The financial approach used by local oil companies will affect their chances of financially competing and taking advantage of investment opportunities as oil majors hasten plans to divest from mostly shallow waters and onshore assets in Africa’s biggest oil producing country.
Financing onshore projects is usually a big deal for most local operators due to pipeline theft, insecurity, hostility from host communities, increasing cost of oil and gas projects and unfavourable government policies, developments that always leaves domestic companies financially battered.
To take advantage of divestment opportunities, most analysts and chief financial risk officers have asked the federal government to create financial prospects for independent crude producers, firms who between them pump about 10 percent of national output.
They advised the government to allow the National Pension Commission (PenCom) to fund and grow some of these assets through the local oil companies which in turn would have a multiplier effect on the economy.
“There is also a need to include a possible fiscal policy position such as tax concessions to indigenous oil producers in order to help advance the government’s push for local content and a connection of the upstream oil sector with the local economy going forward,” one senior chief financial officer familiar with the matter told BusinessDay.
Luqman Agboola, head of energy and Infrastructure at Sofidam Capital said robust financing structures, independent due diligence, risk mitigation in raising funds and innovative financing in periods of lower oil prices will be critical for any local companies seeking to acquire oil major assets.
Apart from these factors, he also noted that preferred bidders must also understand the need to have good corporate governance and bankable financings for the development of onshore field’s assets post-acquisition.
“Reserve based lending structures, contractor financing and forward sale/prepayment structures are some forms that are likely to be utilised by prospective financiers while the most project financing type transactions is the offtake agreement,” Agboola 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.
On risk mitigation, Adeoluwa Eweje, an international oil, and gas analyst, 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.
Eweje 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.
“Project financing in the oil and gas industry in Nigeria has become increasingly difficult as we are now witnessing an apparent shortage of funds available to finance a huge portfolio of projects,” Leesi Gborogbosi, a project finance manager of upstream oil & gas projects and CEO of Gabriel Domale Consulting said.
He noted that this is partly due to decreased oil price regime, huge unrecovered loan portfolio, poor knowledge of the dynamics of projects and contracts, and lack of financial discipline.
The plight of Nigeria’s oil and gas producers is a window into Nigeria’s crippled economy. The militancy has intensified problems for a country that has failed to absorb the effects of oil prices that have rallied to $73.
This development has exposed the sorry state of the industry, the main revenue earner of the country, and worsened the growth prospects of an economy wallowing in its second recession in five years, where 40 percent of people in Africa’s most populous country live below the poverty line.
“Domestic oil companies are caught in the middle,” Gborogbosi said. “Local banks can’t supply foreign exchange to these companies that need money. So many are having to collect revenue in naira.
Moody’s says Nigerian banks’ exposure to the oil and gas industry is substantial, at around 27 percent of total loans as at the end of 2019.
Moody’s also stressed that the quality of banks’ oil and gas loan portfolios will further deteriorate as a majority of these loans were extended to the upstream and service segments, where borrowers are more sensitive to oil price movements than downstream.