What Shell writes down of Nige­ria’s $1.3 bil­lion oil-field scan­dal means


Multi­na­tional Pet ro l e u m oil and gas gi­ant, Royal Dut c h Sh e l l , an­nounced that it would write down its in­vest­ment in the con­tro­ver­sial Mal­abu OPL 245 off­shore field in Nige­ria, a de­ci­sion that comes with huge im­pli­ca­tion for a field at the heart of pro­tracted lit­i­ga­tion in Italy.

Ac­cord­ing to Reuters, Shell an­nounced the write­down dur­ing its sec­ondquar­ter 2020 earn­ings call. The com­pany had recorded losses in its up­stream divi­sion, in­clud­ing a post-tax im­pair­ment charge of $4.7 bil­lion re­lated to write­downs of the Mal­abu oil­field, and as­sets sales in North Amer­ica and Brazil.

What does a write­down mean?

A write- down oc­curs when a busi­ness re­duces the car­ry­ing amount of an as­set, other than through nor­mal de­pre­ci­a­tion and amor­ti­za­tion. A write-down is nor­mally done when the mar­ket value of an as­set de­clines be­low its cur­rent­car­ry­ing amount.

The above ex­pla­na­tion means that OPL 245 pur­chased for $1.3 bil­lion in 2011, which is one of the big­gest sources of un­tapped oil re­serves on the African con­ti­nent with re­serves es­ti­mated at 9 bil­lion bar­rels has de­pre­ci­ated in value.

Higher Value

Ac­cord­ing to Barn­aby Pace of Global Wit­ness, a part­ner at the oil con­sul­tancy group Arthur D Lit­tle with over 30 years, Stephen Roger’s eco­nomic anal­y­sis found that the mar­ket value of OPL 245 was $3.511 bil­lion in 2011, with $80 per bar­rel of oil which was the terms Shell and Eni bought the block.

Eni’s ex­perts had val­ued the block higher at $4.543 bil­lion. They ar­gued how­ever that de­spite the val­u­a­tion, the price paid ($1.3 bil­lion) was rea­son­able be­cause of var­i­ous risks.

Rogers in his sub­mis­sion crit­i­cised their po­si­tion, say­ing Eni’s ex­pert’s method is “double-count­ing the dis­counts for risk”.

Rogers also eval­u­ated the val­ues of gas, which Eni’s ex­pert didn’t in­clude, at $167 mil­lion.

In the run-up to the deal, Shell and Eni val­ued the block in 2010 and 2011 re­spec­tively at $3.268 bil­lion ($80 per bar­rel) and $3.540 bil­lion ($70 per bar­rel).

But us­ing an av­er­age of price paid per bar­rel in other deals done in West Africa, Rogers cal­cu­lated the value of OPL 245 to a range of $ 2.623 bil­lion-$ 3.700 bil­lion but said these are def­i­nitely too low as the terms of the 2011 deal are un­usu­ally favourable to the com­pa­nies com­pared to other deals.

The Backstory

Shell bought the oil­field along­side an Ital­ian com­pany, Eni, in 2011. To­gether, they paid $ 1.3 bil­lion. The pay­ment was to a com­pany called Mal­abu, which was owned by Nige­ria’s former Oil Min­is­ter Dan Etete. How­ever, Ital­ian pros­e­cu­tors claim that most of the pay­ments were kick­backs to Nige­rian govern­ment of­fi­cials.

Pros­e­cu­tors have, there­fore, called for an 8-year pri­son sen­tence for former Eni CEO, Paolo Sca­roni. Both com­pa­nies have been fined $ 1.04 mil­lion and pros­e­cu­tors seek the con­fis­ca­tion of $1.092 bil­lion from the de­fen­dants of the case.

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