Analysts have warned that violence and industry-sized vandalism in Nigeria’s oil-producing south could pose a serious risk for Heritage Oil (LON:HOIL) who recently signed a $850 million in Nigeria.
The firm has described the deal, which will see it buy a 45 per cent stake in 30 Nigerian oil fields from a group of Shell-led oil majors, as “transformational” and “very exciting”.
According to an article published in the UK’s Proactive Investors site, HOIL stands to gain a lot with its recent buy. They write:
These assets currently yield 35,000 barrels of production per day and they contain 700 million barrels of oil reserves – over a billion barrels oil equivalent if you include gas.
It increases the firm’s daily production volumes significantly to 11,350 barrels from 605 million. And it is hoped that this can be boosted further by refurbishing infrastructure.
The acquisition has an estimated ‘per barrel’ price of just US$1.7 which is cheap by industry standards.
However, analysts argue that the assets are cheap for a reason. Some cited the difficulties faced by oil giant, Royal Dutch Shell, as reasons to be wary of the Nigerian oil market.
Simon Hawkins, an analyst with Singer’s Capital Markets in the UK, also pointed to major changes the Nigerian government is currently making in the oil sector, through the drafted Petroleum Industry Bill, as a reason to be wary about going into the market in Africa’s top oil producing nation.
“Although we regard doing a deal as a potential positive for Heritage we are cautious about this given the risks associated with investing in a non-operated role in one of the world’s most challenging environments,” Hawkins said in a note to clients.
Another analyst from Westhouse Securities, Peter Bassett, said the “challenging environment” in Nigeria is a key reason as to why the reserves are priced low in the country.
However, Bassett also notes that “Heritage has had notable success in operating in challenging environments, so have the experience to take on the challenge.”
The oil firm is noted for its reputation of taking a chance where others do not; for instance, Heritage Oil was one of the first firms to go into war-torn Iraq and is already making moves in Libya, only months after its violent revolution.