African JVs in Focus After Eni-BP Tie-Up

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• BP and Eni are signaling that co-operation may be the best course of action for the embattled majors as they consolidate cash-generating, but noncore, assets in Africa. • Angola is likely to sign off on the proposed merger as it needs whatever investment it can get in its declining oil sector. • Elsewhere in Africa similar joint ventures by the majors to combine assets could make sense but problems in the onshore -- especially in Nigeria -- will more likely see an acceleration of outright disposals. The Issue Eni and BP have decided to merge their upstream and LNG operations in Angola into a new, self-funding joint venture (IOD May19'21). The move shows that the majors are exploring new ways to minimize costs, and risks, in parts of the world that provide steady cash flow from oil and gas production but are becoming peripheral to their long-term planning. But it is not yet clear whether this is a one-off or part of a wider industry trend that will see the majors pool their resources when they feel it suits them. Angola: A Logical Tie-Up There is some logic behind Eni and BP pairing up in Angola, sub-Sahara’s second-largest oil producer behind Nigeria. The two companies have similar levels of equity production of around 130,000 barrels of oil equivalent per day from operated and nonoperated fields, they are involved in oil and gas exploration, and they have identical stakes of 13.6% in the Angola LNG consortium. Angola is likely to sign off on the proposed merger, as it needs whatever investment it can get in its declining oil sector. Production has been in steady decline over the past few years, while shenanigans around the former management of state-run oil company Sonangol have not helped matters. By entering into a nonbinding agreement to combine their oil, gas and LNG portfolios in Angola, BP and Eni have signaled that co-operation may be the best course of action for the embattled majors. This new alliance, which requires the approval of the Angolan government, as well as BP’s and Eni’s various joint-venture partners, is designed to reduce costs and maximize efficiencies in a country that neither company views as central to its long-term growth. When announcing the proposed tie-up, the two majors said they would draw up a business plan to assess future opportunities for growth both in Angola and regionally, which suggests that they could work together in other parts of Africa. They have already hired financial advisers to help fund the new venture, which raises the question of whether outside investors may, at some stage, be offered shares in the new entity. Of the two partners, Eni sees the greatest potential in Angola, which explains why Eni CEO Claudio Descalzi met last month in Luanda with Angolan President Joao Lourenco to discuss long-term plans. Last year, Eni produced around 90,000 barrels per day of crude and 22 billion cubic feet of gas from various deepwater projects in Angola, mostly from Block 15/06, which it operates with a 36.84% interest alongside Sonangol's stake and local operator SSI Fifteen (EIF Jan.22'20). New, relatively small discoveries continue to be made, of which the most recent was a 200 million-250 million barrel find announced last month. A larger discovery of around 1 billion boe was made last year at Agogo. Angola is less important to BP, despite the fact that it has invested more than $30 billion in the country since its entry in the late 1970s. BP operates two deepwater blocks, 15 and 18, of which the latter is now in its second development phase, with the first having kicked off in 2007. The UK major also has minority equity in three offshore blocks, plus equity in the Angola LNG project, which is operated by Chevron and has capacity of 5.2 million tons per year. Tie-Ups Elsewhere in Africa? Some of the majors operating in Nigeria -- which like Angola is all about deepwater acreage -- may see strategic alliances as a potential way forward, especially as it is becoming harder to find willing buyers for upstream equity. Exxon Mobil, for example, has reportedly been looking to divest part of its Nigerian upstream portfolio, and that would free up capital that it could reinvest in one of its core areas of operation, such as Guyana or Qatar. But as long as the Nigerian projects continue to deliver steady cash flow, which is guaranteed at current oil price levels, there is less pressure on companies to trim their portfolios. One company that has a long-term commitment to Nigerian deepwater is Royal Dutch Shell, which is in the final stages of a long and arduous campaign to hive off all its equity in legacy onshore projects in the Niger Delta, along with its joint venture partners in the Shell Petroleum Development Co. (SPDC): Total and Eni. There are now only a handful of onshore assets left to dispose of, the latest being a $1.1 billion deal to sell a 45% stake in OML 17 to a subsidiary of a Nigerian independent, Heirs Petroleum. Nearly all of the SPDC sales have been to indigenous companies, some of which borrowed heavily to finance the acquisitions. One of these Nigerian buyers, Aiteo, is now locked in a legal battle with Shell related to the $2.4 billion purchase of SPDC's 45% stake in OML 29 over six years ago. Shell CEO Ben van Beurden confirmed to investors this month that there was no point hanging on to any onshore assets, citing ongoing pollution and constant oil theft as two compelling reasons (IOD Feb.12'21). “The balance of risks and rewards associated with our onshore oil portfolio in Nigeria are no longer compatible with our strategic ambitions," he said, pointing out that the deepwater properties have a much lower carbon intensity. But Shell selling its remaining onshore assets is likely to be complicated by potential liabilities incurred from the oil spills connected to the assets, along with the security costs associated with running them. In other words, it could get very messy. On the other side of Africa, Total finds itself exposed on two fronts. In Mozambique, the French major has suspended all work, for at least a year, on the $20 billion Mozambique LNG project, which it operates with a 26.5% stake. And in Uganda, it is due to start work on the $5 billion Lake Albert oil development where peak production of around 230,000 b/d of crude oil is envisaged, along with the construction of a cross-border pipeline -- across an area of natural beauty -- to transport the oil to the Indian Ocean. Total is poised to tender contracts for Lake Albert, even though it has still to make a final investment decision on the project. As pressure grows on the majors to cut down on pollution levels, Total will have some questions to answer when, and if, it fires the starting gun. Paul Sampson, London

Offshore Oil and Gas, Corporate Strategy , M&A
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