Welcome to our 121st issue a s Nigeria celebrates the triumph of democracy. We congratulate our president elect Muhammadu Buhari. We hope this change will herald the dawn of a new Nigeria. But what does this change mean for the oil industry? I am writing an article for the next newsletter issue on the 7 most important things Buhari needs to do to salvage the oil and gas industry. Please email me your thoughts and views as soon as possible so I can take your views into account when I write the article. You can contact me via editor@nogintelligence.com.

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Shell Petroleum Development Company of Nigeria Limited and its partners who together own 45 per cent interests in oil mining leases (OML) 18, 24, and 29 have just announced the completion of the sale of the third in the quartet of assets that they put up for sale in this latest round of divestments. The sale of OML 29, the choice asset of the lot, together with the Nembe Creek Trunk Line to Aiteo Eastern E&P Company Limited for $2.562 billion, has netted Shell $1.7 billion.

 

Only a few days before, Shell announced the completion of the sale of OML 18 to Eroton Exploration and Production Company Limited in which it netted $737 million for its 30 per cent stake. In October last year, they completed the sale to Newcross Exploration and Production. Whilst these three new Nigerian independent power houses are celebrating, the sale of OML 25 is unfortunately in court after the Nigerian National Petroleum Corporation scuttled the sale to Crestar by exercising a right of pre-emption over the asset. Crestar is suing to have the sale to it reinstated. Read more about the case under Legal News.

 

The sale of these three assets alone have given Shell and its partners (Shell with 30 per cent, Total with 10 per cent and Agip 10 per cent) a windfall after analysts said that the assets in these divestments are fetching premia of up to 40 per cent as Nigerian independents struggle to buy assets that will take them into the big league in view of a lack of open bidding rounds from the government. In spite of this however, indigenous companies are pleased to have the opportunity to get their hands on major producing assets leading to the rise and rise of the Nigerian independent.

 

Shell said in a statement: "This divestment is part of the strategic review of the SPDC's onshore portfolio and is in line with the Federal Government's aim of developing Nigerian companies in the country's upstream oil and gas business."  

 

In the statement, Shell denied that the sales were indicative of a desire to get out of Nigeria. The Dutch giant said in a statement: "Shell has been in Nigeria for more than 50 years and remains committed to keeping a long-term presence there - both onshore and offshore."  

 

Patrick de La Chevardière, Chief Financial Officer at Total, which has so far raked in over $1 billion from the sales said in a statement: "The sale of these non-operated onshore blocks in Nigeria is yet another example of our strategy of dynamic portfolio management, achieved at attractive valuations."

 

He added: "These transactions also reduce our exposure to non-operated blocks onshore Nigeria, and allow us to focus on our core, operated developments, such as the Egina project."

 

One of the surprising twists to this divestment exercise is the revelation that the buyers get operatorship of the assets. Past divestments have been beset by wrangling over operatorship. When the divestment strategy began, buyers assumed that the operatorship of the assets would transfer to them from Shell.

 

NNPC however dealt a sharp blow to the ambitions of these new independents to gain operatorship of major assets and prove their mettle. Such ambitions would be in keeping with the policy of increasing Nigerian participation in exploration and production. NNPC however chose to take over operatorship and the assets were handed to the operating arm of NNPC, the Nigerian Petroleum Development Company (NPDC) to run. Not having the funds or technical staff to operate these assets, NPDC entered into a number of "Strategic Alliance" agreements for funding and technical assistance. Some of the agreements have been criticised not least because the details of the agreements have not been made public.  

 

Industry watchers see the relinquishment of operatorship to the new independents as being much more supportive of an industry in which indigenous participation and capability in the oil and gas industry be allowed to grow and flourish.

 

The divested infrastructure includes flow stations together with associated gas infrastructure plus oil and gas pipelines within the OML, said SPDC. It said the divested fields produced around 43,000 barrels of oil equivalent per day (100 per cent) in 2014.

