Indigenous Nigerian firms are snapping up billion of dollars worth of oil and gas assets from Western majors, however questions remain over corporate governance gaps between the domestic oil companies and foreign ones as their assets grow…
When companies acquire assets through mergers or acquisitions they are essentially signalling they want to be bigger in size, whether it is measured by increased output, revenues, profits, or geographical footprint.
However there is something else bigger firms have to contend with which is the increased scrutiny of their operations by regulators and shareholders, who often demand the best corporate governance practises or standards.
Questions are expectedly being raised about corporate governance practices at indigenous oil companies, who are the major beneficiaries of International Oil Company (IOC) divestments from Nigeria.
“My concern is that too many indigenous oil and gas companies are expanding faster than they can handle,” an oil and gas stakeholder, and former executive at state owned oil company NNPC, told BusinessDay.
Shell, Total and Agip divested from Nigerian assets worth $6.5 billion in 2013.
Oando just closed a deal to acquire $1.5 billion of ConocoPhillips assets.
SEPLAT Petroleum Development Corporation, an indigenous oil and gas firm, acquired assets (OML 4, 38 and 41) from Shell onshore divestments in Nigeria.
Africa’s richest man Aliko Dangote, recently submitted the highest bid for Shell’s stake in Oil Mining Lease (OML) 18, according Forbes online, quoting a recent report by Africa Intelligence.
Other Nigerian oil companies such as Shoreline Natural Resources and Neconde have bought fields from the Western majors.
The Nigerian government envisages that local indigenous producers will double their share from around 5 percent of total production in 2010 to 10 percent by 2020.
“We saw local Nigerian companies dominating in the oil licensing rounds in 2000, 2005, 2006 and 2007, both in onshore and offshore licences. Moreover, they have been increasing their presence in the sector through non-organic growth, by buying assets from international majors, including Shell, ConocoPhillips and Total. We estimate that over the past four years indigenous companies have spent over $3bn to acquire about 587Mbls of 2P reserves and over 100kb/d of daily oil production,” said IIdar Davletshin, an energy analyst at renaissance Capital in a May 26 report.
“We think other IOCs, including Shell, ExxonMobil and others, may continue their divestments, with more assets offered for sale before the end of the year.”
While indigenous continue to expand, the recent incident with Afren a Nigerian focused but London listed company is a cause for pause.
Afren was downgraded on Thursday (August 07) by ratings agency Standard & Poor’s (S & P) over fears the oil company’s investigation into alleged unauthorised payments could cause banks’ lending to dry up.
Afren announced on July 31 that it had suspended chief executive Osman Shahenshah and chief operating officer Shahid Ullah as it launched an investigation into “the receipt of unauthorised payments potentially for the benefit of the CEO and COO”.
S&P said it views the allegations as “severe and rare”, and has downgraded its assessment of Afren’s management and governance to “weak”, from “fair”.
“We believe that Afren’s governance has deteriorated significantly,” said S&P.
S&P also highlighted Afren’s “poor track record” on reporting conflicts of interest, citing the late disclosure in 2013 of management’s shares in First Hydrocarbon Nigeria, a Nigerian oil and gas company that holds a 45pc interest in one of Afren’s key onshore assets in Nigeria.
The investigation into alleged improper payments has so far knocked almost £500m off the FTSE 250 company’s value (see Fig 2), a rude shock for shareholders.
Some indigenous oil firms have sought to stress their firm commitments to corporate governance.
SEPLAT which has a dual listing in London and Lagos, says’ part of the reason for listing in London is due to higher governance standards.
“SEPLAT recognizes the importance of good corporate governance and it is committed to business integrity and high ethical standards and values in all its activities,” the company said on its website.
While the future is bright for indigenous firms some of which make a compelling investment case, the Nigerian government which is a major supporter of IOC asset transfers to such firms may have to increase its capacity for oversight of to the sector to prevent any unintended consequences of weak corporate governance.
Nigerian Banks who are mostly exposed to the sector through loans should also evaluate their concentration risk to oil and gas firms to prevent a build up of bad loans.
