Saturday, 29 December 2012 00:00
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Why TOTAL’s sale to Sinopec is surprising

THERE are five clear reasons why many were surprised by TOTAL’s announcement, on Monday, November 18, 2012, that it sold its 20 percent stake in Nigeria’s Oil Mining Lease (OML) 138, to China Petrochemical Corp(Sinopec), as part of an asset-disposal programme.

How could the French major choose a $2.5Billion cheque over continued, profitable operation of a producing deepwater asset, gushing 140,000Barrels of Crude Oil a day, and primed to reach 180,000BOPD in a matter of months?

 The OML 138 has considerable upside potential, at least at a first glance. To the east of Usan, the licence’s only producing field, is the undeveloped Ukot play, whose discovery well –Ukot-1-flowed at a rate of 13,900BOPD, on testing, in 1998. Usan’s appraisal had also led to the “discovery” of Usan West field which, with Ukot, is on standby, for near term development.

OML 138 is governed by the 1993 Production Sharing Contract agreement, a sweetheart deal which allows zero royalty and Petroleum profit tax of just 30%. This PSC has not been renegotiated.

How come that the other partners, including America’s largest oil companies, ExxonMobil and Chevron, each of which holds higher equity(30%) than TOTAL, as well as Canadian independent Nexen, with 20%, did not invoke a right of first refusal to the transaction?

TOTAL has been the most aggressive investor in the Nigerian E&P space in the last five years. It has delivered two large deep-water fields where other majors have held up investment, citing inclement climate. The Usan field is the newer of the two. TOTAL has promised more deep-water developments. The third, Egina field, was supposed to have its final investment decision taken-at most-in a month’s time, by the company’s own words. Now this.

In the one week between the break out of speculation about the TOTAL-Sinopec deal and last Monday’s announcement, everyone had assumed that TOTAL was selling stakes in some of its mature assets on land and swamp, an area prone to militancy and oil theft. TOTAL has 10% equity in thirty two (32), Shell-operated Oil Mining Leases(OML) on these terrains. Those, it was generally assumed, were more likely to be prospects for sale.
Still, it is in scrutinizing the content of the surprises that the deal’s raison d’être starts to make some sense.

The Usan field, no doubt, looks like a high value field, one of only seven fields in Nigeria with production of over 100,000BOPD. TOTAL plans to complete $15 billion to $20 billion of asset disposals from 2012 to 2014 and OML 138 happens to be one of them. “If the company could sell such a prized Nigerian asset, then it means that the rest of its assets in Nigeria is fair game”, says one official at the country’s department of petroleum resources.

TOTAL’s press statement on the sale, however, contends against insinuation that it is exiting the country. “Usan accounts for less than 10% of the group’s equity production in Nigeria”, TOTAL’s president for upstream, Yves-Louis Darricarrere, was quoted to have said. “The sale of the asset operated from a minority position will allow us to focus our resources on the material growth opportunities in TOTAL’s portfolio.”

Even then, “oil majors are global travellers, who are always having a wide choice of assets all over the planet and ranking them”, says Jerry Tolkein,  a Cairo- based upstream analyst who is focused on the continent. True, but does it mean that TOTAL, who paid around $1.5Billion two years ago to acquire a landlocked asset in Uganda that would require a further  $12-15Billion investment on a 1,000Km pipeline for evacuation, ranks such an asset higher than OML 138, or would rather sell OML 138 to secure a place in the East African frontier?

Part of the data that may provide the sale is that the 1993 PSC agreement, which incentivized the development of fields like Usan, is under pressure. Compared with $31billion made from Joint Venture licences in 2011, the Nigerian state makes around $1billion from licences under PSC terms, most of which are deepwater fields. So, the government, after allowing zero royalty for deepwater acreages awarded in 1993(when the country was unsure of what treasure lay in the frontier), is now keen on collecting royalty. Indeed, the major bone of contention in deepwater is that fiscal terms have become less favourable to the producers in the Production Sharing Contracts that are becoming operable since the first open acreage sale in the country in 2000.

Enter the Petroleum Industry Bill(PIB), an omnibus piece of legislation, which combines 16 different Nigerian petroleum laws in what is supposed to be a single transparent and coherent document. The legislation has been locked down in a raucous debate since it was first presented to the National Assembly in 2008. The PIB is perceived as a law that would formally grant government access to taxes that are far much higher than today’s take that the IOCs consider outrageous. Royalty on deepwater fields (in excess of 250metres water depth) will go up from zero to 15%. Is that enough for TOTAL to walk out?