MPN divestment: Why NNPC shook the table

Sopuruchi Onwuka

Inability of the highly anticipated acquisition of Mobil Producing Nigeria (MPN) Unlimited by leading indigenous independent firm, Seplat Energy Plc, to scale initial ministerial assent amplifies the new hard-line position of the Nigerian National Petroleum Company (NNPC) Limited on the control of oil and gas assets in which it holds government’s overriding interest.

The Oracle Today gathered from inside sources that the management of NNPC is currently proposing a new paradigm to achieve symmetry in divesting resource and production assets in which it holds controlling stake. Part of the proposal, it was gathered, is to create a unified position on the pattern of divestment in the industry.

Mallam Kyari had at a conference made reference to the prevailing chaotic divestment transactions on Nigerian petroleum assets which have led to disputes over operating rights in the past. He declared that the NNPC would come with a proper policy on asset transfers among players in the industry.

In overriding the divestment which many analysts had counted as done deal and which Seplat had declared would take retroactive effect from 1 January 2021, NNPC claims that it is also pushing to secure its own future as the industry activates the provisions of the Petroleum Industry Act (PIA). It is not also difficult to infer that NNPC is also asserting its influence on government’s decisions and actions in the industry.

The Oracle Today reports that President Muhammadu Buhari who is also the Minister of Petroleum Resources declined to honour the request from parties seeking his approval to ExxonMobil’s $1.523 billion cash-out from MPN.

The acquisition entailed that Seplat, in staking so much money in favour of the deal, would take ownership of MPN and its commercial interest in assets it operates under joint venture with NNPC Limited. The company, which launched into being on the back of brownfield acquisitions from Shell and propelled growth with further acquisitions from Chevron and Eland respectively, had posted a new growth outlook with acquisition of MPN.

In its first quarter performance statement for the year, Seplat had declared expectation to conclude acquisition of MPN within the second half of the year. And the assets in prospect are expected to raise Seplat’s status to the position of a major hydrocarbon liquids producer and unassailable gas factor in the Nigerian petroleum industry.

Chief Executive Officer of Seplat, Mr. Roger Brown, had said benefits from the awaited acquisition might have retroactive effect and capture the prevailing oil price windfalls for his company.

“Our proposed acquisition of MPNU remains on course. We are awaiting the necessary approvals from government and regulators and expect the transaction to complete in the second half of this year. The effective date of 1 January 2021 means we will benefit from higher recent oil prices and as we have previously reported, the addition of MPNU will nearly treble our production and double our reserves on a pro forma 2020 basis.

“The acquisition will reinforce our leadership of Nigeria’s indigenous energy sector and enabling us to generate strong future cash flows that will underpin our investment in Nigeria’s energy transition and improve our overall stakeholder returns. It will also bring a significant undeveloped gas resource base which, alongside our ANOH gas project development, will underpin Nigeria’s energy transition and drive domestic and export revenues when developed,” he said.

Seplat Energy Offshore Limited was positioned as the special purpose vehicle to operate the new portfolio if and when the deal reached conclusion. With the deal, Seplat targeted to inherit production assets that cover over 90 offshore platforms comprising about 300 producing wells hosted in four oil mining licenses with joint capacity for over 550,00 barrels a day (b/d) of crude oil, condensate and natural gas liquids (NGL).

Officials of ExxonMobil had explained during a media encounter in Abuja that the company was not trading on petroleum assets, selling its JV interests nor exiting Nigerian operations. They explained that the transaction was an equity sale arrangement that merely transfers ExxonMobil’s stakes in MPN to Seplat. The implication is that the divestment would, on the surface, replace MPN with Seplat as the JV partner to NNPC.

It is not clear if Seplat had floated the new company to replace or oversee MPN. Seplat did not also clarify expected relationship that would exist between MPN and Seplat Energy Offshore Limited or whether MPN would be rebranded on arrival.

Most analysts point out that rebranding a company after acquisition is a strategic ownership announcement. Earlier company acquisitions in the industry, including those of National Oil, Unipetrol, African Petroleum and Chevron all concluded before the new owners rebranded the companies to Conoil, Oando, Forte and MRS respectively.

In whatever way, it was clear that Seplat has strongly anticipated approval for the acquisition deal and had laid administrative structure for smooth ownership transition. Acquisition of MPN directly infers ownership of its assets and liabilities; and successful conclusion of the transaction could have scaled up the status of Seplat to a critical indigenous producer by pushing its gross operated output to over 600,000 barrels of wellhead hydrocarbon liquids per day.

But the national oil company is also interested in pushing growth, and has expressed misgivings against Seplat’s acquisition MPN’s JV interests, pointing at its pre-emptive rights under the JOA to be offered the acquisition opportunity.

The national oil company had since 2012 expressed displeasure in the changes brought on by divestments in its partnership structure. After initial divestment deals which conferred indigenous companies like Seplat and Aiteo with operatorship of respective resource and production assets, NNPC had risen to contest the control of subsequently divested assets.