 

The sale to Aiteo Eastern, a consortium made up of Aiteo with an 85 per cent stake in the deal, Tempo Energy Resources with a 10 per cent stake and Taleveras with a 5 per cent) includes not just OML 29, but the troubled Nembe Creek Trunk Line. The major pipeline has been persistently vandalised by oil thieves leading Shell to decide to include it in the sale. The 100km long Nembe Creek Trunk Line was commissioned in 2010. It evacuates crude to the Bonny Crude Oil Terminal at the rate of 600,000 barrels per day. Shell has not included the terminal in the sale.

 

OML 29 covers an area of 983 square kilometres and includes the Nembe, Santa Barbara and Okoroba fields, and related facilities. Established reports have it that OML 29's remaining reserves (P1+P2) hold about 2.2 billion barrels of oil equivalent (BOE), while its hydrocarbon fields could deliver as much as 160,000 barrels of oil per day and 300MMscfpd of gas at peak.

 

OML 18 went to Eroton (previously misreported as Erotron) which consists of a consortium including Toronto Stock Exchange listed Mart Resources, Midwestern and Suntrust Oil. The name Erotron comes from Notore spelt backwards. Notore is a leading fertiliser and agro-allied company. Its owners have an interest in Suntrust Oil.

 

Approximately 140 wells have been drilled on OML 18. Three fields are currently in production on the block. Production in recent years has ranged between 20,000 to 30,000 barrels of oil per day from approximately 30 producing wells. Aggregate cumulative oil production from OML 18 since 1970 is approximately 1,060 million barrels, with peak production in January 1971 at 140,000 barrels of oil per day.

 

Crude oil production from OML 18 is exported through the Bonny Crude Oil Terminal via the Nembe Creek Trunkline. Gas production from OML 18 is delivered to various power, industrial and commercial customers via the Nigeria Gas Company's pipeline.

 

 

Nigerian State Owned Company Hits 200,000 BPD Production

 

Oil production from the Nigerian Petroleum Development Company, which operates some joint venture assets on behalf of the Nigerian National Petroleum Corporation (NNPC), has hit production of 200,000 barrels per day (bpd) from 130,000 bpd. Domestic gas supply from the national operator has also gone up to about 600 million standard cubic feet of gas per day. It supplies gas to the Oredo, Ughelli and Utorogu gas plants.

 

With the oil price crash in the second half of last year the Managing Director of NPDC, Anthony Muoneke who was appointed last year has been under pressure to ramp up production. It seems he has managed to deliver, giving the Minister of Petroleum Resources, Diezani Alison-Madueke added impetus as she sought to defend her Ministry's 2014 performance and the budget for 2015 before the House of Representatives Joint Committee on Petroleum Resources - Upstream, Downstream and Gas Resources.

 

Total to Add 60,000 Bpd to Nigerian Production in 2015

 

The CEO of one of Total's Nigerian subsidiaries, Elizabeth Proust, has given the industry a shot in the arm as she announced the intentions of the French oil giant to see through major projects as part of a $20 billion investment from 2010. One of them, Phase 2 of the Ofon field is expected to add 60,000 barrels per day (bpd) to the company's Nigerian production in 2015. She said the other major projects, the upgrade of oil mining lease (OML) 58 and the development of the Egina deepwater field located in OML 130, were also progressing and remained on track.

 

Total's Ofon field, which has been on stream since 1997, is about 60 kilometers from Port Harcourt in 40 meters of water. The second phase of field development will raise output from the current 30,000 barrels of oil equivalent per day (boe/d) to a total of 90,000 boe/d of oil, gas and condensate. Total was able to achieve flare out in January this year after eliminating the flaring of 950,000 cubic meters per day, which will now be monetised in a move that will sharply reduce its greenhouse gas emissions during routine operations.

