Against the backdrop of non-performing loans indigenous investors in Nigeria’s oil and gas companies obtain from banks, which has put pressure on bank’s results, hedging loans, a practice used to reduce any substantial losses or gains suffered by a borrower, experts say, could lessen their exposure to bank loans.
Also a clearer understanding of upstream operations by Nigerian banks , they say would have checked the current stresses non-performing loans is exerting on banks whose second quarter results bore signs of shrinking bottom-line.
Nigerian banks who gave out loans to indigenous oil and companies who bought divested assets from International Oil Companies (IOC) have been accused of treating loan proposals from the operators in the same manner they did for fuel importers who secured short-term loans at unsustainable interest rates.
Industry watchers say on account of this there was little consideration for stiffer corporate governance that would have ensured due diligence was carried out and investments were properly hedged.
“What the banks, have been doing is giving loans to those who import refined oil products and they brought that same model to the upstream operations,” said Mutiu Sumonu, chairman of Julius Berger Nigeria.
He further said, “It is clear the banking industry does not understand the upstream operations hence their due diligence on reserve base lending was weak,” said Mutiu Sumonu, chairman of Julius Berger Nigeria at a recent Society for Petroleum Engineers conference held in Lagos.
He added, “Hedging was not mandatory by the lenders. If they have insisted that all those buying assets hedge their assets there would not have been this type of collapse.”
Analysts say investors strategically use instruments in the market to offset the risk of any adverse price movements and hedging involves investing in two securities with negative correlations. They contend that banks rarely consider these options when advancing credit lines to risky.
“All too often in financing transactions the strategy – and documentation – to be employed by the borrower in hedging risk under the loan are left until the last minute and are given insufficient thought,” observed Emma Spiers, partner at Derivatives and Structured Finance, London.
Of the 24 marginal field licenses issued in 2003, barely 8 are involved in active production as plummeting global oil prices and the renewed militancy continue compound the problem of lack of technical competence by operators to engage in production.
“Marginal field operators face low level risks such as threats and kidnappings, which impact negatively on their cost and which never get reported by the media or gets government’s attention,” said Felix Amieyofori, managing director, Energia Company Limited.
Operators are saying that for Nigeria to achieve competiveness, government needed to assure some level of certainty in contractual agreements and reduce contracting cycle from the current 24- 36 months to six months as in Angola to encourage investments in the sector.
“Nigeria should drive diversification beyond upstream, extending the value chain to encourage a mix of production to further deepen her production output,” said Ademola Adeyemi-Bero, managing director, First E and P Development Company Limited at the SPE Conference.
Experts have called for the education of marginal field operators so they understand the intricacies of the assets they were buying from divestments calls by the International Oil Companies.
“Marginal fields are lying low because of the quality of bidders and we must be a lot more stringent if we must get value. This is a technical business and we must not allow just anybody to get into it but only those with technical expertise,” Sumonu said.
OLUSOLA BELLO & ISAAC ANYAOGU