Even before the passage of the Petroleum Industry Act (PIA) which solidifies its argument to build its asset base as it transits from a public corporation to public liability company that thrives on commercial viability, NNPC had started taking greater interest in the mode of asset divestment by the major oil firms in the country.

After watching the initial divestments which transferred assets with embedment of operatorship, NNPC had risen to assert its authority by not just recovering the operatorship exiting partners, but also demonstrating operating capacity to improve production growth and enhance resource valorisation.

Today, the company’s exploration and production affiliate, the Nigeria Petroleum Development Company (NPDC), leads a pack of technically primed independent companies in restreaming and optimizing production at moribund oilfields divested by foreign majors.

In oil mining lease (OML) 42, the NPDC led Neconde in reopening shut in wells and driving redevelopement to boost production from 13,600 barrels per day inherited from Shell to significant 70,000 barrels per day in 2017.

In OML 40, the NPDC led the Elcrest consortium comprising Eland and Starcrest Energy to reenter the Opuama field in 2014 with production resumption starting from 4,496 barrels per day to 15,000 barrels per day in 2017, according to data available at NNPC NAPIMS.

At OML 26, the NPDC also led First Hydrocarbons and Afren in an optimization and redevelopment programme to boost production from Shell’s divestment legacy of 4,501 barrels per day to 14,000 barrels per day in 2017.

In OML 30 where Shoreline acquired Shell’s interest to become a JV partner, the NPDC applied well workovers and redevelopment in shooting output from inherited figure of 28,785 barrels per day to 65,000 barrels per day.

And at OML 34 in which its partners with investing ND Western, the NPDC succeeded driving production from divestment figure of 10,074 barrels per day to 27,000 barrels per day.

As at 2017, NPDC led its partners in operations that added significant 130,000 barrels per day to Shell operated legacy output.

A former Group Managing Director of NNPC had during a chat with our correspondent in Abuja expressed displeasure that most reserves growth opportunities available to the NPDC was traded off to private players that could not stake the desired level of investment in optimizing value from the assets.

He lamented that some of the prime assets reserved for the growth of NNPC were given out by the government under intense political pressure.

The industry veteran had while in office stood strongly against subjugating the NPDC under the operating leadership of small independent upstream upstarts that have limited scope of operations. Most of the buyers of divested assets, he said, are still supervised by NNPC.

The new position of NNPC on operatorship of divested assets is therefore to unbundle the deals and separate sale of interests from operating rights. Our source had argued that operating right was the prerogative of the state player and holder of overriding interest in the JV.

Since the new posture of NNPC was established, subsequent divestments decoupled financial interests from operating rights. And NNPC has persistently strengthened the NPDC with new operating responsibilities.

Thus with the passage of the PIA and the roll off of full commercial operations by the national oil company, the Mele Kyari management has strongly asserted the determination of the company to launch into full commercial operations to propel growth and profitability.

He sings it loud that the fortunes and success of the new company would depend on the strength of its hydrocarbon reserves and industry production assets. He has pointed out in several presentations that NNPC retains its official mandate to guarantee full economic benefits of petroleum exploitation and energy security for the country.

Beyond words, NNPC has since the pre-PIA days further deployed its pre-emptive rights in competing for acquisition of divested interests in some petroleum assets. It overrode nearly completed divestment of Chevron’s interest in two oil mining licenses to indigenous Consolidated Oil Producing Limited popularly called Conoil.

The success of that pre-emption appears to have laid a new pattern for mergers and acquisitions as traditional JV operators pull out from Nigeria’s highly troubled and matured Niger Delta terrain.

Therefore the prevailing pre-emption of Seplat’s acquisition of MPN is not completely unexpected. It is clear that the national oil company is not only asserting its authority over assets operated on its behalf by the foreign companies, it might be driving its own commercial interests and choice of partners.

Government and NNPC have for decades relied heavily on the foreign JV operators to drive growth in the industry through well funded exploration, development and production investments. Most of them drove activities with own funds under several carry arrangements that were evolved to address government’s late response to cash calls.

With the entire JV interests of Total and Eni in basked for Shell’s JV exit, the entire ExxonMobil JV portfolio currently in the market, and sizeable chunks of Chevron’s JV assets in periodic offer; it has become clear that acquisitions will rule transactions in the Nigerian upstream industry in years to come. So, with more divestments lined up in the industry, NNPC Limited will continue to welcome a new set of partners. And the company’s right to chose who becomes its next partner appears to be part of the issues influencing its participation in the divestment bids.

Group Spokesman of NNPC, Mr Garba Deen Mohammed, is yet to speak with us; but a senior official in the Exploration and Production Division of the company stated that NNPC is concerned about a number of issues arising from divestments: Financial and technical capacity of new partners, their liabilities and exposure to third parties, and their industry pedigree.

“Every businessman is interested in knowing his partner in details. These divestments are providing that opportunity for NNPC to study the parties in transactions and how the divestments will affect operations in which we are involved,” he noted.

Second, he said, is how the divestments would aid the growth ambitions of NNPC as it transitions into full scope commercial operations as mandated by the Petroleum Industry Act (PIA).