 

During the whole field development phase until the start in January 2015, the company says it deployed an array of technical innovations and implemented their most extensive local content programs in the country to date. 3,000,000 cubic meters per day of the gas will be exported to the Bonny Liquefied Natural Gas Plant plant, while 800,000 cubic meters per day will be injected into the wells to enhance oil recovery and some 500,000 cubic meters per day will be use for power generation to supply electricity to the Ofon facilities.

 

The onshore lease OML-58 upgrade project will increase the capacity of the block's production facilities and keep local communities closely involved in the project, the company says. Total is the operator of the additional condensate gas development project on OML 58. The company says that upgrading the facilities of OML 58 is consistent with its strategy of maximizing production. The completion of the upgrade will raise the condensate gas treatment capacity from 10 to 15 million cubic meters per day (Msm3/d). This entails building a second treatment train at the Obite Treatment Centre, modernizing the facilities of the Obite gas plant, and building a 42-inches/45-km gas pipeline to handle the new volumes for export to the Bonny LNG plant.      

                                                                         

The Egina project located 130 km from shore in a water depth of 1,750 m, is a deepwater project, which takes technology to a new level, drawing on the full benefit of Total's deep offshore experience and expertise. The project currently under development will have a production capacity of 200,000 barrels per day (b/d). The field infrastructure consists of a subsea production system tied in to a Floating Production Storage and Offloading (FPSO) vessel with a processing capacity of 200,000 b/d and a storage capacity of 2,3 million barrels. All the basic engineering work was done locally - a first in Nigeria.

 

The new OPEC Reference Basket of Crudes (ORB) is made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela).

 

Seven Energy Begins Gas Supply to Notore

 

Notore Chemical Industries, one of Africa's leading fertilizer and agro-allied companies has secured gas supply from Accugas, a wholly-owned subsidiary of indigenous oil and gas production company, Seven Energy. Notore will be immensely relieved that its fertisliser plant now has a steady contract for the supply of 25 million cubic feet per day (MMcfpd), which it will use for feedstock.

 

Adequate gas supply is critical to Notore, which took over the fertiliser company built by the Federal Government in Onne. After reviving the company, it is now in a position to ramp up output from the plant now that it has been able to guarantee vital feedstock to the plant.

 

Seven Energy's CEO, Seven Energy, Phillip Ihenacho said: "We are happy to announce the formal commencement of gas deliveries to Notore Chemical Industries Plc through our subsidiary, Accugas, a clear demonstration of our commitment to drive the industrialisation of Nigeria through the development of the Country's huge natural gas resources. Through the supply of our processed gas we are providing a new source of feedstock to meet the company's increasing requirements, whilst directly enabling the production of fertiliser that Nigeria's burgeoning agriculture sector desperately needs to grow."

 

Seven Energy has earned its stripes as a national gas champion after investing $1 billion over the last 5 years in gas infrastructure. The company recently received recognition for its contribution to the development of domestic gas infrastructure after emerging winner of the Indigenous Firm of the Year Award conferred by the Petroleum Africa magazine.

  

Receiving the award, Ihenacho, said at the time: "It is a fantastic recognition of all our on-going efforts and achievements during 2014 in contributing to the development of the Nigerian gas market in a responsible way. We are committed to aiding the development of Nigeria's gas resources, improving power supply and supporting local economic growth."

 

The choice of Seven Energy as the Indigenous Firm of the Year was based on the Company's achievements in 2014, which include the production and supply of gas to the Ibom Power Plant in Akwa Ibom State, the completion of the second train at the Uquo Gas processing facility, achieving 200 MMcfpd (million cubic feet per day) of gas processing capacity, and the formal commissioning of the Uquo Gas Processing facility by President Goodluck Jonathan.

  

Other achievements by the company in 2014 include obtaining a $170 million 5.5 year loan facility to support the acquisition of East Horizon Gas Company Limited from Oando. East Horizon owns the 128 km East Horizon gas pipeline and holds a 25 MMcfpd gas sales agreement with Unicem, one of Nigeria's largest cement plants. In addition, Seven Energy acquired SRL 905 Holdings Limited, which holds a 40% interest in oil prospecting licence (OPL) 905.

