Shell cashes out from SPDC JV with $2.4 bn

• Assures staff of job retention

Sopuruchi Onwuka

Shell has finally pulled a foot from the Nigerian conventional petroleum play after selling off the combined interest of multinational private entities in the NNPC/Shell/TotalEnergies/Eni exploration and production Joint venture for a total of $2.4 billion.

Shell stated that the part of the proceeds would however be reserved buy feed gas to service its supply obligations to the Nigeria LNG Limited, and also foot its own share of remediation costs at the time of decommissioning.

Under a deal declared January 16, Renaissance Consortium comprising frontline indigenous firms including ND Western, Aradel Energy, First E&P, Waltersmith and Petrolin would now replace Shell, TotalEnergies and Eni in the joint venture with NNPC Limited.

Shell stated that the SPDC JV holds and operates 15 oil mining leases for petroleum operations onshore and three for petroleum operations in shallow water in Nigeria. Proved reserves that are the subject of the farm out transaction were approximately 458 MMboe based on December 31, 2022, estimates by SEC.

The SPDC JV is an unincorporated joint venture in which the Shell Petroleum Development Company (SPDC) Limited holds 30% equity interets, the Nigerian National Petroleum Corporation holds overriding 55% stake on behalf of the government, Total Exploration and Production Nigeria Limited has 10%, and Nigeria Agip Oil Company (NAOC) Limited has 5%.

The Oracle Today reports that judging from previous farm out deals, Shell typically sells the 45 percent stake jointly held by the three multinational partners in the JV. This entails that the Renaissance Consortium has provisionally bought out Shell, TotalEnergies and Agip from the JV.

Shell’s divestment from SPDC does not however affect its equity stakes in Shell Nigeria Exploration and Production Company Limited (SNEPCo), Shell Nigeria Gas Limited (SNG), Daystar Power Group, and the Nigeria LNG (NLNG,) Limited.

The Oracle Today reports that SNEPCo produces oil and gas in the deepwater Gulf of Guinea under separate operated and non operated Production Sharing Contracts (PSCs) with the government through the NNPC Limited as the concessionaire.

Shell Nigeria Gas Limited (SNG) provides gas to domestic industrial and commercial customers; and Daystar Power Group provides integrated solar power to commercial and industrial business across West Africa.

Shell also holds a 25.6% interest in the NLNG which produces and exports LNG to global markets.

Under the terms of the JV farm out transaction, Shell stated, the Renaissance Consortium would pay Shell significant $1.3 billion on face value of the assets, and another $1.1 billion in consideration of prior receivables and cash balances in the business,

Payments are expected to be staggered to completion of the transaction. And the full transaction values, Shell stated, would be adjusted to reflect any shareholder distributions, above US$200 million, made prior to completion.

“Other contingent payments, including those related to gas supply to NLNG, may become payable depending on business performance and fluctuation of product prices,” the company stated.

The net book value of the entity subject to this transaction is approximately US$2.8bln as at December 31, 2023, Shell pointed out, adding that economic performance under the agreed deal structure accrues to the buyer with effect from December 31, 2021.

“However, Shell will continue to consolidate SPDC until control transfers at completion. Although any amounts will depend on the future financial performance of the business, we expect to recognise impairments in respect of the business up to the date of completion, including to the extent that the net book value of SPDC exceeds the expected consideration at completion.

At closing, Shell will provide secured term loans of up to US$1.2bln, to cover a variety of funding requirements.

“Shell is providing additional financing of up to US$1.3bln over future years to fund SPDC’s share of the development of the SPDC JV’s gas resources to supply feedgas to NLNG, and its share of specific decommissioning and restoration costs. This additional financing will only be drawn down when these costs are approved and incurred by the SPDC JV.”

Shell assured that the farm out deal would not impact Nigeria’s economic aspiration from the JV operations, stating that the divestment would preserve the full range of SPDC’s operating capabilities in the country.

The company also assured that remains a major investor in Nigeria’s energy sector through its Deepwater and Integrated Gas businesses.

With the completion of the farm out deal, focus would now shift to the reaction of the NNPC Limited which has gained the reputation of deal breaker in the industry where it has stalled approval of previous farm out transactions by ExxonMobil and also raised the flag against farm out by Agip.

The National oil company had in the past successfully broken a farm out deal between Chevron and indigenous Conoil, pointing at its preferential right mop up interests of exiting partners.

However, with the high level of anxiety with which the new administration of the government pursues foreign exchange revenue, and President Tinubu’s visible pressure on the upstream petroleum industry to ramp up oil output, it is expected that completion of the pending farm out transactions would soon scale through government’s approvals.

Thus, the timing of the farm out agreements by Shell JV partners to coincide with the change in the administration of the federal government appears strategic.

Shell stated that the transaction has been designed to preserve the full range of SPDC’s operating capabilities following the change of ownership. This includes the technical expertise, management systems and processes that SPDC implements on behalf of all the companies in the SPDC Joint Venture (SPDC JV).

Shell stated that SPDC’s staff would continue to be employed by the company as it transitions to new ownership.

“Following completion, Shell will retain a role in supporting the management of SPDC JV facilities that supply a major portion of the feed gas to Nigeria LNG (NLNG), to help Nigeria achieve maximum value from NLNG,” it stated.

With the JV farm out successfully deliverd, Shell stated that its operations in Nigeria would now focus on investments in deepwater terrains and in integrated gas positions.

Shell’s Integrated Gas and Upstream Director, Zoë Yujnovich, stated: “This agreement marks an important milestone for Shell in Nigeria, aligning with our previously announced intent to exit onshore oil production in the Niger Delta, simplifying our portfolio and focusing future disciplined investment in Nigeria on our Deepwater and Integrated Gas positions.”

“It is a significant moment for SPDC, whose people have built it into a high-quality business over many years. Now, after decades as a pioneer in Nigeria’s energy sector, SPDC will move to its next chapter under the ownership of an experienced, ambitious Nigerian-led consortium.

“Shell sees a bright future in Nigeria with a positive investment outlook for its energy sector. We will continue to support the country’s growing energy needs and export ambitions in areas aligned with our strategy.”