Nigeria’s Proposed Sale of Oft-Bombed Oil Assets Not Easy

For sale: stakes in oil fields. Bids from world class energy companies preferred. Pipelines and terminals associated with the deposits only blown up about a dozen times in the past year. Deal may depend on crude prices.

Nigerian President Muhammadu Buhari’s government on March 7 proposed a plan to jump start the economy by, among other things, selling stakes in joint-venture oil projects within the next three years. Given a militancy escalation that blighted those very assets last year, and previous struggles to privatize state businesses, analysts inside and outside the west African country say such sales won’t be straightforward.

“Nigeria’s track record on privatization and divestments has not exactly been the best, so people are probably going to greet this news with a certain degree of skepticism and I think rightly so,” Manji Cheto, a West Africa specialist at Teneo Intelligence in London, said by phone. “I don’t think this is going to be a process that’s speedy.”

Normally Africa’s biggest producer, Nigeria has been among the world’s hardest-hit supplier nations over the past year due to the militant attacks that crushed its output while prices remained half what they were in mid-2014. At the same time, its reduced flows have helped limit a global crude glut, bolstering OPEC and other nations dependent on revenue from selling the commodity.

The oil ministry and Nigeria National Petroleum Corp. didn’t respond to multiple calls and emails requesting comment.

Smaller Stakes

The oil asset-sale plan starting this year through 2020 would reduce the average 55 percent stake Nigeria holds in joint ventures with Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA, which produce about 90 percent of its crude.

Previous privatizations included power assets, a process that Nigerian Senate President Bukola Saraki said in February had “failed” to improve domestic access to electricity as planned. In 2010, the West African nation halted the sale of Nigerian Telecommunications Ltd., also known as Nitel, and opted to liquidate the company after failing to find a buyer for the former monopoly. It’s also struggled to secure outside investment in its refineries.

The government has traditionally been reluctant to sell crude assets. Existing plans aim to increase oil production to 2.5 million barrels a day by 2020 after falling to about 1.4 million last year, the lowest level in almost three decades. Such an increase could boost government revenue by 800 billion naira ($2.53 billion) annually and fund a revamp of domestic refineries. Lowering its stakes would diminish any windfall from a recovery in output and prices.

Unwilling Seller

“Many within the government do not really want to let go of oil assets, but the current reality may be slowly beginning to change that thinking,” said Cheta Nwanze, head of research at Lagos-based risk advisory SBM Intelligence. “This proposal represents an adjustment to a new economic normal and not a glowing embrace of market forces.”

Nigeria’s militant threat hasn’t gone away, either. While the government has stepped up engagement with community leaders and proposed restoring the budget to pay former fighters, the Niger Delta Avengers threatened earlier this year to widen attacks. The group was responsible for most pipeline sabotage last year.

The African country is also part way through five years of $5.1 billion in payments — in the form of crude sales — to oil companies to reimburse them for past operating costs.

“I imagine international oil companies will treat any additional equity stakes offered to them with a healthy dose of caution given the severe production disruptions of 2016 and the fact that the NNPC still owes substantial sums to their venture partners,” said Charles Swabey, an oil and gas analyst at BMI Research.

Good Assets

Nigeria reducing its average stake to 40 percent from 55 percent would be seen as ideal for the government, Pabina Yinkere, head of institutional business at Lagos-based Vetiva Capital Management, said in an interview.

The partner companies will receive the right of first refusal in any sale of the stakes, according to Nwanze from SBM Intelligence. International oil companies built up the stakes they have today from the late 1970s to the 1990s. So there is precedent for offloading such assets.

“The JV assets are good assets,” Yinkere said. “Nigerian buyers may be few this time around due to funding as many local banks will not be so willing to lend toward this. We could see healthy foreign appetite for the sale, particularly from China and India.”

But while Nigeria thinks about loosening its grip on the assets, a rebound in crude oil prices could still cause the sale to go the way of previous divestment plans. West Texas Intermediate for April delivery fell 0.5 percent to $48.24 a barrel on the New York Mercantile Exchange at 12:20 p.m. in London.

“The need to increase government income is the primary motivation for these new proposals, and a return to the good times of higher oil prices and normal Nigerian production will be a formidable disincentive,” Nwanze said.

Bloomberg