Nigeria’s leading upstream oil company, Seplat Petroleum reported it took an impairment loss of N41.1 billion ($114.4 million) from its interest in OML 55, a contentious Oil block it currently shares with Belemaoil under a management contract signed in 2017.
The losses contributed significantly to the company’s full-year loss of N30.7 billion in 2020, one of its highest on record and only topped in the last 5 years by the N45.3 billion incurred in 2016.
The company explained the impairment loss was “primarily as a result of re-assessment of future cash flows from the Group’s oil and gas properties due to significant fall in oil prices” during the year. This was contained in notes 12.2 of its 2020 audited accounts which it recently released.
Seplat received total proceeds of $4.8 million under the “revised OML55 commercial arrangement with Belemaoil for the monetization of 67.5 kbbls” part of the agreement it reached with the Rivers State-based Belemaoil. It claimed the recovery was “impacted by OPEC+ production cuts and low oil prices” leading to an impairment of $114.4 million.
In 2015, Seplat announced it had entered an agreement with Balemaoil to acquire about 56.25% of the share capital of Belemaoil Producing Limited. This was after Belemaoil completed the acquisition of a 40 percent interest in OML 55 from Chevron Nigeria Limited. NNPC holds the remaining 60 percent interest in OML 55.
Seplat at the time claimed its “effective working interest in OML 55 as a result of the Acquisition is 22.5 percent” a claim that will be disputed years later by Belemaoil.
Seplat also claimed it paid $132.2 million to acquire the 22.5% “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.
Seplat also announced the following when it acquired the asset:
“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 percent, from 80 percent of the other shareholders’ oil lifting entitlements.
The Company estimates net recoverable hydrocarbon volumes attributable to its 22.5 percent 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 percent working interest basis). Pursuant to the Joint Operating Model approved by the Honorable Nigerian Minister of Petroleum Resources, Seplat has been designated operator of OML 55. The Company will also act as technical services provider to Belemaoil.”
These claims ended up being disputed by Belemaoil until the NNPC/NAPIMS waded in to reach a truce in 2017. Before the truce, Belamaoil claimed Seplat did not meet its commitment by not completing “certain agreed payment” which was required to purchase 40% stake in OML 55 then owned by Chevron.
Losses mount despite the agreement
Despite the agreement reached with Balema, Seplat had no choice but to make provisions for the N41 billion losses in its 2020 financial year. They provided the following explanation;
“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 also explained that it has put plans in motion to address other issues affecting production from the oil block.
“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 monetize liftings towards full recovery of the $330 million discharge sum.”
Why this matters
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.