February 24, 2024
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OIL & GAS

Shell’s Sale of Onshore Assets Unclear New Era for Nigerian Oil – Analysts

Shell’s exit from Nigeria’s onshore oil sector highlights risks oil majors face in Africa’s biggest exporter but has raised hopes that local firms could reverse the output decline from the Niger Delta, Reuters quoted the industry officials and analysts saying.

Shell – which pioneered Nigeria’s oil industry – is the most prominent Western company to exit the Delta, a region blighted by pollution, oil theft and pipeline vandalism. Those issues have for years stymied investment – and throttled production and government finances.

The company’s sale of its subsidiary to five mostly local firms fits an ongoing trend of Western energy companies divesting onshore Nigerian oil fields. Exxon (XOM.N), opens new tab, Italy’s Eni (ENI.MI), opens new tab, Norway’s Equinor (EQNR.OL), opens new tab and China’s Addax have struck deals to sell assets in the country in recent years.

“Nigeria has had well-established problems in policy in the oil sector, and the FX policy concerns have put constraints on investments. That’s probably partially why you have seen the majors pulling out, and disinvesting to some extent,” said Andrew Matheny, senior economist with Goldman Sachs.

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President Bola Tinubu took office last May pledging to remove obstacles faced by producers, including ending crude theft and pipeline vandalism. But seven months into his presidency, the asset sales, which were well underway before his election, highlight the inexorable changes to the country’s oil sector.

“If companies are now leaving the less capital-intensive onshore operations to focus on offshore operations, it sends a perfect picture of the risk involved in doing business in Nigeria,” said Seyi Awojulugbe, a senior analyst at security consultancy SBM Intelligence in Lagos.

Ten years ago, Shell’s share of production was as high as 300,000 barrels of oil equivalent per day (boed) in Nigeria. This fell to 131,000 boed in 2022, which the company blamed on sabotage and theft in the Niger Delta, its annual reports showed.

Industry experts said Shell, Exxon and other majors who hoped to divest were not putting much money into developing onshore assets – hastening production decline.

“The majors reduced investments in the onshore for many years,” said Roger Brown, chief executive of Nigeria’s Seplat Energy (SEPLAT.LG), opens new tab. He cited the combination of local issues and the fact that major oil companies must compete for cash with their assets in other regions, such as Guyana, that can often look more attractive.

“I think the independent companies will get production up more than the IOCs will because they do have the appetite to invest,” Brown added.

Seplat is still awaiting regulatory approval of its own deal, announced in February 2022, to buy Exxon’s assets onshore. Nigeria’s junior oil minister said Shell’s asset sale would be quickly approved once all paperwork was received, adding that local companies would be able to step up to fill the void.

Some local firms, including Seplat, First E&P and Heritage have managed to raise production and reduce oil spills on assets purchased from Shell.

But it has not worked for others, including Aiteo Eastern E&P and Eroton Exploration, which have struggled with leaking pipelines and oil spills.

Richard Bronze, head of geopolitics at London-based Energy Aspects, said local firms lacked the financial heft of oil majors, which could affect future output.

Still, Brown said that if oil majors aren’t investing, their access to cheaper capital is irrelevant. Local banks, some international lenders, and oil traders, are also sources of cash for local companies.

“It will be available but it won’t be cheap,” he said. “But at these oil prices, indigenous businesses can afford to develop it.”

 

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