FBN Quest raises three major points in sourcing finance for marginal field bid round
FG raises Nigerian Content Intervention Fund to $350M
Ahead of the next marginal field bid round, preferred bidders must consider robust financing structures, independent due diligence and risk mitigation in raising funds while innovative financing will be critical in period of lower oil price and COVID-19 pandemic, Ifeoma Finnih, Head Oil, Gas & Infrastructure, Debt Solutions, Fbnquest has said.
Apart from these three factors, preferred bidders must also understand the need to structure optimal and bankable financings for the development of marginal field assets postacquisition.
When it comes to investing in marginal field, Finnih explained that robust financing structures involve the source of financing, framework and the various contracts that underpin how the financing will be availed.
“Reserve based lending structures, contractor financing and forward sale/ prepayment structures are some forms that are likely to be utilized by prospective financiers while the most project financing type transactions is the offtake agreement,” Finnih said.
An off-take agreement establishes the contractual framework for the purchase and sale of oil and or gas between the seller and the off-taker. The terms of the agreements are typically negotiated before field development and will become effective upon completion of the project and production from the field commences.
Concerning independent due diligence, Finnih said it’s certainly to be undertaken by prospective financiers, however, the level of due diligence will largely be dependent on the type of financing that the bidder is seeking to raise, with project finance structures requiring extensive levels of due diligence.
“Due diligence is key for project finance transactions and even more so in an upstream oil and gas deal where cash flows and repayments are based on oil and or gas reserves,” Finnih said.
On risk mitigation, Finnih advises bidders to think through all possible risks of the proposed transaction and work towards ensuring that risks such as geological, operational, environmental, price, regulatory risks and others are suitably mitigated.
Finnih noted that other critical requirements set out in the existing guidelines such as, evidence of technical capabilities of the management and operational teams, proposed field development plans, evacuation infrastructure and others are essential aspects of the deal which needs to be taken into consideration and will be critically reviewed by prospective lenders.
If it successfully gets investors to stake the maximum on the oil fields, the federal government is hoping the 57 fields may earn Nigeria additional $5.7billion, an income higher than the loans the Federal Government sought from the Bretton Woods institutions within the last few months to address the effects of the coronavirus pandemic.
To avert situations where investors are edged out of deals after securing the oilfields, the Department of Petroleum Resources (DPR) said it has already activated sustainability plans for the marginal field programme.
“Finance will be a critical aspect of this process and to ensure that industry players can successfully attract the funding required, the above items should be carefully considered as the bid round progresses,” Finnih concluded.
The Governing Council of the Nigerian Content Development and Monitoring Board (NCDMB) has approved the expansion of the Nigerian Content Intervention Fund from US$200 million to US$350 million.
The enlargement of the Fund by US$150 million was part of the decisions taken at the recent NCDMB Governing Council meeting, which held virtually on June 16, 2020 according to a release signed by Julius Bokoru, special assistant on media and public affairs to Timipre Sylva, minister of state for Petroleum Resources.
The meeting was chaired by the Minister of State for Petroleum Resources, Timipre Sylva, who is the Chairman of the Council.
The Council approved that US$ 100 million from the additional funds would be deployed to boost the five existing loan products of the NCI Fund, which include manufacturing, asset acquisition, contract finance, loan refinancing and community contractor financing.
Similarly, the Council also approved that US$20 million and US$30 million respectively should be deployed to two newly developed loan product types – the Intervention Fund for Women in Oil & Gas and PETAN Products, which include Working Capital loans and Capacity Building loans for PETAN member companies.
The NCI Fund was instituted in 2017 as a US$200 million Fund managed by the Bank of Industry (BOI) engaged to facilitate on-lending to qualified stakeholders in the Nigerian Oil and Gas industry on five loan product types. The NCI Fund is a portion of the Nigerian Content Development Fund ( NCDF), aggregated from the one percent deduction from the value of contracts executed in the upstream sector of the oil and gas industry. About 94 percent of the NCI Funds has been disbursed to 27 beneficiaries as at May 2020. NCDMB has received new applications from 100 companies for nearly triple the size of the original fund.
Guidelines for the NCI Fund provide that beneficiaries of the Manufacturing Loan and Asset acquisition Loan can access a maximum of Us$10million respectively. Also, beneficiaries of Contract finance Loan can access Us$5million while beneficiaries of the Loan Refinancing package can access Us$10million, with beneficiaries of the Community Contractor Finance Scheme limited to N20million.
The maximum tenure for all loan types is 5 years and applicants cannot have two different loans running simultaneously.
At the onset of the Fund, the applicable interest rate for the various loan types was pegged at eight (8) percent, except the Community Contractor Finance Scheme, which was five (5) percent.
However in April 2020 as part of NCDMB’S response to mitigate economic impact of the coronavirus pandemic, Council approved reduction of the interest rate from eight (8) to six (6) percent per annum for all four of the loan products. The Board also extended the moratorium for all loan products.