What is happening?
Nigerian domestic oil companies (DOCs) are taking over the country’s onshore oil and gas industry, while international oil companies (IOCs) are steadily moving offshore, or out of Nigeria altogether. Recent events raise concerns that this is happening too rapidly for the Federal Government to ensure communities and the environment are protected.
The trend has been ongoing for the past decade, but has accelerated recently. In 2022, Shell, the IOC with the largest stake in the Nigerian oil and gas industry, announced that it had received four offers for its entire onshore oil and gas portfolio, reportedly worth US$3 billion. Shortly after, ExxonMobil announced it had entered an agreement to sell the entire share capital of its Nigerian subsidiary for shallow water operations, Mobil, to DOC Seplat Energy for US$1.3 billion. Other IOCs such as Total and Chevron also have a number of oil blocks for sale, and this trend is expected to continue.
Why is this happening?
IOCs are divesting for a range of reasons, including insecurity, oil theft, and entrenched hostilities in host communities, which ultimately contribute to the high costs and risks of continued operations. They publicly disclose that these issues are making their Nigerian assets a divestment priority when rebalancing their international portfolios.
There are also global environmental trends that increase risks to their operations. Recent progress in UK and Dutch courts could increase the ability of communities to seek justice for historical oil spills, requiring financial compensation for damage and loss of livelihoods.
More broadly, market and policy forces are changing the way the world values fossil fuels, to drive a global energy transition and lower carbon emissions. Consequently, hydrocarbon projects are becoming uneconomical and risk becoming ‘stranded assets’ that are no longer able to earn a return, so IOCs are offloading these while they still have value.
What does our own work show?
Our recent report explored the drivers and implications mentioned above in more detail.
It also analysed trends over the past three decades. It found that Between 2010-2021, 26 major divestments were finalised, with all but one involving sales from IOCs to DOCs.
In terms of operatorships, IOCs are involved in the operation of 47% of OMLs, while DOCs are involved in 45%. Assuming Seplat takes over as sole operator of Mobil’s blocks, then IOCs will cede their lead as operators for the first time in Nigeria’s history (becoming 44.2% for IOCs, and 47.8% for DOCs).
Why is this important?
This transition has justified a lot of attention, since the industry has historically been immensely profitable for IOCs and the Federal Government of Nigeria (FGN), but has failed to improve the wellbeing of the majority of citizens in the Niger Delta.
The IOCs have also played a role in creating and perpetuating the very issues they claim are forcing them out of the Niger Delta, which reinforces the reasoning they should address their legacies before leaving. After extracting immense wealth, the IOCs are instead leaving behind toxic legacies of environmental pollution, social strife, and governance problems, without making efforts to address them adequately.
Simultaneously, there are concerns over the ability of DOCs, who are taking over with less experience and resources. There are already signs that the environmental, social and governance (ESG) performance could be worse, so the problems that communities face will continue, could worsen, and they will have fewer options to seek accountability and justice in international courts.
These concerns were reinforced recently by a number of environmental disasters at oil blocks owned by DOCs. One example is the handling of an extensive oil spill at the end of 2021, at a well that Aiteo acquired from Shell in 2015. The spill lasted 38 days because the DOC reportedly did not have the response strategy or expertise to plug the leak. Aiteo also has an ongoing court case against Shell over the integrity of the pipelines acquired, which highlights a sector-wide risk that DOCs are inheriting infrastructure in need of extensive maintenance, upgrades, and decommissioning.
Another example is an explosion in 2022 at a floating production, storage, and offloading (FPSO) vessel, operated by another DOC, Shebah. The FPSO was nearly 50 years old and reportedly, “most if not all of the big trading companies stopped using it several years ago”. It exploded with at least 60,000 barrels of oil on board, and 10 crew were reported to be dead or missing. This case highlights that DOCs could be content operating aged infrastructure to the point of environmental and human disaster.
The timing of these divestments is an important factor. The Petroleum Industry Act was passed at the end of 2021, and the Federal Government is going through the monumental process of restructuring the oil and gas sector, including creating new regulators and privatising the national oil company. This raises concerns that the divestments will be poorly managed, as the Ministry of Petroleum Resources will be pulled in other directions, and IOCs will divest without any formal agreements to address their legacies.
What needs to be done about it?
The IOCs have a huge role to play in mediating the transition to DOCs, and remediating their toxic legacies before leaving. Last year, the Federal Government claimed it will develop “a comprehensive Divestment Policy that will provide clear guidelines and criteria for divestment of partner interest”. With divestment deals in progress, it needs to speed up the design, consultation, and implementation of an effective policy regime to ensure IOCs do not leave without addressing, the problems they have caused, or buy their way out of responsibilities.
A policy framework for divestments could support communities to assess damage, asset integrity, and legally order action, since the courts have shown a willingness to prevent asset sales until legacies are addressed. For example, Shell’s divestment has hit a snag, as a court ruled it must wait until a decision is reached on an earlier ruling, ordering payment of N800bn ($1.95bn) in compensation to 88 communities in Rivers State for oil pollution.
As a last line of defence, Ministerial approval is required before acquisitions are completed. Therefore, the Minister (President Buhari) and Minister of State (Sylva) should make a policy stand to show IOCs that they must address their toxic legacies.
Published 25.04.22
