Chevron’s first attempt at oil asset divestment in Nigeria runs into murky waters

American oil giant Chevron took a decision last year to pull out of three oil assets in Nigeria and put them up for sale. The decision followed what has gradually become a successful process that has seen a few international oil companies such as Shell, Agip, ConocoPhillips transfer assets to indigenous oil producers through bidding rounds.

However, in this first attempt by Chevron to sell its 40 percent stake in Oil Mining Leases (OMLs) 52, 53 and 55, the American oil company appears to want to sour this success story by attempting to change the rules it set when it invited bids for the assets, writes OLUSOLA BELLO and FEMI ASU.

Now in the Supreme Court over the alleged breach of the bid process of its divestment of interest in three oil blocks, Chevron has added a new chapter to the

history books of asset divestments by international oil companies (IOCs) operating in Nigeria.

These are clearly not the best of times for the United States-based oil major, whose asset sell-off has been adjudged the most controversial of IOC divestments seen in the country and has remained stalled for about nine months, leaving a sour taste in the mouth of Nigeria’s 60-year-old oil industry.

In the past few years, IOCs including Shell, France’s Total and Italian Eni (Nigerian Agip Oil Company Limited) have successfully disposed of stakes in onshore and shallow water offshore fields in the country without eliciting any major controversy such that has been seen with the Chevron divestment, which remained a subject of litigation.

Shell has conducted about four bid exercises for the divestment of its oil assets without litigation from the bidders. Between January 2010 and

November 2012, Shell sold stakes in eight of its onshore interests to local players.

The company is currently divesting its stakes in four additional onshore oil blocks.

In what is the latest asset disposition by IOCs to indigenous players, US-based ConocoPhillips in June this year successfully concluded the sale of its Nigerian oil and gas business to Oando Energy Resources, the upstream business of Oando plc.

Though the deadline for the closure of the transaction was overshot due to financial challenges, the parties pulled through the transaction.

Almost at the same time, Chevron and Shell disclosed plans to divest some of their onshore assets, but it is now different strokes for both oil giants.

Chevron announced its plan to divest its 40 percent stake in Oil Mining Lease (OMLs) 52, 53, 55, 83 and 85. Shell put up for sale its 30 percent shares in four oil blocks in the Niger Delta – OML 18, 24, 25, 29 – as well as a key pipeline, the Nembe Creek Trunk Line.

When Chevron Nigeria Limited set out in June 2013 to divest its interest in the OMLs, it made it clear that its preference was to sell all of the interests in the targeted OMLs through a single transaction to the highest bidder who must show evidence of financial ability to close the sale.

The company adopted an open bidding exercise, which was concluded in September, 2013.

During the stage one of the bid round, Brittania-U Nigeria Limited bided $1.2bn, emerging as the highest bid on the three OMLs.

At the second stage, the company submitted a binding offer for $1.67bn, which was accompanied with a 15 percent irrevocable letter of credit of $250m (jointly syndicated by its bankers First Bank of Nigeria Limited and Diamond Bank), which is part of the bid process requirement.

When Chevron and its consultants PNB Paribas opened the submitted bids, Brittania-U was the highest bidder with $1.67bn.

It was gathered that Brittania-U submitted three Bank Commitment letters, following Chevron’s request of a Bank’s Commitment Letter covering the $1.42bn. But two weeks after the close of the bid, there was no formal award letter from Chevron, as envisaged under the Stage II bid process, and for which the banks where to issue their firm commitment letter.

Sources said that after submitting the commitment letters, Brittania-U requested Chevron to give it a formal award letter confirming it as the highest and preferred bidder, which would enable it to get the fund from its bankers. But the request was not granted.

It was also gathered that before the deadline of October 31, 2013, given by Chevron, Brittania-U’s bankers issued the required firm commitment letters backed by valid board approvals for the value of the final binding offer.

At a meeting at Chevron’s office in Houston on November 14 and 15, all outstanding issues were resolved, with a firm agreement for assignment of the three OMLs to Brittania-U at agreed price of $1.015bn. That meeting, we learnt, was held at the instance of the President of Chevron Corporation.

