The investment space for Nigerian banks in the upstream sector is expanding to include international banks, service companies and trading houses of international oil companies who are now providing debt transactions and contractor financing into the Nigerian oil and gas sector as funding appetite of Nigerian banks dips.
Nigerian banks reported in 2016 that the energy sector accounted for almost 40 percent of their non-performing loans due to slow recovery of oil prices which knocked off profitability forecasts of upstream projects they funded. These agencies, analysts say are filling the vacuum through innovative financing schemes.
“This is becoming the trend in the oil and gas sector,” says Ayodele Oni, energy lawyer and partner at Bloomfield Law firm. “It is driven by the fact that the Nigerian government as well as the banks are cash-strapped, so it makes to use creative funding techniques to keep projects alive in the industry.”
Oni further said that oil servicing companies are now willing to forego payment for services rendered during the drilling of an oil well for a share of the profit from the discovery and sale of crude oil from the well.
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In January, Vitol, the world’s largest independent oil trader, led a $530m oil-for-loan deal with Shoreline, a Nigerian energy company, as the commodity trader began a programme to extend large financing facilities to private players as well as cash-strapped states.
The five-year agreement with Shoreline Energy will give Vitol preferential access to physical cargoes, amounting to at least 30,000 barrels a day of crude produced in the oil-rich Niger Delta.
Analysts say these pre-pay deals have become a major part of the oil trading industry since crude prices tumbled from a 2014 peak of around $115 a barrel to less than $50 in 2016. Ramping traded volumes have been seen as a way to raise earnings and competition.
Indigenous companies too operating in the oil and gas sector are also taking advantage of funding from IOCs. In May, Osagie Okunbor, chairman of Shell Companies in Nigeria said 290 Nigerian contractors received loans valued at over N472 billion under the Shell Contractors Support Fund (SCSP).
Okunbor said the SCSP was set up by the company to help vendors and suppliers in the oil and gas industry to secure funds at reduced interest rates, with relaxed collateral requirements and quicker processing time. According to him, Shell awarded contracts worth over N230 billion to Nigerian contractors in 2017, representing 94 per cent of the total contracts in that year.
In the last three years, the Nigerian National Petroleum Corporation (NNPC) says it has attracted $3.7bn in Alternative Funding Programmes to sustain and increase the national daily production.
This includes $1.2 billion multi-year drilling financing package for 23 onshore and 13 offshore wells under NNPC/Chevron Nigeria Limited Joint Venture termed Project Cheetah and the $2.5 billion alternative funding arrangements for NNPC/SPDC JV ($1Billion) termed Project Santolina; NNPC/CNL JV ($780Million) termed Project Falcon as well as the NNPC/First E&P JV and Schlumberger Agreement ($700Million).
Earlier in the year, the Nigerian Deposit Insurance Corporation called for quick, concerted pre-emptive action on account of weak corporate governance and internal controls in Nigerian banks, echoing similar warnings by the International Monetary Fund (IMF). In September, Polaris Bank acquired distressed Skye bank which the CBN said can no longer continue to live on borrowed times with indefinite liquidity support from it.
“I know the exposure of Nigerian banks to the oil and gas sector is currently down to around 20 percent but it still constitute a significant portion of their loan books and the risk in oil prices persists. It is hard to see the reason why any bank will want to go aggressively in oil and gas finance now,” says Jubril Adebayo, head of energy research at Ecobank.
Adebayo further says, “That being said, it is not to say there are still no opportunities banks can explore to create risk assets as any risk asset they create now will actually be less risky than what they were taking on in the past. They will want more guarantee, they will do more analysis, to see the viability of the project they are financing.”
