Oil firms seek PE deals to fund marginal field bids

With bank loans to the energy sector constituting nearly 40 per cent of their non-performing loan portfolios, killing desire for further lending, local oil firms are seeking equity financing and other funding arrangements to participate in the forthcoming marginal fields and inland basin bid rounds.
According to sources, oil sector investors are looking to private placements, private equity investments and inclusion of credible partners who will provide contractor financing as well as as debt financing through shareholder loans to augment funding requirements.

“Unlike in the past where people without the requisite knowledge participated in the previous bid rounds leading to only about 30 per cent of the fields acquired being developed, credible people are preparing to participate this time around and they are not allowing funding to constrain them,” said a financial adviser who didn’t want to be named.
Experts say more of these kinds of funding arrangements will grow as competent people now want a piece of the marginal fields’ pie.

“As bank lending to the oil sector becomes a trickle investors can take advantage of these, equity and other funding strategies but should get the right technical and financial partners, explore creative ways of raising financing and conduct careful due diligence and verify reserve portfolio,” Samson Enikanoselu, senior associate, Detail Commercial Solicitors said at the recently concluded marginal fields investment matchmaking workshop organised by Meiracopp Nigeria Limited and Businessday West Africa Energy in Lagos recently.

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The guidelines for the forthcoming marginal fields bid rounds make it imperative to source funding.
Investors may be required to fork over $300,000 as a signature bonus, $50,000 each for a Competent Persons Report (CPR), which contains details of bidders shareholding structure, audited financial statements and financial resources to bid and pay for the oil acreages and $15,000 as data mining fees access data on available acreages.
Other creative funding strategies include Volumetric Production Payment financing (VPP) wherein the VPP investor provides financing in exchange for an overriding interest in a specified volume of crude.
The VPP investor receives a dedicated share of a hydrocarbon produced over a stated term and partners could include International Banks, energy trading companies, and hedge funds.

Another funding strategy is farm-in agreements where the awardee farms-out part of its interest in the marginal field to a technical and financial partner who provides financing for field development and operations. The agreement can also contain “Carry Obligations” to cover future obligations and ministerial consent will be required said Enikanoselu.

Investors are also looking explore carry arrangements and contractor financing. In carry agreements, a technical and financial partner carries full development and operational cost and recovers cost and profits from crude production. Under contractor financing, the field contractor pre-finances field development and operations and receives repayment from crude sales.
“For these financing arrangements to be successful there must be a high degree of trust among partners,” warned Bank Anthony Okoroafor, President of Petroleum Technology Association of Nigeria (PETAN) who said some operators have been known to renege on their terms once they hit first oil. For instance,, London-based independent E&P company Panoro Energy is currently in disagreement with its joint venture partners in OML 113 license off Nigeria, which contains the Aje field. The company in a statement said it intends to initiate arbitration and legal proceedings ‘to protect its interests.’

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Okoroafor called for iron-clad agreements because of the huge capital outlay required.
Though marginal fields in Nigeria have an average economic life of between 8 and 15 years and can produce between 4,000 boepd to 30000 boepd per field, they give local players the best opportunity to participate in the oil and gas sector, develop expertise and grow local content.
But operators have not always been prolific producers.

A total of 30 marginal field licenses have been awarded since the policy was introduced and only around 30 per cent of the fields have reached commercial production. Marginal field production made up only 3.05 per cent of crude oil output between 2015 and 2016, say analysts at Bloomfield law firm.
“From our experience advising on several marginal field issues and transactions, we are of the reasoned view that wrong technical and financial partnership is one of the key ingredients for the failure observed in the operations of many of the licensees that have performed below expectations,” said Ayodele Oni and other analysts at Bloomfield law firm.

ISAAC ANYAOGU