  

 

Afren Notifies Serious Fraud Office Over Expense Payments

 

Afren Plc has said it is notifying the Serious Fraud Office after the ongoing review by the firm of Willkie Farr & Gallagher (UK) LLP revealed some preliminary concerns regarding the hire of an individual within its operations in 2012 and the payment of certain travel and accommodations expenses connected to Afren's activities. The company made the revelations to satisfy the conditions precedent for $200 million in interim funding to be provided by certain holders of the Company's 2016 Notes, 2019 Notes and 2020 Notes.  

 

The company has reported to the committee of the bondholders that it has preliminary concerns arising from work carried out by Willkie Farr & Gallagher regarding these payments. The revelation is another blow to the company that has been brought to its knees by a combination of the fallout over the sacking of its CEO, CFO and other executives over unauthorised payments, the slashing of its estimates of reserves at its Barda Rash oil block in Kurdistan and finally crashing oil prices.  

 

All these disastrous events have left the company cash-strapped. After acquisition talks with Seplat broke down, Afren had no choice but to turn to its bondholders for a rescue deal, which has come at a very high price for the shareholders after the company's shares tumbled more than 98 per cent in just one year.

 

Having received WFG's preliminary findings of such review, the Company has notified the proposed providers of the interim funding of its concerns (as required under the terms of funding). In addition the company admitted that it has had to notify the Serious Fraud Office. Afren said that it had begun the implementation of improved internal compliance procedures and that it has taken steps to halt its previous practices in relation to those kinds of expense payments.

 

Egbert Imomoh, executive chairman, said: "The Company takes its compliance with all laws extremely seriously and we are committed to ensuring that our business is not undermined by breaches of our internal policies or applicable legislation."

 

The interim funding to be provided by the bondholders will see them emerge as controllers of the company.

 

Crestar's Battle for Shell OML 25 Receives Boost from Federal High Court

 

The court battle for oil mining lease (OML) 25 being spearheaded by James Bay Resources on behalf of Crestar Integrated Natural Resources, the company that won the bid in the most recent divestment exercise by Shell, has received a boost. According to James Bay, the 45 per cent equity owner of Crestar, it has been granted an injunction by the Federal High Court, which requires Shell and its joint venture partners, Total and Agip, to preserve their 45 per cent participating interests in OML 25. This effectively prevents them from transferring their interests to the Nigerian National Petroleum Corporation (NNPC) until the matter is ruled on finally by the court.

 

The dispute arose from the latest round of divestment by Shell and its joint venture partners from the Nigerian onshore area as they try to strategically position themselves for deeper water opportunities where they can operate with fewer local problems. Crestar, which was formed by James Bay and a group of Nigerian oil and gas professionals including Adeniyi Olaniyan who became the CEO of the special purpose vehicle (SPV) formed to bid for the acquisition of the asset, and former Director of the Department of Petroleum Resources (DPR), Osten Olorunsola who became the Chairman, emerged as the highest bidder.

 

With many ex-Shell people on board Crestar had a distinct advantage in the bidding process. They had experience of the Shell assets and in particular OML 25, and in the end their intimate knowledge would enable them to put in a well-informed bid. Their winning bid of $453 million was accepted by Shell and Crestar deposited 100 per cent of the purchase price into an escrow account with JP Morgan in London. The parties signed the Sales Purchase Agreement (SPA) on the 3rd of July 2014 and began popping champagne with no forewarning of the trouble ahead. Unfortunately for the potential powerhouse, the celebrations did not last long.

 

According to Crestar, about 100 days after the execution of the SPA, NNPC, which owns a 55 per cent share of the asset said it had exercised its right of pre-emption in the Joint Operating Agreement between it and the Shell joint venture. This right of pre-emption, which is not uncommon in joint venture agreements, gives NNPC the right of first refusal over any assets to be divested by its partners. The problem, according to Crestar, is that NNPC is obliged to exercise that right of pre-emption within 30 days and so was out of time by the time it did so.

