Legal proceedings will have ‘little impact’ on Shell asset sale

By Temitayo Lawal
Posted on Wednesday, 29 June 2022 11:44, updated on Monday, 4 July 2022 16:43

REUTERS/Rick Wilking.

Legal proceedings against Shell in Nigeria will have "little impact on the deal," an energy industry analyst who is knowledgeable about the workings of the oil sector tells The Africa Report. 

“All the risks would have been captured or will be captured in the due diligence of the potential buyers. There may be some delay due to the court injunctions and potential need to negotiate with the community, but this will not halt the deal,” he says.

This stance is corroborated by Uwa Osadiaye, a senior vice president and oil and gas analyst at FBNQuest, who argues that since the decision to sell is from Shell Global, due to its energy transition and asset portfolio optimisation plans, the company will not think twice about selling, especially considering how their Nigerian onshore assets are comparatively expensive and inefficient to operate.

“Oil companies were ready to write off value in Russia at the beginning of the conflict. Paying compensation to host communities to achieve their energy transition goal is much easier,” he says.

Asset sale

Last month, there were reports that Shell Global, after receiving bids from at least four indigenous oil companies, had reached the final stages of their Nigerian asset sale process.

One of the reasons Shell is disposing these onshore assets in the first place is because of community issues

The oil giant had announced last year that it wanted to sell its Shell Petroleum Development Company of Nigeria Limited (SPDC) subsidiary, a joint venture that runs the company’s shallow-water and onshore asset interests and where Royal Dutch Shell owns 30% equity.

It stirred mixed feelings because, on the one hand, it highlights the exodus of global players in the Nigerian oil sector due to incessant sabotage and oil theft, as well as the global energy transition away from fossil fuels.

On the other hand, it signals the success of the Petroleum Industry Act (PIA), which has provided a framework and energised indigenous players to acquire key oil assets or invest in new ones in the country.

However on 16 June 2022, Nigeria’s Supreme Court ruled that Shell and its host communities should maintain the “status quo” until November, when it is ready to rule on the “contentious” appeal brought before it by Shell: up to 88 communities of Egbalor Ebubu in the oil rich Rivers State are suing the oil giant and are seeking compensation for a 2019 oil spill in the communities.

“One of the reasons Shell is disposing [of] these onshore assets in the first place is because of community issues,” says the source. “Community issues should not be a deal breaker for such a landmark transaction. It will be resolved.”

Held to account

As Osadiye says, this may be the last time that Shell can be held to account. “If not now, they never will. It is only appropriate that the instrument of law is being used to hold Shell accountable considering the scale of damage oil exploration has wreaked on these communities that cannot fish or farm because their lands are poisoned,” he says.

READ MORE Nigeria’s silent killer: The deadly price of oil

Although Shell has repeatedly denied its involvement and ascribed the spill to attacks by local oil thieves, a federal high court ruled in November 2020 that Shell pay the communities N800bn ($1.95bn) in compensation.

Shell immediately filed an appeal at a Court of Appeal in Owerri, Imo State, southeastern Nigeria. In March this year, the Appeal Court upheld the decision of the lower court, that Shell pay the compensation. It also added a deadline for the payment.

“The Justices [of the Appeal Court] wanted Shell to deposit that huge sum into a designated court account within 48 hours,” a senior lawyer familiar with the case, but who prefers to be unnamed, tells The Africa Report.

“Of course, Shell couldn’t comply because it was impracticable to carry out, and the Court wanted to charge the directors of Shell for contempt of the court order to deposit,” they say.

The Court of Appeal also banned Shell, either by itself, via subsidiary or an agent from “selling, allocating, vandalising or disposing off” its assets until the appeal was determined. This meant that the onshore asset sale process that had already started was forced to pause.

The only major hurdle they may face is funding and they must have kickstarted that process before they started bidding.

