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Examining Impact Of Falling Crude Oil Price On IOC’s Operations

Posted: Sep 1, 2015 at 12:12 am   /   by   /   comments (0)

The falling oil price at the international market is surely taking its toll on the operations of International Oil Companies in the country.

Since the price of crude plummeted over a year ago from the over $100 per barrel to less than $50 per barrel now, many International Oil Companies have embarked on series of divestments of their stakes while others have gone ahead to acquire smaller oil exploration companies.

For instance, Maurel& Prom, French energy exploration and production company, said recently that it was reabsorbing its former Nigerian unit MPI as a first step towards tripling in size to cope with the impact of the plunge in the oil price.

The company said it was buying MPI in a deal that would give MPI investors one Maurel & Prom share for two shares held, and would also pay a 0.45 euro exceptional cash dividend per share before the merger.

Chief Executive of Maurel& Prom, Jean-Francois Henin, said that the group would work intensively in the coming weeks to secure another deal with a competitor of its stature.

“Companies the size of MPI, or MPI plus Maurel & Prom, are no longer big enough to remain independent. We can survive, but in terms of the future for our shareholders, it’s absolutely necessary to build a larger, more diversified group,” Henin said.

He noted that Maurel& Prom and MPI face a tough macroeconomic environment following a 60 percent drop in oil prices in the last year, noting that they see expansion as the route to better access to financing and greater opportunities for external growth.

“Everyone is talking to everyone, because everyone feels the same need. All players in the sector today are considering how to combine forces with someone else and what are the best possible combinations,” Henin said.

Maurel & Prom said the MPI deal, due to be completed in December, would add Nigeria to its operations in Gabon and Tanzania, giving it presence in three key sub-Saharan oil and gas countries, adding that MPI also had a strong cash position with no debt.

Maurel & Prom said the combined company would have an enterprise value close to $2 billion, the industry’s fourth largest after Tullow Oil, Premier Oil and Genel Energy, or the fifth-biggest by market capitalisation, noting that the deal was unanimously approved by the boards of Maurel & Prom and MPI, and would be put to a shareholders’ vote in December.

Also, Total had recently divested its interests in its three onshore Oil Mining Leases (OML) in the country,  which included OML 18 and OML 24, which crossed $1 billion, after it had completed the sale of its stake in OML 29 to local firm, Aiteo Eastern E&P for $569 million.

According to Total’s chief financial officer, Patrick de La Chevardiere, “The sale of these non-operated onshore blocks in Nigeria is yet another example of our strategy of dynamic portfolio management, achieved at attractive valuations.

“These transactions also reduce our exposure to non-operated blocks onshore Nigeria, and allow us to focus on our core, operated developments, such as the Egina project.”

Total has divested its interests in 11 onshore blocks to Nigerian companies since 2010 in accordance with the Nigerian government’s objective of developing Nigerian companies in the sector.

Total has a 10 percent stake in several onshore blocks in Nigeria through the Shell Petroleum Development Company (SPDC) Joint Venture alongside the Nigerian National Petroleum Corporation (55 percent), SPDC (30 percent, operator) and Nigerian Agip Oil Company Limited (5 percent).

Similarly, Chevron Corporation said recently that it was selling its 40 percent stakes in two more Nigerian shallow water offshore oil blocks, Oil Mining Leases (OML) 86 and 88 in the Niger Delta area.

Chevron had in February completed the sale of its 40 percent stakes in two Nigerian shallow water offshore oil blocks, OML 83 and 85, to local firm First Exploration & Petroleum Development Company Limited (First E&P).

Though there are speculations that oil theft, pipeline vandalism and uncertainty over taxes in Nigeria’s proposed Petroleum Industry Bill, which is still in the making, has been holding back billions of dollars in investment, especially in capital-intensive deepwater offshore blocks, leading some multinational upstream firms to sell them.

In another development, the Dangote Group also partners with First E&P to form a new company, West African E&P Venture,  to jointly develop oil mining leases (OMLs), divested by international oil companies (IOCs). They have both partnered in the acquisition of OMLs 71 and 72 from Shell.

First E&P would be the operator on the assets while Dangote would finance the acquisitions and the development of the assets, so as to ensure that he would eventually have access to feedstock.

With the feat, First E&P emerged as the only company that has acquired offshore oil assets among other indigenous companies that have so far acquired oil blocks from the International Oil Companies (IOCs) under the latest divestment programme.

On fears over if the divestments do not indicate a plot by the International Oil Companies to leave the shores of Nigeria,

Rolake Akinkugbe of Ecobank Research in a paper titled ‘IOC Divestments in Nigeria: Opportunities, Challenges and Outlook’ noted that: “We do not believe that the current wave of divestments portends a mass wave of IOC exits from Nigeria in the near-future. In actual fact the divestments represent, in our view, a re-balancing of asset portfolios towards the offshore, which now accounts for at least 80% of Nigeria’s total production. Moreover, Shell still retains ownership in 30 onshore blocks, while the other large IOCs, Total, ExxonMobil, and Chevron still look set to commit billions of dollars in capital to Nigeria’s offshore region in the next decade.

She noted that Nigeria’s oil production has declined in recent months to below 2 million bpd and that the country would need to retain a competitive edge upstream, given the emergence of new exploration and production frontiers in the Africa region; namely Ghana, and the Gulf of Guinea pre-salt plays (Angola, Gabon, Congo) and East Africa, which has rapidly gained world-class hydrocarbons status.

She said the attractiveness of fiscal terms for offshore exploration within the delayed PIB could be crucial, given operators’ commercial shift towards the offshore.

“In the near-term, Nigeria’s oil and gas industry –  public and private – may take comfort from the fact that the continued oil and gas discoveries, the ability of junior explorers to successful tap foreign equity capital for their Nigeria activities, the country’s still robust crude oil reserves base (37 billion barrels), and the relative stability of offshore production, signal or at least guarantee that investor appetite for the country’s oil sector will remain resilient despite the operational and regulatory challenges,” she said in the paper.