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Equity investment, debt financing possible options for marginal field bidders

Equity investment, debt financing possible options for marginal field bidders

Assuming the Bid Round runs its course, there are various challenges to potential preferred bidders. One of these challenges has to do with the fiscals.

Given the prevailing market conditions in the global oil market – low prices and oil glut, attracting foreign capital may be difficult. The Petroleum Industry Bill (PIB) currently before the National Assembly contains a number of provisions which if passed, will impact on the fiscal terms for the development of the fields.

Some of these include the requirement of payment of 2.5 percent of the audited operating expenses by all operators into an endowment fund for the benefit of the host communities. The PIB also provides for payment of 30 percent corporate income tax on upstream operations and replaces petroleum profit tax with a hydrocarbon tax at a rate of 50 percent for onshore and shallow-water operations and 25percent for deep-water and frontier acreages.

On the financing and bankability of the firms, it is noted that as international lenders continue to shift their focus from financing fossil fuels to renewables, bidders may find it difficult to access the finance required to develop the assets once assigned. That said, some international lenders will still finance fossil fuel developments where asset owners have existing assets of good quality, a sound financial track record and are led by a strong management team.

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According to ADVOCAAT law Firm, a firm which has been involved extensively on bid rounds in Nigeria, it stated that the financial exposure of domestic lenders to local independents may curtail their ability to fund the marginal field acquisitions and subsequent development.

“Local lenders may therefore, be unwilling to fund successful bidders who are new entrants, without cash flow and a tested management team. The low debt capacity of such newcomers due to a lack of proven reserves and cash flow means that equity issuance or technical and financing arrangements with service companies may be the available funding options until such fields have been appraised for development to attract debt funding”, it stated .

It explained that the oil and gas sector is capital intensive and prospective bidders will find it difficult to access financing given prevailing global financial crisis. Some of the financing options below the law firm said may be considered for the purposes of financing the acquisition and development of the awarded fields.

a. Equity Investment

This is one of the traditional modes of raising finance and for an awardee, it involves finding the right equity partners to inject the necessary capital into the awardee entity or an SPV. This is the most suitable means of sourcing financing for newcomers that don’t have assets with reserves and or and cash flow.

Equity funding can be raised through private placement or from the capital market. Another avenue to source equity is through equity investment.

Debt Finance

Equity investment typically goes hand in hand with debt financing as majority of lenders would require some evidence that the promoters have committed or will commit some equity to the project (usually 30 percent) before providing the debt. As noted earlier, awardees may find it difficult to attract this form of financing as the usual Debt Finance Institutions (DFI) are expressing aversion to financing oil development projects.

Given the reluctance of the DFIS, the local banks will struggle to provide the necessary capital to develop these fields particularly in light of the existing indebtedness of oil and gas exploration companies.

Another serious challenge that the bidders are facing is the delay and uncertainty in the passage of the Petroleum Industry Bill (PIB). The PIB is to comprehensively reform the Nigeria’s oil and gas sector. But it’s non -passage has continued to undermine the confidence of investors in the sector. Passage of this law should help improve governance of the sector by strengthening institutions and providing clarity of structures, roles, accountability, transparency, and overall efficiency.

On the possibility of farmout arrangement by the bidders, the law firm said, given the short timeframe within which investors are required to negotiate the farmout agreements, it is important that bidders avert their minds to the various issues that may likely arise during such negotiations and these include the following: – Negotiating access to infrastructure necessary for evacuation of production: issues such as capacity and tariff and the possibility of review of same must be considered by bidders for the purposes of separation, treatment, storage, transportation of crude oil and gas to be produced from the fields. In addition, issues such as pipeline losses and the risk allocation of same, given the constant vandalisation of evacuation pipelines must be taken into consideration.