Nigeria’s crude output may continue on a downward trajectory, far into the next decade, despite the country being the second largest store of Liquid hydrocarbons in Africa, with higher proven reserves than all of the European Union and Great Britain combined.
Egbert Imomoh, former Deputy Managing Director of Shell in Nigeria and one-time global president of the Society of Petroleum Engineers (SPE), argues that, with the performance of several of the Nigerian companies who have purchased assets from Shell and other majors in the course of the divestments of the last 12 years, there are reasons to worry about a deep plunge in output when the IOCs finalise their remaining exit plans from the country’s onshore and shallow water terrains.
In a comprehensive paper entitled Divestment of IOCs in Nigeria: Drivers and Potential Consequences, delivered at a lunch hour meeting of the Centre for Petroleum Information (CPI), Imomoh remarked that “for Shell the divestment process started many years ago and the train had left the station long before the recent announcement which drew attention”. The strategy, he told the elite gathering of oil executives, investors, bankers and energy lawyers, was based on a need to reduce the foot print in the land/swamp terrain of the Niger delta, but now the plan “appears to have progressed from a reduction to a total removal of their foot print”.
Mr. Imomoh cited Venezuela, a country with the largest crude oil reserves on the planet (303Billion barrels, according to the September 2021 edition of BP Review of Statistics, the industry’s top reference for hydrocarbon reserves), which now produces 540,000Barrels of Oil Per Day, a result of many years of underinvestment.
With 33Billion barrels in reserves, a figure not so different from the volume it held 15 years ago, Nigeria is currently struggling to meet up with an OPEC quota that is not up to 60% of the output it had achieved in 2005 (which was 2.6Million Barrels a day). The question is, will divestment push the country on a further headlong crash in output?
A key concern for Imomoh, himself the last Executive Chairman of Afren Plc (which, at the height of its powers, was a leading participant in E&P asset sales and purchase), is the “focus only on short term gains by some buyers of the divested assets as they recoup purchase price”.
It may also, he argued, result in “reduction in long range activities like training; exploration may suffer and no addition to reserves and cost of operations may go up as cost of capital will go up”.
A cursory count by Africa Oil+Gas Report indicates at least three Nigerian owned companies who have not drilled a single well in the last six to eight years since they purchased equity belonging to Shell, TOTAL and ENI in onshore acreages in eastern and western Niger Delta. During the Q&A session after the paper, participants suggested that over 600,000Barrels of Oil Per Day can easily be left unproduced, if the remaining 26 onshore/shallow water concessions are divested by IOCs and purchased by companies with ‘focus only on short term gains as they recoup purchase price’.
Shell has announced plans to divest from all its remaining 18 operated onshore and shallow water acreages. After the divestment, the company’s only operated acreage left will be Oil Mining Lease (OML) 118. As it is, the bulk of Nigeria’s proven reserves are onshore ad shallow water, as the proven volumes reported in the deepwater terrain are less than a quarter of those in onshore and shallow water terrains.
Mr. Imomoh notes that other negative impact of divestment could include “lack of serious external international pressure, which could result in not caring about what the world thinks of operations and there could be a temptation to cut corners and play by ‘local’ rules on issues like safety, environment, taxes, staff relations and so on”. What is more, “the multiplicity of companies will put pressure on government partners and regulatory agency for monitoring operations”.
But there have been positive outcomes of the divestment programme, the industry veteran points out, presenting two slides that show contrasting performances. One slide features a list of five companies, whose owners are professionals with strong governance principles. They have injected new investment, leading to output growth. A second slide features another list of five companies, whose performances have been sub-par, because their owners are nonprofessionals, they have made no new investment and the companies are run with weak governance principles.
With evidence of assets that have shown positive outcome, it is clear that divestments can actually help grow the economy. “Assets will be worked on aggressively by new owners who will want to extract value quickly. They will offer employment opportunities; they can lead to an expansion of contractor base; they can lead to an increase in local content; they can lead to lower costs as local companies will not bear the burden of an international home office; indigenous companies should be able to solve community issues quickly and there’s tendency for local companies to focus early on gas development.
The challenge, Imomoh concludes, is how to take advantage of the opportunities and avoid the downside; how to regulate an increasing number of small players; how to ensure that the assets get into the hands of those who grow them and how to ensure that the country, still heavily dependent on the sector, continues to get maximum benefit from the industry.