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April 4, 2013 6:34 pm
Nigeria’s oil industry is increasingly a tale of two cities.
Behind the high walls of their compounds in Port Harcourt, the centre of production, executives from international oil companies fret about oil theft and discuss how best to sell their assets. But in Lagos, Nigeria’s commercial capital, a new breed of homegrown and well-connected entrepreneurs gathers in hotel bars to discuss the opposite: buying opportunities.
In the past five years oil majors such as Royal Dutch Shell, Total, ConocoPhillips and ENI of Italy have sold $5bn worth of onshore oilfields to local companies. The shift in ownership in Africa’s largest and oldest oil industry represents the first attempt by indigenous executives to tap global capital markets in order to buy part of the domestic oil industry.
The transition has left an army of bankers salivating over a dealmaking boom and the potential for Nigerian oil companies to list in London and North America. The sell-off is also an opportunity for local businesses to show they can better handle the operational challenges and corruption that have bedevilled the Nigerian industry for decades, and provide more benefits to local communities.
“The indigenisation process creates the potential to utilise . . . fields that would otherwise lay idle and not produce any sort of revenues for local communities,” says Joshua Holland, an Africa analyst at PFC Energy in Washington.
But the risks are also high. Critics fear that Nigeria, with a long history of corruption and nepotism, could follow the path of South Africa, where policies to increase black ownership of businesses created a new oligarchy, rather than the redistribution of wealth.
Finance is not the only challenge facing local Nigerian oil producers, writes Ajay Makan.
The willingness of the majors to make sales in recent years has coincided with a surge in oil theft or “bunkering” as it is called locally, from onshore oil installations and pipelines.
About 150,000 barrels a day are said to be lost to theft – as much as 20 per cent of onshore production – while as much again has to be shut in when companies declare force majeure and close down export pipeline systems.
The result is not just lost revenue, but potentially costly liability for environmental damage.
Local company executives are confident they can manage the theft issue better than the majors. Austin Avuru, the chief executive of Seplat, says: “If there is vandalism on our pipeline we will respond within 24 hours ... Shell is too large for that too happen.”
Mr Avuru says theft has been reduced to less than 1 per cent on the 35 km of pipeline Seplat took over from Shell when it purchased an oilfield in 2010.
Other indigenous operators claim better relations with local communities, and a willingness to make more concessions to local demands than majors, without fear of setting a precedent.
But theft has continued to increase despite the transfer in ownership from foreign to local companies in recent years. And that is a menace to more dealmaking because it calls into question the prices local companies have been willing to pay for onshore oilfields.
“On a per barrel basis the deals [by indigenous companies] so far look quite reasonable,” said Obo Idornigie, an upstream analyst at Wood Mackenzie. “[But] oil theft has picked up massively in the last year and if it doesn’t improve we could see a discount for theft creeping into our valuations.”
About a third of Nigeria’s oil production capacity of 2.5m barrels a day is located onshore, mostly in the Niger Delta swamps. Just a few years ago, international oil companies operated the vast majority. But a combination of rising oil theft, the majors’ focus on larger and more secure offshore fields and government pressure has led to a flurry of deals between oil majors and local companies.
The dealmaking wave is set to gather pace if Nigeria’s long-awaited Petroleum Investment Bill is passed, defining the fiscal terms for production by local and foreign companies. “After the PIB there is the potential for a land grab in Nigeria,” says Wale Tinubu, chief executive of Oando, whose upstream subsidiary successfully bid $1.8bn for the Nigerian portfolio of ConocoPhillips in December.
That prospect is creating fertile ground for alliances between international investors and well-connected local entrepreneurs.
Local companies, which have sprung up almost overnight to bid for oilfields, have been deliberately structured to take advantage of the push for indigenisation.
They often combine an international oil company, bringing capital and expertise, with a majority local shareholder, often with little connection to the oil industry.
London-listed independents Afren and Heritage Oil hold substantial stakes in First Hydrocarbon Nigeria and Shoreline Natural Resources, two companies set up in recent years specifically to buy oilfields from Royal Dutch Shell.
Labi Ogunbiyi, chief executive of FHN, says the main difficulty is not raising capital, but the competition. “If you can appeal to companies looking to break into Nigeria you can quickly get into the bidding,” he says.
The presence of international companies raises questions about just how indigenous the new local companies are, and to what extent they will help spread Nigeria’s hydrocarbon wealth more widely within the country.
Local operators deny they are passive shareholders providing an indigenous seal, and say that joint ventures allow for the transfer of knowledge from foreign companies. Some, such as Oando, have resisted foreign partnerships altogether.
Oando has also introduced a share reward scheme, which allows hundreds of the company’s Nigerian managers to earn stock in the company, depending on performance.
Mr Tinubu declares himself “very happy” with the number of middle class Oando employees, who can frequent Lagos’ growing phalanx of bars and nightclubs, a sign, he says, of “Nigeria’s growing middle class”.
Closed ownership structures will also be opened up further, as the need for capital to fund more acquisitions and pressure from foreign banks such as BNP Paribas and Standard Chartered, which have provided finance to local companies, creates pressure for equity offerings.
Austin Avuru, chief executive of Seplat, an indigenous operator that bought an onshore field from Shell in 2010, says an equity listing will have to follow another large acquisition.
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