The Most Profitable Deals Have Been outside Bid Rounds

The best example of an investor, in the Nigerian oil industry, who has succeeded in acquisitions outside bid rounds, is the Chinese Government.
By Toyin Akinosho,

To go by western media reports, China looms large in countries like Angola and Zambia and Tanzania, resource-rich African countries where the Asian tiger supposedly constructs massive infrastructure projects in exchange for payment with tones of mineral resources or thousands of barrels of oil per day.
In Nigeria, China is largely a contractor; it constructs roads and gets paid with hard cash. Yes? No?
Is that all?
Take another look..

In August 2009, China Petroleum & Chemical Corporation (Sinopec) paid $7 billion to take over Addax Petroleum, the largest and fastest growing international independent in Nigeria and the Gulf of Guinea. This was three years after China National Overseas Offshore Corporation (CNOOC) launched itself into the country by paying $2.68 billion for 45% of the SAPETRO held, TOTAL operated Oil Mining Lease (OML) 130, which contains the 750 million barrel condensate field, Akpo.

With these two transactions, China accessed seven acreages in Nigeria, six of them operated by Addax and one of them operated by TOTAL.
CNOOC ‘s transaction for OML 130, was between them and SAPETRO (South Atlantic Petroleum), owned by General TY Danjuma as it is SAPETRO who is the lease holder. The 45% by the Chinese came from SAPETRO’s 60%.

In retrospect now, it looks like China’s foray in Nigeria has been a strategic, 15 year move. The Chinese have never participated in an open bid round in Nigeria. They’ve preferred proven reserves to exploration assets and they’ve been very careful in picking winners. Now they have a net production of over 150,000barrels of liquid hydrocarbons in the country everyday and, without a single more asset, even this can double in a few years time.

China first arrived in the Nigerian oil industry in the mid nineties as a contractor. The Bureau of Geophysics, a subsidiary of China National Petroleum Corporation(CNPC) won a seismic acquisition contract from Shell in 1998. The Anglo Dutch giant was reluctant, but Nigerian National Petroleum Corporation NNPC, the country’s state hydrocarbon company, insisted on opening up the competition to non western service companies. Around the same time, Sipec, a subsidiary of China Petroleum &Chemical Corporation (Sinopec), was poring through data in the blocks held by Nigerian Petroleum Development Company (NPDC), the operating arm of NNPC, in the Midwestern part of the country.

While the BGP fumbled in its first shoots, NPDC staff complained that Sipec was not showing sufficient seriousness about operating a lease. The evidence in hand today suggests that it was all a matter of teething.

The BGP has since gone on to win a Shell award and successfully execute more contracts and at some point, was nearly squeezing the Western geophysical companies out of the market with its low bid prices. Sipec, in the same way, finally got to take over operatorship of NPDC’s OMLs 64 and 66. In March 2009, four years after the Asian operator signed a joint venture agreement with NPDC, a significant discovery was made on OML 64: a 150 feet of pay in four reservoirs in Kakaku 1, with the rig Lonestar 2005.

Meanwhile, CNOOC bought 38% of Emerald operated Oil Prospecting Lease OPL 229. There is an oil discovery on the lease, but the partners don’t seem to be in a hurry. Sinopec took advantage of the Nigerian marginal field programme by acquiring 40% in Universal Energy’s Stubb Creek, a 15 million barrel field located in the Eastern Niger Delta. The marginal field programme is designed to allow Nigeria’s homegrown independents to become producers of small fields. As of December 2010, Sinopec appeared desperate to bring Stubb Creek on production, but things didn’t happen as initially planned. As I prepared this piece, I still couldn’t ascertain when Stubb Creek would come into production.

But for the Chinese Government, which owns these companies(CNOOC, BGP, Sinopec, Sipec), Stubb Creek is a small fry. Today, as Akpo field is delivering 175,000 Barrels of condensates per day, CNOOC, entitled to 45% of all the hydrocarbons from that delivery, owns 78,750BCPD of the fluids. With Sinopec’s 75,000BOPD, which is Addax’s current Nigerian production, the two Chinese companies readily export 153,000Barrels of hydrocarbon liquids out of Nigeria.

The TOTAL operated OML 130 and the Addax portfolio have significant upside potentials. TOTAL plans to, this year(2012), take a final investment decision on Egina field, also located in OML 130. That promises 200,000BOPD at peak around 2016(if the FID is taken in 2012). Cash flush China will pay her share of the investment (say $2.7 Billion if we assume the cost of development is $6Billion). The Chinese government will be receiving an additional 90,000 BOPD  in 2016, to, perhaps conservatively, a half of what it  currently accesses (given natural production decline). If crude prices stay this skyward, this is a lot of money. So the $10Billion invested in farm-in into one acreage and the full take over of a full, operating company, with significant portfolio, without worrying about taking part in auctions, looks like a very worthwhile way to go, afterall.

Compared with companies that have won acreages in bid rounds in Nigeria since our first open acreage sale in 2000, this looks so easy.  You can count on your fingers how many companies, winning acreage during the 2000, 2005, 2007 bid rounds, have proceeded to first oil on any field. It does appear that once a company can scrutinize the portfolio of Nigerian assets currently under contract, and you have enough cash to pay for entry, you’d become a producer of Nigerian oil.

The Chinese case happens to light up more because of the scale of investment involved. There are  other examples. Afren, the UK listed company (usually erroneously assumed to be owned by Rilwanu Lukman),  operates about 55,000Barrels Of Oil Per day today, from two fields in the prolific South East Offshore Niger Delta. Of this volume, some 20+,000BOPD accrues to Afren as working interest production. None of the two fields delivering this crude was won from the Nigerian government, either on a discretionary basis, or via a bid round. Afren, founded in 2004, four years after the 2000 awards, simply went around talking to companies, who already had acreages or fields, but neither had the technical expertise, nor the finance, nor the daring, to take their assets to production.

There’s one more example and this is perhaps the most interesting. By 2008, Platform Petroleum, a marginal field company which had only then put its Egbeoma field(its only hydrocarbon asset) on stream, was worried about the high gas to oil ratio(GOR) in the field and the long term value of the marginal field enterprise. It approached Shell , yes the almighty Shell, with a proposal, asking to take over one or two acreages in the vicinity of Egbeoma field. Shell told Platform that another Nigerian company, Shebah,  had also broached the same issue. “You two should work together and come back to us”, they told Platform.
By late 2008, Seplat (Shebah and Platform) had been formed. They needed money to pay for the acreages Shell had agreed to sell to them. They approached Oando, (another Nigerian minnow) which was less interested in partnership than in taking over the embryonic company. But the partners didn’t respect Oando’s track record in upstream (E&P) matters enough to agree to be bought over, so they scouted around for other Nigerian partners. Not getting exactly what they wanted at home, the Seplat partners went over to a small French company, Maurel et Prom(M&P), who agreed to buy 45% of the shares of Seplat. Shell made the first of its onshore divestments to Seplat in 2010. Today Seplat has operated production of 37,000BOPD, the largest operating indigenous company in Nigeria.

Akinosho is publisher of Africa Oil+Gas Report.


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