 

Most industry watchers are puzzled by the move by NNPC, which had never sought to exercise the right of pre-emption in all the other Shell divestments. Why this asset in particular? It was not the most sought after of the 4 assets put up for sale in this tranche by Shell and its partners. That honour goes to OML 29, which, along with the vital Nembe Creek Trunk Line, went to the Aiteo-led consortium. NNPC and the Ministry of Petroleum remained tight-lipped on the issue, giving no official explanation. Crestar and James Bay tried everything they could to get the decision reversed. They sent emissaries to the very top, including the Canadian Ambassador, enlisted by shareholder, James Bay Resources.

 

As speculation mounted about the reasons why this unprecedented exercise of the right of preemption, a theory emerged that the alleged rift between the Minister of Petroleum Resources and the former DPR Director, who she had sacked the year before, was to blame. In a bid to salvage the situation, Olorunsola resigned as Director, but to no avail.

 

At the beginning of the year, James Bay decided it had had enough and fired the warning salvo by hiring hardnosed UK litigation firm, Amsterdam & Partners. Soon after, Crestar commenced legal action in the Federal High Court after instructing Tayo Oyetibo & Co to represent it. On the 4th of February, a Lagos Federal High Court Judge, presided over by Honourable Justice IDRIS made an Order directing the Shell Petroleum Development Company of Nigeria Ltd, Total E & P Nigeria Ltd and Nigeria Agip Oil Company Ltd to preserve their 45 per cent participating interests in OML 25. This meant that they could not transfer their interests to NNPC.

 

Following that ruling, Shell went to court to try and get the injunction discharged and failed, with the Federal High Court affirming the injunction pending a further hearing.

 

Stephen Shefsky, CEO of James Bay said of the victory in court: "We are pleased with the court's decision to affirm the injunctions and suspend the transfer to NNPC so that Crestar's own right to acquire the interest in OML 25 can be adjudicated."

 

Crestar is also intending to proceed directly against NNPC after serving a statutory notice 30-day pre-action notice to the state corporation. Crestar says that in the action against NNPC it will show that the exercise of the right of pre-emption was time-barred.

 

NNPC is obliged to match the bid price and was generally reported to be having a number of discussions over potential funding for the acquisition although NOGintelligence has no direct knowledge of the kinds of funding arraignments that may have been discussed.  Crestar claims it can show that NNPC is attempting to fund its own acquisition with monies obtained from private third parties in exchange for interests in OML 25. Crestar says any such arrangement would almost certainly violate several Nigerian laws regulating government borrowing.  

 

James Bay Resources is a Canadian resource company with 37,974,070 shares outstanding and trades on the Canadian Securities Exchange under the symbol "JBR". It was initially listed on the TSX as a mining company. After developing an appetite for oil and gas, the company applied to the TSX for a change of business (COB) from a mining company to an oil and gas company. After waiting three years for the elusive COB from the TSX, James Bay chose to voluntarily delist from the TSX and commenced trading on the rather easier Canadian Securities Exchange (CSE) after receiving conditional approval to list.  

 

Crestar's shareholder structure is expected to adjust upon finalization of its interest in OML 25, to reflect an agreed ownership stake earned by the funder.

 

Bonga Oil Spill Claim Looms as Impacted Communities Begin Verification

 

Another large oil spill claim is looming for Shell as it was revealed that communities impacted by Shell's Bonga offshore oil spill in 2011 have commenced verification of claims. Speaking about the exercise, George Ibobra, past Chairman of the Community Development Committee Chairman of Koluama 2 in Southern Ijaw Local Government of Bayelsa, said the verification had reached its final stages. The oil spill, which occurred in areas around Bayelsa and Delta States, saw 40,000 barrels crude oil spilt into the Atlantic. The House of Representatives and National Oil Spills Detection and Response Agency has recommended a compensation of $3.96 billion for victims of the incident.