When a business or parts of a business fails to perform in a way that is consistent with the goals of a company, selling off their assets or investments is usually a way out for the company; this is called divestment. Quite popular among International Oil Companies (IOCs) in the oil and gas industry for some reasons, a new wave of divestment is happening in Nigeria again. In the past, some of the reasons have included high operation costs, disputes with host communities and growing insecurity. Now the oil price collapse, Covid-19 pandemic and the fossil fuel divestment movement championed by the emergence of renewable energy are some new suspects.
As part of the global energy transition, companies like the Australian; BHP Group are reportedly selling off their oil and gas operations in Algeria, Trinidad and Tobago and Australia. Along with other major oil producers in Nigeria, Shell is also trying to get on the clean energy train by divesting its remaining investments in Nigeria. In a move that could spell economic ruin for Nigeria after recovering from the collapse in oil prices, the global giant stated that they could no longer handle the risks associated with doing business in Nigeria. One could also speculate that the series of court losses these past few months contributed to this decision.
What happens in a divestment process?
Before any sale of oil and gas interests can occur, the seller is mandated to apply for the Petroleum Minister’s consent following guidelines by the regulator, Department of Petroleum Resources (DPR). The authority for this comes from the 2012 case, Moni Pulo v Brass. The DPR Guidelines and Procedures for Obtaining Minister’s Consent to The
Assignment of Interest in Oil and Gas Assets 2021 outlined some legal obligations involved in a valid asset transfer. Some of its important provisions are summarised below;
–Assignability of interest in Section 3: a participant in the Nigerian oil and gas sector has the right to transfer any of its assets or interests through mergers, acquisition, divestment or any transaction that can alter ownership- in a process known as assignment. The seller is known as the assignor, and the buyer is the assignee.
–Notification to the DPR on intention to assign in Section 4.2: the assignment procedure starts with a notification in writing by the assignor to the DPR stating their intention to assign their interests
–Notification of prospective assignees: the assignor also must submit its list of qualified candidates to the DPR, who within 10 working days will vet and determine if they are acceptable.
–Application to the DPR requesting The Minister’s consent in section 5: only after the successful completion of the notification stages is the assignor allowed to submit a written application to the Director of Petroleum Resources requesting consent. So an application must be supported by the required documents.
– Divestment requirements in section 6: this provides a structured process on the requirements for an assignment by divestment – the type of transaction that Shell is involved in;
* The DPR conducts its due diligence, and part of it includes checking the pricing of the asset to ensure that it has no adverse effects on the Nigerian revenue;
* Where the assignee is part of any arrangement with the NNPC (such as joint ventures and production sharing agreements), they must seek a waiver of the right of pre-emption from the non-assigning parties and a permission letter by the NNPC subject to the provisions of such documents;
* An agreement reflecting decommissioning and abandonment liabilities and costs will also need to be sent to the DPR, who will deduct them from the transaction purse. These documents form part of the required documents for consent.
–Granting of Minister’s Consent in section 7: this happens if the Minister is satisfied that the buyer is of good reputation, acceptable by the government of Nigeria and possesses sufficient technical and financial expertise. If a fee gets imposed by the Minister, it must be paid before consent gets granted.
Local Content Legislation to the rescue
Amid the uncertainty surrounding the industry’s future, one thing is assured- the opportunities that will be created for local companies and producers. In the past few years, Nigerian companies such as Seplat and Oando have acquired assets (oil mining licenses and oil prospective licences) divested by Shell and ConocoPhillips are doing tremendously well. So this also creates employment opportunities for Nigerians in the industry.
The fact that Nigerian companies can be considered eligible to take over these divested assets demonstrates the impact of local content policies. The industry has come so far from when Nigerians were merely spectators and indigenous companies could not handle the capacity. The purpose of local content law is to increase local knowledge and participation in the industry. They seek to equip local talent with skills so one day they can sustain the industry with little to no assistance from their foreign predecessors. The companies mentioned above and the fact that Nigerians now hold some of the highest positions in these IOCs (in their country) are a testament to the effectiveness of such policies.
The Nigerian Oil & Gas Industry Content Development Act (The Act) is aimed at promoting local skill development and participation in the Nigerian oil and gas industry. Under Section 3(1), the Act pushes for Nigerian industry participants to be given first consideration in the award of oil blocks, oil field licenses, lifting licenses and other projects. It continues in 3(2) with the provision of exclusive consideration for Nigerian indigenous companies who have the capabilities in terms of equipment and manpower to execute the work.
Now, this does not mean the IOCs are unable to sell those assets to other IOCs. It simply means that when divesting their interests, they must prioritise offers from competent indigenous companies and operators with the financial and technical capabilities to take over their assets. This is in line with Group Managing Director, NNPC, Mele Kyari, who announced the divestment policy one week ago. To add value to the industry, only investors with “technical, financial and operational capabilities” will be able to acquire assets.
This divestment process is happening quickly, so the NNPC is drafting a Comprehensive Divestment Policy (CDP) to guide the entire process and protect Nigerian interests. This will prepare Nigeria for more divestments in the future and fuel the development of its renewable industry. There also seems to be a shift towards the development of gas as oil export revenues fluctuate.