure, significantly, is indisputable. It is also commendable, there is a high propensity for the Federal Government to grant approval for Shell assets sale deal with Renaissance, thereby minimizing the political risk. However, there are legitimate concerns and apprehensions with respect to this transaction.
First, there is a wishful desire for NNPC to reduce its majority share in these JV assets to minority ownership, using the NLNG Model. Fortunately, with the approval of the Federal Government and endorsement of the National Economic Council, NNPC Limited can sell shares held by the Government. Luckily the Government needs a lot of money and selling its share in NNPC is preferred to borrowing with a high capital cost and foregone future earnings in my opinion. But that is, NNPC Limited is still trying to find its bearing with bloated workforce and an above industry average technical cost per barrel to retain majority shares in these JV assets. Notwithstanding the outstanding pedigree of the Titans behind the consortium, managing NNPC Limited inefficacy so as not to delimit optimal asset development may be a challenge.
Secondly, the propensity of the workers unions in the oil and gas industry to act myopically within the context of survival instincts is worrisome. This too may unsettle the divestment deal because of idealistic demands. For example, during the industry reform process, which took nearly 21 years to conclude and with nothing but business-as-usual outcomes, oil and gas workers unions were not easy to manage. Two years later the expectations from the PIA Act remain impending because of the idealistic demands including guaranteed employment for all workers whether such workers are relevant to the new dispensation or irrelevant. Renaissance Consortium must not be delimited with unnecessary hitches by PENGASON and NUPENG that, in my opinion, have driven the oil and gas industry in Nigeria against the traffic of improvement as anticipated when the industry reform process started in 2000.
Thirdly, the prospect of diminishing government access to petroleum revenue from these divested onshore assets is sensible. The sensibility of this worry may not necessarily be premised on business failure on the part of the Consortium but the repressiveness of PIA fiscal terms, which may delimit further investments to explore and develop additional onshore assets. There is empirical evidence to suggest that the PIA royalty schemes, the hydrocarbon resource tax, and other instruments in the PIA 2021 may limit capacity expansion thereby significantly reducing government access to revenue. Perhaps, Schedule Seven of the PIA and the royalty regulations fashioned by the Petroleum Commission can be amended to enhance the profitability of onshore assets development. As mentioned in several discussions, the fiscal terms in the PIA 2021 is skewed desperately and understandably in favor of deep offshore and not shallow or onshore assets.
Fourthly, Nigeria is riddled with self-justification of bad behaviors with “it is their fault” syndrome. Characterizing the selling of Shell shares in the JV assets in Nigeria to indigenous investors as an unethical abandonment of environmental damages done to the region is a woolly thinking but not surprising. Restoration of environmental damages is part of the business and the Consortium buying these assets are not novice. They understand the risk in petroleum business operations and the fact that assets acquisition has a highly significant likelihood of environmental and safety hazard liability. Honestly, I do not see anything unethical in selling assets to qualified investors with financial and technical competence. The promised rewards can be huge and significantly bigger than the inherent liability attached to it.
However, it is amazing the perceptions about oil and gas operations in Nigeria. That the industry deliberately pollute the environment without being sanctioned just does not make sense. Moreover, it is extremely expensive to restore the environment to its normal condition. So, companies are very cautious of this aspect of the business and when damages to the environment occur, companies are liable to restore the environment to its natural status, according to the law of the land following global best practice. Certainly, and this is not unusual, self-inflicted damages are consequential and when this is not arrested by the community, it becomes more consequential.
Finally, managing into the future petroleum business operations will require proper engagement with Petroleum Host Community. The PIA 2021 offers clear roadmaps and guidelines to foster sustainable economic development and posterity within the host communities. The Act disavows transfer payment syndrome and allocates 75% of available fund for capital project, which has intergenerational implications. 20% is allocated as reserve fund with only 5% earmarked for administrative expenses. In exchange, however, the communities are on notice to protect infrastructure and renounce perpetual unrest, vandalism, and any other acts that can disrupt production. Otherwise, the communities will forfeit available funds for the repairs of infrastructure damage. Of course, this PIA provision remains contentious but rational.
CONCLUDING REMARKS AND KEY TAKE AWAYS
The consortium invited to buy these Shell assets is made up of indigenous investors. This is good for the country within the context of energy security as the global energy landscape evolves. More so, these are seasoned players in the petroleum business. They are not novices, just seeking petroleum economic rents. These are professionals in business with requisite skills set to develop petroleum resources for value. The premise for my embracing this emerging phenomenon is how these international companies have managed assets in mature basins in the United States. Today, one can hardly see an IOC anymore in onshore basins in the 48 US Continental States because of diminishing hydrocarbon resources and discovery sizes.
However, there are legitimate concerns and apprehensions with respect to this transaction. NNPC still has the majority shares of these onshore assets in Nigeria. The wishful thinking is for NNPC to consider divesting its own interests from these assets or assume a minority share as is the case in the NLNG assets. Fortunately, funding the inevitable 2024 budget deficit by selling shares rather than borrowing funds may be palatable. Seeking approval of the Federal Government and getting endorsement of the National Economic Council, NNPC Limited to sell government part or all shares held by the NNPC Limited in these assets to the Consortium is a desirable business decision in times like this. Such decision will undoubtedly enhance the efficacy of these assets divestment from SPDC to Resonance Consortium for sustainable economic development of Nigeria.