By Teddy Nwanunobi
Seplat Petroleum Development Company (SPDC), a leading upstream oil company in Nigeria, has blamed the loss of N41.1 billion ($114.4 million) it suffered from its interest in OML 55 on “significant fall in oil prices”.
SPDC said in note 12.2 of its recently released 2020 audited accounts that the impairment loss was “primarily as a result of re-assessment of future cash flows from the Group’s oil and gas (property) due to significant fall in oil prices” during the year.
Valuechain reports that OML 55 is a contentious oil bloc SPDC shares with Belemaoil, under the management contract signed in 2017.
The losses contributed significantly to SPDC’s full year loss of N30.7 billion in 2020, one of its highest on record, and only topped in the last five years by the N45.3 billion that was incurred in 2016.
SPDC received total proceeds of $4.8 million under the “revised OML 55 commercial arrangement with Belemaoil for the monetisation of 67.5 kbbls” part of the agreement it reached with the Rivers State-based Belemaoil.
It claimed that the recovery was “impacted by OPEC+ production cuts and low oil prices”, leading to an impairment of $114.4 million.
It would be recalled that Seplat, in 2015, announced that it had entered into an agreement with Belemaoil to acquire about 56.25 per cent of the share capital of Belemaoil Producing Limited, after Belemaoil completed the acquisition of a 40 per cent interest in OML 55 from Chevron Nigeria Limited, with the Nigerian National Petroleum Corporation (NNPC) holding the remaining 60 per cent interest in OML 55.
Then, SPDC claimed its “effective working interest in OML 55 as a result of the Acquisition is 22.5 per cent” – a claim that would be disputed by Belemaoil years later.
Seplat also claimed that it paid $132.2 million to acquire the 22.5 per cent “effective working interest in OML 55” and also revealed it “advanced certain loans of $132.9 million to the other shareholders of Belemaoil to meet their share of investments and costs associated with Belemaoil”, bringing the total up-front cash outlay, after adjustments, to about $265.1 million.
“The adjustments to the up-front acquisition cost include a deferred payment of $20.6 million contingent on oil prices averaging $90 a barrel or above for 12 consecutive months over the next five years. Under the agreed terms Seplat will recover the loaned amounts, together with an uplift premium of $20.6 million and annual interest of 10 per cent, from 80 per cent of the other shareholders’ oil lifting entitlements.
“The company estimates net recoverable hydrocarbon volumes attributable to its 22.5 per cent effective working interest to be approximately 20 million barrels of oil and condensate and 156 Bscf of gas (total 46 MMboe). Current gross production at OML 55 is approximately 8,000 bopd (1,800 bopd on a 22.5 per cent working interest basis). Pursuant to the Joint Operating Model approved by the Honourable Nigerian Minister of Petroleum Resources, Seplat has been designated operator of OML 55. The company will also act as technical services provider to Belemaoil,” Seplat announced, after acquiring the asset.
But these claims ended up being disputed by Belemaoil.
Belemaoil claimed that SPDC did not meet its commitment by not completing “certain agreed payment” which was required to purchase 40 per cent stake in OML 55 then owned by Chevron.
However, the NNPC/NAPIMS waded in to reach a truce in 2017.
Despite the agreement reached with Belemaoil, Seplat had no choice but to make provisions for the N41 billion losses in its 2020 financial year.
“In accordance with the revised commercial arrangement that was agreed in July 2016, which provides for a discharge sum of $330 million to be paid to Seplat over a six-year period through allocation of crude oil volumes produced from OML 55, Seplat received payments amounting to $4.8 million in 2020. Total payments received from inception to the end of 2020 stood at $124.8 million and the outstanding discharge sum to be paid to Seplat is $205.2 million. Recovery during the year was impacted by OPEC+ production cuts and low oil prices,” Seplat explained.
It also explained that it has put plans in motion to address other issues affecting production from the oil bloc.
“In a bid to sustain production from this block, Seplat’s Asset Management Team has received the field data for technical evaluation to resolve production challenges that have delayed target recovery of the investment. In 2021, Seplat will continue to monetise liftings towards full recovery of the $330 million discharge sum,” SPDC added.
An operating OML 55 will be strategic to Seplat in 2021, and could determine how well it recovers from the losses of 2020.
Their share price could skyrocket by the end of the year, if the asset produces as expected.