Shell Companies in Nigeria are Shell Petroleum Development Company of Nigeria Limited (SPDC), Shell Nigeria Exploration and Production Company Limited (SNEPCo) and Shell Nigeria Gas (SNG). SPDC explores oil and gas from land, swamps and shallow waters in the Niger Delta, SNEPCo operates deep offshore in the Gulf of Guinea and SNG distributes gas within the country.

“As a result of this, the directors appealed to the Supreme Court against the contempt proceedings at the Court of Appeal and of course, the main judgement,” says the senior lawyer.

“We are encouraged by the recent Supreme Court ruling…We have a strong belief in the merit of our case and in the rule of law,” Bamidele Odugbesan, media relations manager at Shell Nigeria, tells The Africa Report.

However, because the recent Supreme Court judgement was only about the contempt proceedings, and not about the deal, Odugbesan believes the asset sale can go ahead.

Indeed the deal is only for a section of their assets in Nigeria as the company, says Odugbesan, and Shell “will continue to invest in the country to help meet its energy needs, with a focus to grow our deep water and gas positions.”

Oil spill

The 2019 oil spill issue has been a huge issue in Nigeria, especially in the Niger Delta where most of the country’s exploration has been done. It has been the reason for many peaceful and armed agitations in the region for years. A prominent peaceful activist, Ken Saro Wiwa, was executed by Nigeria’s military regime in 1995.

Militant agitators have also sprung up in the region, leading to the Nigerian government establishing the amnesty programme and the Niger Delta Development Commission to address some of these issues. The newly signed Petroleum Industry Act also created a Host Community Fund to be taken from profits of oil companies, if it is certified that there are no attacks or sabotage on their assets in any financial year.

Most relevantly, the host communities are motivated because some of them have won legal cases against oil companies in the past.

However, even if it crosses the legal hurdle, Shell may still meet a regulatory brick wall. In 2019, the oil giant, along with other oil majors like Chevron, Exxon Mobil, Eni, Total and Equinor, were hit with billions in back taxes by the Nigerian government. At nearly $20bn in total, each company was asked to pay at least $2.5bn to the government.

The federal government demanded for the payment of the “outstanding royalties and taxes for oil and gas production,” after settling a dispute with the subnational governments over the distribution formula for revenue from hydrocarbon production.

The companies believed that it was a misunderstanding of a clause in the original production sharing contracts that they signed with the government years ago.

Meanwhile, in April this year, Shell was awarded by the federal government’s revenue collection agency, FIRS, as a leading tax compliant organisation in Nigeria for 2021. The company claims that it merited the award because it remitted over $6bn in taxes between 2015 and 2020.

It is for reasons such as this that Osadiaye believes that the oil giant won’t face any regulatory hurdles while selling its onshore and shallow water assets.

“The NNPC has just been incorporated in line with the newly signed PIA and they needed a key asset to themselves. The ExxonMobil asset was just right due its gas range and no incidence of violence or attacks. From a country perspective, it was very valuable and perhaps that’s why they stopped the deal!” Osadiaye says.

Investor interest

Seplat Energy, an indigenous oil company had already finalised the deal to acquire some ExxonMobil assets in the country, but it was stopped by the NNPC, citing national interest reasons and first-refusal principle. The national oil company has since made a counter-offer to ExxonMobil, local media reported.

“These Shell assets on sale are also key, but are not as strategic as ExxonMobil’s so I see limited risks,” Osadiaye says.

Nevertheless, investor interest will remain, says Osadiaye. This is because unlike 25 years ago, interest in the sector has mainly been local. The sector has been witnessing a rise in the partnership between indigenous players and smaller or mid-sized oil companies that are familiar with the terrain and understand what the issues are.

They are expected to wait till the case is concluded in order to avoid operating in a restive or angry host community, but the interests will remain and “are going nowhere”, says Osadiaye

“The only major hurdle they may face is funding and they must have kickstarted that process before they started bidding. I expect the funding to come from organisations like Afreximbank, AfDB and even countries like China. The capital and interests in this kind of deal are patient and the funders are generally less sensitive,” he says.

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