Friday, September 23, 2011

Shell Nigeria oil sales to end with operator deal

* Buyers, NNPC likely to reach operator compromise

* NNPC to "operate" but sub-contract - sources

* Stalled reforms holding back investment

By Joe Brock

ABUJA, (Reuters) - Shell's (RDSa.L) Nigerian oil block sales are heading for a messy conclusion due to a tussle over who operates the fields, sources close to the deals said, highlighting the complex nature of doing business in Africa's largest energy industry.

Shell along with foreign oil major partners Total and Eni have agreed to sell their share in four onshore oil blocks which Shell operates in the Niger Delta wetlands but they need ministerial approval.

Deals for the blocks, one of which attracted a bid of over $1 billion, have already been agreed and a 10 percent deposit paid. These payments triggered a 180-day window for the deals to be completed, the first of which expires at the end of this month, according to sources involved.

State-oil firm NNPC, which owns the majority stake in the blocks, is at loggerheads with the buyers because it says its subsidiary will take over from Shell as operator of the fields once the deals are completed.

But some buyers of the blocks are not willing to complete the deals if NNPC is the operator.

A consortium led by Poland's Kulczk Oil Ventures agreed a deal for Shell's block OML 42, while independent energy firm Eland Oil, in partnership with Nigeria's Starcrest, has agreed to buy OML 40. Niger Delta E&P and Petrolin won OML 34 and Conoil, owned by Nigerian billionaire Mike Adenugu, picked up the biggest block OML 30.

Financial backers will not want to lose their initial funding, in one case topping $100 million, while NNPC and Shell will want deals to go through to realise financial returns, so a compromise should be found.

The likely scenario is that NNPC becomes the "operator" of the blocks and then farms out the development of the fields to another firm. This could be the buyer of Shell's share or another contractor and potentially a host of other companies in between, sources close to the deals told Reuters.

"Just because you're the 'operator' doesn't mean the guys on the ground will have your logo on their shirt," a source with one oil company involved in the bidding process told Reuters.

"It would be a disaster for some of these companies if these deals don't go through and I'm sure a compromise will be made. There might be a few more layers and a bit less money at the end of the line but it will still be nicely profitable," he added.

The government says it wants NNPC to increase the amount of oil it operates and not give away rights to other companies.

But oil minister, Diezani Allison-Madueke, earlier this year signed off operating rights on three other onshore blocks OML 4, 38 and 41 shortly before leaving office. President Goodluck Jonathan re-appointed her after winning April's elections.

Operating rights for these blocks were given to Seplat Petroleum, a company owned by two other small Nigerian firms.

Seven Energy, partly-owned by British firm Petrofac , was brought in to help operate the blocks through its Nigerian subsidiary Septa Energy. The operation of the fields may eventually be done by Petrofac, industry sources said.

The process for allocating who operates blocks and selling stakes in fields is inconsistent and was unclear to the buyers of Shell's fields who have complained that they were led to believe they would run the projects.

Inefficiency and a lack of financing within NNPC has been acknowledged by Nigeria's government, which has ordered a comprehensive audit. International watchdogs, Transparency International and Revenue Watch Institute, rated NNPC as the least transparent out of 44 national and international energy companies, in a report earlier this year.

Nigeria's government says its ambition is to make NNPC a successful state-owned energy company like Brazil's Petrobras and Malaysia's Petronas but becoming operator in name, but not in practise, won't get them to that goal.

While the oil ministry and NNPC has spent months involving itself in asset sales between other companies, new investment in the energy sector has stalled, mainly due to political wrangling over the Petroleum Industry Bill.

Nigeria has assumed oil production of more than 2.4 million barrels per day next year but without investment in new projects to replace reserves, production will soon begin declining.

"The problem for the industry is it has found itself bogged down in opaque details at a time when it has failed to clarify the big strategic issues of how it is going to manage a sector of such critical importance for the country," said Antony Goldman, Nigerian oil and gas expert and head of PM Consulting. (Editing by James Jukwey)

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