Monday, 21 September 2015

A PROJECT FINANCE INSIGHT ON NIGERIAN OIL AND GAS SECTOR

Within the last five years, there has been a radical transformation in the configuration of the Nigerian oil and gas sector. In line with the Federal Government’s agenda to empower indigenous oil companies, oil mining licences (OMLs) have been transferred from foreign to local ownership. International oil companies (IOCs) such as Shell, Total, Agip, Eni and Conoco Phillips have divested from their portfolio of onshore assets to focus more on offshore assets that offer more lucrative prospects. Although it is too early to uniformly say that the divestment process has been a success or failure, there are still certain implications to be considered.

First is the fact that since local oil and gas players have taken a forefront role in the acquisition of various onshore OMLs, this has significantly enhanced their capacity in the oil industry. While many local players lack the capital, sophisticated technology and experienced personnel that the IOCs have, strategic alliances and the local debt market (source of financing) have enabled firms to make considerable progress.  Secondly, since IOCs are now directing their efforts towards offshore/deepwater assets, this offers them the opportunity to deploy their resources towards more productive endeavours that capitalise on their portfolio of technical expertise. As previously mentioned, it is unclear whether selling onshore/shallow water oil assets in the Niger Delta region to locals has been mutually rewarding, but the divestment process has regardless created immense activity in the oil industry.

Between 2011 and 2014, there have been over six OML acquisitions that have primarily relied on project finance to partly fund the acquisition cost of these costly OMLs.  Project finance is defined as the financing of infrastructure projects using debt and equity capital that is repaid by the cash flow generated from the project.  Given the large size of these transactions, local oil and gas companies have had to borrow substantial sums to purchase OMLs.

The bulk of these borrowed funds have come from local commercial banks that lend on a five- to seven-year basis and this puts urgent pressure on borrowers to optimise the value of their acquired assets. Once the financing has been secured, there is a proverbial stopwatch ticking for borrowers to pay down the debt from the cash flows of the asset. As a result of this time constraint, project financiers are beginning to see a flurry of refinancing and restructuring opportunities in the oil and gas industry, as borrowers seek to extend debt tenors and restructure their existing debt obligations.

The key takeaway is that in light of the momentous transfer of ownership, local players are finding it tough to reap the rewards of these assets in a volatile and uncertain world. The recent downward spiral in oil prices has also made it increasingly difficult for local companies to service their debt payments in the interim. In a time where the global oil and gas industry is facing considerable headwinds, many indigenous players are beginning to consider alternative investment destinations and are diverting resources towards gas infrastructure.

The gas market in Nigeria is highly fragmented and given the country’s tremendous thirst for electric power, the attractiveness of supplying gas to power projects has rapidly increased. Local gas companies such as Accugas, Seplat and Oando are at the vanguard of this industry and are starting to benefit from ‘first mover’s advantage’ as the industry begins to receive traction from selling appropriately priced gas. Unlike oil prices, gas prices are not subject to as harsh fluctuations and can be fixed for a period of time that is documented within legal agreements.

Project finance has enabled companies like Accugas to build a gas pipeline to a generator in Akwa-Ibom and Seplat to deliver gas to the Sapele, Geregu and Azura power generators. There is likely to be additional activity within the gas market as more power generators are built and other chinks in the power supply chain are repaired (transmission and distribution).

Recently, Alhaji Aliko Dangote announced his plan to construct a gas pipeline from the Niger Delta to Lagos that will serve as feedstock for his oil refinery and petrochemical plant. As both oil and gas industries adjust to their ‘new normal’, project finance will continue to serve as a tool of economic empowerment.

While the projections for the global oil industry remain bleak given reduced demand from China, who for the last decade has consumed 11 percent of global oil production, and the increased supply from America and others, there is still hope. Oil prices have historically had spouts of drastic fluctuation and the ramifications on the whole seem to be positive. As the drop in oil prices persist, there is a corresponding rise in disposable incomes for households.

As a result, global economic growth may improve as consumers demand more products. Oil prices are likely to hover within the $50-$60 per barrel range for the foreseeable future and this provides an interesting dynamic for the Nigerian economy. Both local and IOCs will be faced with tough times ahead, but given the relatively premature state of project finance in Nigeria, there is still a wide array of financing techniques to be implemented. To date, the domestic capital markets have rarely been used as a source of financing for the oil and gas industry and bondholders have not been provided with appealing projects that have sensible economic characteristics.

As the capital markets broaden their investor base and offer various ways for investors to participate in the Nigerian economy, we will see the oil and gas industry take advantage of this stable source of financing to fund future growth. (Businessday).