One legal expert told BusinessDay that with that done, it would ordinarily be taken that the parties have entered into binding contract for the acquisition of 40 percent interest in OMLs 52, 53 and 55 by Brittania-U for $1.015bn.

It later emerged that as before the meeting in Houston, Chevron had signed Sales and Purchase Agreement (SPA) with Seplat/Amni & Belama Oil for the three OMLs. But all efforts by Brittania-U to make Chevron release the SPA were abortive.

Chevron lands in court

While Shell is having a swell time divesting its oil-fields, Chevron is having a chaotic experience in its first attempt at divestment in the country.

The Royal Dutch Shell-led consortium is close to selling the oil-fields for about $5bn to indigenous firms as they have signed sales and purchase agreements for some of the oil mining leases. The consortium also includes Total of France and Italian oil giant Eni.

But legal challenges said to have been engendered by Chevron’s attempt to compromise the initially transparent bid process have pulled the plug on Chevron’s sales of the oil blocks worth up to $1bn.

Having provided its bankers’ firm commitment duly collaterised to fully finance the transaction and yet was not given the formal award letter by Chevron, Brittania-U headed for court in December to seek redress for the purported repudiation by Chevron of the agreed assignment of its interest in the three OMLs.

Brittania-U had approached the Federal High Court Ikoyi, Lagos, asking the court to declare that by the final binding offer made by the plaintiff to the first defendant on November 14th and 15th, 2013, at a meeting at Chevron’s office in Houston, Brittania-U was deemed to have been accepted by Chevron.

Chevron had alleged that Brittania-U was unable to finance the firm bid price of $1.015bn for the acquisition of its interest in the OMLs.

On December 13, 2013, an injunction was granted by the Court restraining Chevron and other defendants from repudiating the concluded sale of the three OMLs to Brittania-U and it was reaffirmed on January 27, 2014 pending further orders of the Court.

The defendants in the suit were listed as Chevron Nigeria Limited; Chevron USA, Inc; BNP Paribas Securities Corp; Mr. Hermant Patel and Seplat Petroleum Development Company Limited, all of which are involved in the transaction of the assets.

In July, 2014, Brittania-U filed an appeal at the Supreme Court against the decision of the Court of Appeal sitting in Lagos in June on the case. The appeal court had on June 20 ruled against the extension of the interim orders earlier made by the Federal High Court on the case.

Bad for the Nigerian oil industry

Industry analysts who spoke to BusinessDay wondered why Chevron allowed such a simple process to go so bad, saying the transaction became messy because Chevron was not straightforward with the bid round.

Asked what the impact of the messy transaction would be on the Nigerian oil and gas industry, Bala Zakka, a renowned energy expert, said: “It is bad for the industry.

“Oil companies, especially the IOCs comply with the regulatory standards or laws of local countries and it is never their intention that they will find themselves in legal disputes to the extent of going to the law courts of the local countries. So, it is painting Nigeria in bad light.

It is showing Nigeria as an unserious country.

“I think the key issue was Chevron’s strategy of wanting to sell OMLs 52, 53 and 55 to one bidder. Chevron had announced its intention of selling the three OMLs to one preferred bidder.

“With the challenge experienced by Oando in raising capital and closing its own deal with Conoco, Chevron had to be cautious about accepting the high offer provided by Britannia-U, without receiving cogent evidence of the highest bidder’s ability to raise the finance in a timely manner. That caution led to Britannia-U going to court and that has led to a situation where the deal seemed to have stalled,” said a legal expert in the energy sector.

Seyi Fadahunsi, a director with Pillar Oil, said that Chevron might have gotten itself boxed in a corner because of its inexperience. Shell, he said, is more experienced than Chevron and has blocked the various pit holes that it would have fallen into hence its success in the

Divestment exercise.

“Chevron has had it fingers burnt but it would not repeat the same mistake again if it has the opportunity to conduct another divestment,” he said.

As it is common in Nigeria, court cases can drag on for years and the longer the delay the less profit the oil major is likely to make from the deals and the greater the chances the sales could fall through altogether.

By implication, such litigation also slows down the potential oil and gas production increases that could be felt from new buyers exploiting assets left undeveloped by oil majors.

Businessday