Previous divestments, he pointed out, had imposed strange partners on the company without prior negotiation and partnership deals. He made it clear that NNPC would require separate due diligence on the financial capacity, corporate integrity and technical savvy of companies seeking its partnership.

But Seplat is not strange to NNPC. From its initial acquisition of Shell’s three producing assets in 2010, Seplat has proved to be a capable and reliable partner that has posted production growth figures similar to the results advanced by the NPDC at operated assets. The two companies have furthered their investment cooperation with the ANOH gas project also operated by Seplat.

“But that was before NNPC assumed its current bull stand. Besides, the size of assets in the MPN acquisition is huge, and the opportunity cost is high for NNPC,” our source noted.

 “You cannot also rule out the influence of PIA on NNPC’s new demand for greater asset base. The company is repositioning for commercial competition with other players in the industry; so it is applying its influence to take stronger commercial position,” he added.

The NNPC had in January raised concerns about the divestment of MPN operated JV assets, declaring intentions to rein in the operator’s interests to firm up its grip on robust reserves base for its planned launch off into full commercial operations. It wrote the company conveying its interest in MPN’s stakes currently on sale.

Our enquiries yielded that the president’s office and lease administrator were notified of NNPC intentions acquire the MPN 40 percent stake in the assets. And NNPC is said to approach the minister’s office with a guarantee of full payment for the assets, having raised princely $5 billion from the money market to drive its asset accretion programme.

“We cannot tell you much about the transaction from this point. The whole decision was made at the Presidency. We only received information on what was decided and acted on the information in line with our role,” a source in the Ministry of Petroleum Resources explained.

The Oracle Today reports that Mallam Kyari has been very strident on the resolve of his management of the company to rise to the value generation challenge by taking bigger commercial positions along the full industry loop.

He had told The Oracle Today at a conference in Abuja that NNPC is under pressure to apply its full capacity and resources in delivering dividends to the government. He had said the company has greater value creation responsibility than the operating companies in the country whose obligations, he pointed out, are limited to few shareholders.

“We have over 200 million shareholders. They need to have faith in our capacity to deliver dividends from the resources we manage on their behalf. Our mandates are set out and our programmes to deliver them have been mapped out,” he told us while emphasizing the new commercial orientation of the company.

He pointed at the frontier exploration programmes of the company as part of the sources of new reserves and also made it clear that the company would join the scramble for brownfield assets as its traditional partners pull investments from vulnerable onshore and shallow water operations.

However, having a large elephant in the room is the nightmare of private investors in an industry where fair competition forms the global standards. It is the credible philosophy that both state players and private investors should compete on a level playing ground.  

Besides, mergers and acquisitions in the industry are the traditional mode of growth. And global templates show that preemptive rights form a slope that inclines opportunities towards the privileged.  

Besides, right of first refusal interchangeably used with pre-emptive right is also sresented by investors as backstage arrangement which could be very vulnerable to shady negotiations. In 2005, 2006 and 2007 when the model was introduced in bid rounds, major multinational firms shunned the exercise on the grounds of non-transparency.

Worse still, government’s objective to extract additional non financial value from beneficiaries of the privilege during licensing rounds failed to secure the targeted investments in refining, processing, petrochemicals and power generation.

Apart from the Dangote group, the local and foreign beneficiaries of the preferential rights granted them in the last licensing rounds reneged on their midstream project commitments. Until today, Oil and Natural Gas Company (ONGC) of India, Korean National Oil Corporation (KNOC), China National Offshore Oil Corporation (CNOOC) and their local partners are yet to scratch the ground for any midstream project.

It is not also visible that the deepwater assets awarded these companies and their local content vehicles have seen exploration and development activity.

Already muffled voices whisper expressions of concern in the industry over the reactivation of rights of first refusal in JOAs which govern the JV operations in the country.  The fears are robustly founded given the ubiquitous presence of NNPC in all operating agreements that rule activities of all players.

It means that the national oil company could by whims shut out competitors from bidding for assets in which it is interested. Such powers could also infringe on the rights of private players to choose buyers, honour commitments to partners or optimize value from divested interests.

Most pungent is the fact that unrestrained application of pre-emptive rights over mergers and acquisitions potentially poses threat to survival and growth of the independent companies that thrive on brown field asset acquisitions. Apart from a privileged number of indigenous independent companies that benefitted from discretionary oil block allocation including Famfa Oil and South Atlantic Petroleum (SAPETRO), nearly all indigenous companies that operate in the upstream segment of the petroleum industry are established on farm out deals.

Therefore, whereas the NNPC has demonstrated value generation in assets where it has taken operating leadership, it is important that the state operator should create space for deal flow in the industry in recognition that that asset trade forms the most credible and available growth path for independent players, and entry path for new investors.

There is strong possibility that divestment of MPN could still be renegotiated and progressed to guarantee mutual value for NNPC and Seplat. The two parties have demonstrated smooth and working relationship that could form the groundwork for new and enhanced partnerships.