The plan by the Nigerian National Petroleum Corporation (NNPC) to secure oil-backed loan of $3.5-5 billion in exchange for 70,000 barrels of oil per day (bpd) over 5 to 7 years from oil trading companies to finance projects portends grave fiscal risks for the country, a transparency watch dog has warned.
The Natural Resource Governance Institute (NRGI), a global extractive sector transparency group, cautions that if this loan is not carefully structured and managed, it could mortgage the country’s resource wealth without much productive return. It also poses major fiscal risks, especially to how much money the government collects from NNPC.
“NNPC receives only about 700,000 bpd (out of about 1.8 million bpd production) and the company unilaterally keeps much of this revenue because an increasing amount of its oil is channelled to offset debts owed to upstream partners; subsidise fuel costs; and cover infrastructure-sabotage related expenses.
“For this reason, it is likely that proposed loans would be repaid at the government’s expense—making it likely in turn that the amount of oil going toward repaying debts rather than funding budget priorities will increase even further,” said a note by Zira John Quaghe, NRGI, Nigeria officer and Alexandra Gillies, an advisor to NRGI.
The risk is worsened by the fact that oil-backed loans tend to be very opaque, preventing citizens and accountability actors from properly scrutinizing the costs, repayment terms and utilisation of the loans.
“In NNPC’s case, there is little documented evidence to justify all the loans provided by oil companies, so why would a loan from commodity traders be any different?
“Political cycles also add incentives for reckless borrowing, since borrowing governments would not need to deal with long-term economic implications and re-negotiations. With the 2019 elections around the corner, there are additional risks connected to NNPC’s history of politicized spending, as seen in the run-up to the 2015 general elections,” said the analysts.
Another concern by NRGI is NNPC’s record of poor financial mismanagement which has made it difficult for Nigeria to maximise returns from its oil sector. NNPC recorded losses of N276 billion and N198 billion in 2015 and 2016 respectively, and still remains unprofitable.
Recall that Ibe Kachikwu, minister of Petroleum Resources, and Maikanti Baru, NNPC’s group managing director, were engaged in a public brickbat over governance of the national oil company indicating the weak public oversight of NNPC’s contracts and procurements system.
“This prompts two important questions: First, why pour more money into a company that has not proven itself a capable steward of national wealth? Second, are NNPC’s proposed capital projects really more important than other public priorities? Neither questions has been satisfactorily answered, and it is likely that NNPC will not translate the loan into positive outcomes for the corporation or the wider Nigerian economy,” said NRGI.
The experiences of Venezuela and Congo-Brazzaville are teaching examples for the consequences of pissing away an oil-backed loan. During the boom years prior to 2014, Venezuela borrowed nearly US$50 billion from state-owned Chinese companies in exchange for oil, and borrowed about US$5 billion from Russia’s Rosneft under similar terms.
The music stopped in 2015 and the ensuing oil price slump saw the Venezuelan National Oil Company (PDVSA) falling months behind in its oil deliveries to China and Russia. The economy is in a tailspin and its creditors can seize its oil assets within and outside the country at will as they currently breathe down their neck.
Meanwhile, oil-backed loans have led to corruption in Congo-Brazzaville says NRGI. Gunvor (a major Swiss commodity trading company with a specialty in trading Russian oil) secured untendered contracts for lifting 22 cargos of crude oil worth USD 2.2 billion from Congo-Brazzaville in exchange for six $125 million pre-financing deals (USD 750 million in total). Swiss law enforcement and NGOs have raised concerns that Gunvor made inappropriate payments to politically connected middlemen in order to secure these lucrative deals.
According to sources cited by Reuters, NNPC plans a $3.5-$5 billion cash-for-crude prepayment with major trading firms including Glencore, Vitol and Trafigura. Standard Chartered is believed to be hired to advise on the deal.
To ensure transparency in the deal, NRGI called for public debate on the proposed oil-backed loan calling on the Federal Government to disclose the parties to the agreement, details of the agreement, tender process and loan usage.
ISAAC ANYAOGU
