Royal Dutch Shell is on the verge of unloading a major portion of its assets in Nigeria.
The oil major is zeroing in on a deal to sell four oil fields and a key pipeline, a sale that could net over $5 billion. The pipeline has been an enormous headache for the company. The Nembe Creek Trunk Line, as it is known, is a 60-mile pipeline that carries 150,000 barrels per day from Nigerian oil fields to the Atlantic coast. But it has suffered repeated attacks from militant groups and thieves. Shell had to pay $1 billion to replace the beleaguered pipeline in 2011.
But the attacks did not stop. The pipeline was shut down for a large portion of 2013 after having been damaged yet again. After briefly reopening, it was shut again earlier this year after another severe attack. The Anglo-Dutch company said that the pipeline was targeted at least 60 times in 2013. And even when the pipeline is operational, oil has been stolen. A spokesperson for the company estimates that the pipeline loses 60,000 barrels per day to thieves. Across the country, Nigeria as a whole loses out on 250,000 barrels per day due to theft, according to Reuters.
So Shell couldn’t get rid of the pipeline soon enough. And the sale was not a surprise – late last year the company had announced its intention to unload the pipeline along with four oil fields. French oil company Total will sell its 10 percent stake in the assets, and Italian oil company Eni will sell its 5 percent stake. The Nigerian National Petroleum Corporation will retain its 55 percent control of the oil fields being sold off.
But Shell is not done in Nigeria entirely. It will still hold onto its offshore oil fields, which are safely tucked away from would-be saboteurs. Shell’s Bonga North West field began producing oil in April 2014. The field is expected to churn out 40,000 barrels per day. The Bonga field is not without its own problems, however. Earlier this year, the Nigerian Oil Spill Detection and Response Agency fined Shell $5 billion for its role in spilling 40,000 barrels into the ocean in 2011.
Shell has decided to relinquish its most troubled onshore assets to focus on its offshore projects. But it is not as if Shell is giving up empty handed. The estimated $5 billion sale price – which has not yet been finalized – is more than twice what the company was expecting last year. That is because domestic Nigerian firms are bidding up the prices, which is a testament to both the large oil reserves in Nigeria – 37 billion barrels according to the U.S. Energy Information Agency – and to the burgeoning domestic oil industry.
“It is a lot of money,” one banker involved in the sale told The Financial Times. “It is a great display of the strength of the Nigerian indigenous oil industry.”
However, the frothy prices also raise the stakes for Nigeria, which will have to go it alone on a greater portion of their onshore oil production sites. Nigeria’s banks have uncharacteristically taken on a lot of debt to finance the deals. The huge outlays have raised concerns of “bubble-like conditions,” according to the FT.
It all depends on whether or not the firms can succeed in lifting oil production, but they have their work cut out for them. The companies could suffer from the same problems of pipeline attacks and theft that plagued Shell and its partners.
As a result of the lack of security, Nigeria’s oil production peaked in 2005 at 2.4 million barrels per day and has declined since then.
The Nigerian firms purchasing Shell’s oil fields and pipelines – Taleveras, Aiteo, Pan Ocean Oil Corporation, among others – will have a tough time turning the operation around.
For Shell’s part, it is all too happy to unload these troubled assets and put $5 billion in the bank. It is in the midst of a two-year, $15 billion divestment campaign in order to slash capital expenditures and realign the company.
By Nick Cunningham of Oilprice.com