• Wednesday, February 21, 2024
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BusinessDay

Why foreign lenders hesitate to finance $20bn oil assets

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With the value of assets to be put on offer during Nigeria’s next marginal oil field licensing round and those to be divested by international oil companies (IOCs) put at $20 billion, indigenous operators expected to pick these assets are now confronted with external funding challenges.

Foreign lenders are hesitant because of counterpart and regulatory risks which are considered as major drawbacks to foreign financing of the said assets, BusinessDay has learnt.

Also, contract sanctity, security concerns, as well as limited operational track record of the Nigerian National Petroleum Corporation (NNPC) are contributing to the lack of interest shown by foreign lenders, and this is causing the country to lag behind in its quest to increase its oil reserve base.

With increasing demand for financing opportunities from offshore, it is feared that the level of insecurity in the country, arising from past and present activities of Niger Delta militants and the Boko Haram insurgency, is making foreign financiers wary of putting their money in Nigeria.

Natznet Tesfay, head of Africa, IHS Country Risk, said it was expected that a high level of activity would be generated by the marginal oil fields licensing bid round and the divestment by IOCs.

Speaking with BusinessDay on the sidelines of a meeting organised by the Lagos Oil Club, the IHS boss, whose talk dwelt on the attractiveness of Nigeria’s oil sector to external lending, said that apart from security, there was also the problem associated with contract security.

She added that potential financiers in the oil and gas sector were concerned about the politicised nature of licence sales and potential conflicts of interest among stakeholders, citing several cases of transactions being contested in courts, which were taking years to resolve.

On the issue of counterpart risk, Tesfay said the situation whereby the NNPC has pre-emptive rights on operatorship of assets sold by oil major joint-venture partners greatly limited opportunities for independent local firms to take full operational control of assets for sale. She also said the NNPC’s track record of operational and financial challenges was not encouraging.

“This would make lenders want to hesitate in bringing their funds to the country,” she added.

BusinessDay had recently reported that foreign and local banks were reducing available fi-nancing to indigenous companies seeking to ac-quire IOC divestitures in Nigeria’s onshore Niger-Delta, leav-ing a majority of bidders stranded in their attempt to acquire such assets.

Recently, Shell announced an extension to the bid deadline by a week, because buyers for the giant OML 29 and the other bigger blocs could not raise the capital needed to close the deal in time.

“In fact, with a 50/50 debt-to-equity ratio, buyers are struggling to access sufficient international equity as the local banks are at their lending limits,” one banking source told BusinessDay.

“International banks, on the other hand, have reduced their lending limits significantly for risky onshore Nigerian assets,” the source added.

International oil companies including Shell and Chevron Corp. are shifting production in Nigeria, Africa’s largest producer, from land-based operations to offshore fields where the risk of kidnapping, sabotage and crude theft is lower.

Assets divestment by IOCs (mostly Shell and Chevron) is ex-pected to create between $4 billion and $8 billion in value within the next two years, according to CBO Capital Partners.

There was one completed deal ($1.5 billion) and one uncompleted deal ($1.79 billion) in 2013, with 13 potential transactions to be com-pleted between 2013 and 2014.

“The bids on Chevron’s share in OML 53 (Ohaji South), 52 (Tunu) and 55 (Robertkiri) are being followed with great interest by the global exploration and production (E&P) community,” CBO Capital said in a report released in November 2013.

“Local firm Brittania-U outbid all other buyers with a factor of two but could not secure initial financ-ing, considering the steep price: $1.6 billion of which $1.2 billion was sought to be financed by debt.”

By:  Olusola Bello