Tuesday, September 27, 2016

Nigeria Mulling Oil Assets Sale That Could Reshape the Industry

President Muhammadu Buhari official Portrait 2015 
 President Muhammadu Buhari
  • Country needs $15 billion to boost economy, reserves: Dangote
  • Sale amid low crude prices may affect assets’ value: analyst
Nigeria’s possible sale of some of its oil and gas assets to raise money and boost the contracting economy in Africa’s most populous country could reduce the government’s influence over its biggest industry.

President Muhammadu Buhari’s economic advisers are working on a plan “to generate immediate large injection of funds into the economy through asset sales, advance payment for license rounds, infrastructure concessioning,” to help deal with the slump in oil revenue, Budget Minister Udoma Udo Udoma said in a Sept. 24 statement. The ministry of Petroleum Resources is examining what oil assets could be sold, Udoma’s spokesman, James Akpandem, said last week.

Battered by low oil prices and a dearth of foreign investment, Nigeria’s economy will probably shrink in 2016 for the first time in 25 years, according to the International Monetary Fund, which forecasts a 1.8 percent contraction. A 15-month currency peg, fuel and power shortages and a slump in crude production, have cut output. The country’s foreign-exchange reserves have fallen by more than a third since the end of September 2014 to $24.8 billion.

Selling upstream assets “will most likely change the structure of the Nigerian oil industry,” Chijioke Nwaozuzu, a professor at the Institute of Petroleum Economics at the University of Port Harcourt, the country’s oil hub, said by phone. A transfer of petroleum reserves to private investors would diminish government influence in the sector, likely resulting in improved efficiency and capacity utilization and “it could also mean mortgaging future crude-oil exports,” he said.
Nigeria has an average 55 percent stake in joint ventures run by Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA. These account for about 90 percent of Nigeria’s oil production, which generates roughly two thirds of government revenue. The state also owns 49 percent of Nigeria LNG Ltd, a multibillion-dollar company which operates Africa’s biggest liquefied natural gas plant.

The sale of such stakes, augmented by offshore borrowing, would help the country raise the $15 billion that is needed to revive the economy, Africa’s richest man, Aliko Dangote, said in an interview with Bloomberg TV on Sept. 22.

Repurchase Clause

If the authorities decide to proceed with the sale of energy assets “it will ideally be to the existing partners who wish to increase their share,” Udoma’s spokesman, Akpandem, said. Any such deal would include a repurchase clause, he said.

“We’re looking at this very feverishly because the other alternative is to go mass borrowing,” State Minister for Petroleum Resources Emmanuel Kachikwu said in an interview last month. “But there’s a limit to your borrowing cap and we’re fairly close to that tipping point where you really can’t borrow anymore otherwise you can’t sustain the borrowing. The other thing to look at is your assets and rights that can be turned into cash.”

Buhari approved a 6.1 trillion naira ($19.4 billion) budget for this year and said he expected the government to raise about $5 billion from the Eurobond market and multilateral lenders.

Higher borrowing costs and the loss of almost half of the revenue projected for this year could push Nigeria’s debt service-to-revenue ratio above the projected 35 percent, according to documents from the budget and national planning ministry.
Dangote has recommended the state parts with some of its shares in NLNG, jointly owned with Shell, Total and Eni. Senate President Bukola Saraki has advocated for the sale of oil and gas interests and the privatization of airports and refineries, while former central bank governor Muhammadu Sanusi II said parting with assets could be done without hurting the government’s strategic interests and would give incentives to private investors.
Oil workers warned on Sept. 25 that they would go on strike if national assets were sold.

Unfavorable Timing

“Given the economic situation and the challenges, the rationale is there,” Rolake Akinkugbe, head of energy and natural resources at Lagos-based FBN Quest, said by phone. Nigeria is likely to do away with those oil fields where it has struggled to meet its share of capital contributions, leaving it with arrears of about $6 billion, she said.

The timing though, with oil prices at about half their 2014 levels and insecurity in the Niger River delta where militants are sabotaging oil and gas infrastructure, may not be right, according to Ayodeji Dawodu, a research analyst at Lagos-based Investment One.

“If it is because the economy is in an emergency, and you’re able to put in a buy-back clause, then it may be justified,” he said by phone. “There has to be a trade off and they should know what they’re trading off.”

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