Rising appetite for oil for cash loans traps Nigeria’s next-generation

The Nigerian National Petroleum Company Limited’s (NNPC) fresh plan to secure $2 billion loan using crude oil pre-payments as collateral has sparked debate and raised questions about its long-term implications for the nation’s economy and Nigeria’s next generation, a demographic crucial for the country’s future prosperity.

Despite Nigeria’s position as the largest producer and exporter of petroleum in Africa and one of the 10 largest producers in the world, the country is not maximising the potential in its oil sector while its struggling oil production continues to enter oil for cash deals to fund fiscal reforms.

These oil-for-cash deals involve borrowing from international lenders with future oil shipments used as collateral. This frees up immediate funds but burdens the country with debt obligations to be repaid with future oil exports.

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According to experts surveyed by BusinessDay, prioritising short-term gains over long-term development jeopardises the future of Nigeria’s youth.

“Oil-for-cash loan agreements saddle future generations with the burden of repaying these loans, potentially at the expense of investments in crucial sectors like education and healthcare,” a senior oil executive who pleaded anonymity said.

Kelvin Emmanuel, an energy economist and board member at Obsidian Archenar Nigeria, said it beggars belief that the Nigerian government in 2024 is embarking on the financialisation of future revenues from oil and gas assets by securitising crude oil and gas output in pursuit of immediate cash.

“At a time when the Nigerian government should be laying out a detailed plan to conduct house cleaning for NNPC Ltd or books, start book building for an IPO, the Nigerian government is amortising precious future crude oil earnings in a deal structure that robs the federating units of millions of barrels of crude oil in oil for swap transaction that sums up the point Jeffrey Frankel made in his working paper about the ‘Resource Curse Theory’ at Harvard University,” Emmanuel said.

NNPC on Tuesday announced it’s considering securing a new $2 billion loan using crude oil pre-payments as collateral.

Mele Kyari the group general manager said the company wanted a loan against 30,000-35,000 barrels per day of crude production but declined to say how much money it sought.

He said the cash raised would be used for all of the NNPC’s business activities, including supporting production growth.

“We have no problem covering our gasoline payments. This is just money for normal business and not a desperate act,” Kyari told Reuters.

It is unclear which lender would arrange the loan, as three sources said Afrexim would be unable to extend its exposure to Nigeria that far.

While NNPC grows its appetite for oil-backed loans, Saudi Aramco declared total dividends of $124.3bn in 2024, a rise of almost 30 per cent compared with last year, when it also increased payments by 30 per cent to $97.8bn after reporting the second-highest annual profits in its history.

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Apart from Aramco, Abu Dhabi National Oil Company (ADNOC), the state-owned oil company of the United Arab Emirates declared revenue of $6.01 billion in the first quarter of 2024, up by 15 percent compared to $5.22 billion in the same quarter last year.

The NNPC has not published its full-year 2023 reports and its first-quarter earnings of 2024 but it doesn’t take a seer to understand that the oil corporation is flailing and is getting more addicted to oil-backed-loans.

“Resource-backed loans are bad because you can’t price the assets properly,” Akinwumi Adesina, president of the African Development Bank Group (AfDB) said in a recent interview with the Associated Press.

Adesina, whose Abidjan, Ivory Coast-based institution assists African countries in financing development projects, said these arrangements come with a litany of problems.

He pinpointed the uneven nature of the negotiations, with lenders typically holding the upper hand and dictating terms to cash-strapped African nations.

“This power imbalance, coupled with a lack of transparency and the potential for corruption, creates fertile ground for exploitation,” Adesina said.

“These are the reasons I say Africa should put an end to natural resource-backed loans,” Adesina said.

He pointed to a bank initiative that helps “countries renegotiate those loans that are asymmetric, not transparent and wrongly priced.”

Adesina said loans secured with natural resources pose a challenge for development banks like his and the International Monetary Fund, which promote sustainable debt management.

“Countries may struggle to get or repay loans from these institutions because they have to use the income from their natural resources, typically crucial to their economies, to pay off resource-tied debts, he said.

Nigeria is the largest producer of crude in Africa with proven reserves of 36.97 billion barrels, yet the International Trade Administration, healthcare infrastructure said the country is still underdeveloped and lacks modern medical facilities.

Medical professionals are in short supply, with only about 35,000 doctors despite needing 237,000, according to World Health Organisation figures, partially due to the massive migration of healthcare workers overseas.

For Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, the fundamental reason why resource-backed loans are not ideal is that the process of accurately pricing the value of assets over the shelf life of the facility is always going to favour the lender over the borrower.

“The Project Gazelle Deal that was structured as a forward sale agreement by NNPC Ltd is a cautionary tale on why the Nigerian Parliament needs to oppose resource-backed loans as though our lives depended on it,” Mohammed said.

Read also: Group petitions Senate, EFCC to probe daily crude oil production

Last year, the Nigerian National Petroleum Company Limited’s (NNPC) $3.3 billion crude-for-cash loan from the African Export-Import Bank (Afreximbank) sparked debate and raised questions about its long-term implications for the nation’s economy.

Evelyne Tsague, a co-director at Natural Resource Governance Institute Africa (NRGI), said African leaders have often taken out these loans to help with their short-term political ambitions, but their countries have ended up severely indebted and with the risk of losing collateral worth more than the value of the loan itself.

“They should stop agreeing to such perilous deals, which are often negotiated by poorly managed state-owned enterprises that often bypass parliaments and national budgets,” Tsague said in a report titled Resource-Backed Loans: Pitfalls and Potential.

David Mihalyi, a co-author of the report and senior economic analyst with NRGI, said: “These deals, sometimes labelled as oil advances, often resemble pay-day loans: they have short maturities, high interest rates and fees, and no commitments on how the money will be used. Countries should stay away from oil advances containing such harmful terms.”

Apart from Nigeria, BusinessDay’s findings showed four African countries where resource-backed loans have contributed significantly to severe debt problems, including Angola, Chad, Republic of Congo and South Sudan.