Mergers, acquisitions in focus as firms sit on oil blocks

Mergers and acquisitions are seen as critical in the Nigerian oil and gas industry as many assets, mostly owned by indigenous players, remain idle, ’FEMI ASU writes

The Nigerian oil and gas industry has in recent years seen a surge in the number of indigenous players, buoyed by the Federal Government’s initiatives and divestment of assets by International Oil Companies operating in the country.

The government’s marginal field programme, licensing rounds, and the asset divestment by the IOCs have put more assets in the hands of local players. But many of the assets are sitting idle.

Over 130 blocks are in the control of indigenous operators who were awarded some 50 marginal blocks through discretionary allocations in the 1990s, another 24 through marginal fields bidding round in 2003, and 60 more blocks through conventional bidding rounds, according to the Oxford Business Group.

In August 2013, the then Director, Department of Petroleum Resources, Mr. George Osahon, said 76 out of the 77 oil blocks awarded in 2005, 2006 and 2007 rounds were largely dormant.

Out of the 24 marginal fields awarded in 2003, only eight are currently producing, according to the DPR.

Industry experts have highlighted the need for mergers and acquisition deals to unfold in the industry in coming years to exploit the assets.

A Partner, Hogan Lovells, an international law firm, Sarah Shaw, noted that the firm saw clients doing big M&A deals when oil price was over $100 per barrel but the crash in prices in 2014 stalled such deals.

“But what we have seen in the last 18 months or two years is a return of M&A activity in the oil and gas space. We are seeing majors look to optimise their portfolios, sell off non-core assets. We have also seen a lot of consolidation in the oilfield services industry, which has been hard hit by the oil price crash,” she said after a briefing in Lagos.

She noted that a few M&A deals had been seen in the downstream sector of the Nigerian oil industry in recent times, adding that the delay in the passage of the Petroleum Industry Bill had hampered M&A deals.

Shaw said, “The legislation with the PIB is promising in terms of creating greater regulatory certainty that will facilitate deals and investments to happen. But, of course, we don’t have certainty around what that holds.

“We don’t have certainty around what the fiscal regime will be, and this, coupled with the fact that the election is coming up next year, makes it difficult for people to have the certainty that you need to do M&A.

“In Nigeria, we continue to see the IOCs (international oil companies) wanting to continue their divestment programmes, and obviously, what we have had is the rising of the Nigerian independents.”

She said the enactment of the PIB might create a more stable regulatory framework that could facilitate M&A deals.

“M&A likes certainty and stability. So, I think the uncertainty around the regulatory regime has not been helpful,” she added.

A Partner, Olaniwun Ajayi LP, a Lagos-based law firm, Tominiyi Owolabi, said M&A activity in Nigeria had been largely driven by divestment by the IOCs.

He said, “We were hoping that the marginal fields round would have introduced some momentum into the market. But we don’t think that is going to happen. Largely, what has held the Nigerian M&A space down has been more of economic realities.

“Now that we are seeing the price of oil go up, once there is a figure where it will stabilise, we think a lot more players will be looking at the M&A space – a lot more people will want to unbundle assets because it makes more sense. A lot more people will be willing to finance acquisitions because the returns make sense.”

Owolabi said in 2015 through to 2017, it didn’t make sense to raise capital for acquisition deals, especially in a terrain like Nigeria, adding, “We are working on a few deals now and we think barring the elections and the elections go, 2018 to 2019 we will see a lot more activity.

He said, “We have a lot of players/people who have assets in the indigenous space that are not optimising those assets. We have assets that are wasting in the indigenous space because people who are running them either don’t have the capacity or don’t have access to funding.

“As we begin to see some Nigerian champions emerge in industry, what we think will happen in the next three to four years is that the champions would begin to have capacity to attract capital to pick some of the redundant assets. If the oil price stabilises, that would provide more impetus for some of those players to begin to look at a lot of marginal fields that are idle.”

Owolabi said there should be some regulatory push to encourage M&A activity in the industry as was seen in the banking sector.

“The country can be making a lot more money from oil and gas assets that are lying fallow. Some years ago, the government threatened that it was going to take marginal fields off people who were not producing. That kind of regulatory push is necessary. The economics, some regulatory push and the stability of crude price would be the impetus to drive M&A,” he added.

The international benchmark for oil prices, Brent crude, recently touched $74.75 per barrel, having gained 10 per cent since the start of this month. It traded around $74.63 as of 8:00pm Nigerian time on Friday.

The PIB, which was initially proposed in 2008, is expected to change the organisational structure and fiscal terms governing the oil and natural gas industry if it becomes law.

“Regulatory uncertainty has resulted in fewer investments in new oil and natural gas projects, and no licensing round has occurred since 2007. The amount of money that Nigeria loses every year from not passing the PIB is estimated to be as high as $15bn,” the Energy Information Administration of the US Energy Department said.

In February, the Group Managing Director, Nigerian National Petroleum Corporation, Dr. Maikanti Baru, said the passage of the PIB would unlock $10bn worth of oil and gas investment in the country.

The first part of the bill, Petroleum Industry Governance Bill, has been passed by the Senate and the House of Representatives, and requires the President’s assent to become law.

“When the other sections of the bill are finally passed, it will unlock over $10bn of investment held up due to uncertainty,” Baru said.

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