As investment dollars thin out argely due to Nigeria’s uncompetitive fiscal and regulatory environment, local oil companies can find creative means to finance new projects without recourse to commercial banks with very low risk appetite.
Gbolahan Elias, a Senior Advocate of Nigeria (SAN) and partner at G. Elias & Co in a presentation at the Centre for Petroleum Information (CPI) Oil and Gas Law Forum, highlighted principal ways indigenous oil companies can source finance through creative structures.
Elias advised that the conditions precedents must be straightened out before embarking on these financing strategies. These include agreeing terms with Engineering, Procurement, Construction (EPC) contractors and carrying out Environmental Impact Assessments (EIA) for two seasons, (wet and dry season) among others.
Forward Sale
According Elias, this is becoming widely accepted in the industry. In order to develop a project, you get the lenders to lend money to an SPV which will buy all or most of the production for a certain number of years. Reference sources like Platts are used to arrive at price benchmarks. The SPV undertakes to buy all the commodity for a determined period and the field developer uses the finance to develop the asset. There will be regular periodic delivery of products and payments over the agreed period.
The implication is that the production company will not have any debts/loan on its books, all it has is an obligation to pay the price in installments over time, it will also have an obligation to deliver a certain number of barrels of oil over time. This has been convenient for the NNPC mandated to sell oil and to the extent that it uses forward stage structure, it does not borrow and does not contend with all the government rules regarding borrowing. It has been popular over the 10 years ExxonMobil have used it in the transactions involving ExxonMobil NGL.
Service fee
Closely related to forward sale, this applies to services and it is a much newer concept. Under this scheme, a marginal field developer can enter into an agreement with a production company who wants to use his infrastructure, pipelines and flow stations, and get them to pay him the service fees in advance so that he can use the funds to build the infrastructure.
“The market is getting familiar with it and should catalyse the development of infrastructure for those who have credible customers,” Elias said.
Insolvency
This is not new to the industry, in recent times two large producers have had this challenge, and this has seen debts been rescheduled. If the owner can show that funding was used to develop the project, and this can be verified, lenders will not panic and could even lead to new players coming in to buy the debt.
Listings
Local oil companies have also listed in the stock market especially in foreign capital market to improve access to financing. Seplat successfully listed on the London stock exchange and many other local producers are thinking seriously about the option.
Bond tax relief
If you are investing in bonds whether issued by oil production company or any other company, you will enjoy an exemption on tax between 10 and 30 percent and this could also become a way to finance oil projects though now many are financed through debt.
In 2010 many capital market participants approached the government and persuaded her to give tax relief on bonds. The idea was that in order to kick start the bond market in a big way, the income on bond, which is the interest element, should be tax free for ten years. The government issued a gazette instrument. It worked to catalyse the bond market in a big way and today, the bond market is far bigger than the stock market. This is exemption is will expire soon.
Traders
Oil traders like Trafigura have become major supplier of money to the market. It used to be production companies investing in smaller production companies or banks lending money to production companies, now it is the traders. For example most of the oil blocks sold by Shell has seen its trading company Shell Western Trading signs off take agreement with production companies who buy the oil blocks.
Contractors
EPC contractors like Schlumberger have also provided much needed capital. It is involved with a $750million transaction with the NNPC. Schlumberger is a major contractor, have contracts to give all sorts of services from start to finish for a field development and rather than get paid in cash, it takes part of the oil production and sells to make money. Companies pay a premium for it because the risk profile is high.
“Part of the difficulty with this kind of arrangement is that it is not really in the DNA of a contactor. Production risk is not their forte, they are contractors and just want to be paid,” says Elias. EPC companies do not have the same stomach and appetite for risks as production companies who can wait for 10 years to get production online.
Some EPC companies including Schlumberger and GE have finance companies with huge assets to finance big projects.
Marginal operators
Elias said that operators have in recent times been intensifying efforts at collaboration which has lead to sharing resources and this has provided valuable financing for the sector. Some have contributed resources to develop projects together.
Participants at the CPI forum agreed that these funding strategies will continue to become relevant in the coming years. Some argued over the need for concessions like the bond relief to drive investments. Gbenga Biobaku, partner at GBC Law who chaired the event said concessions should lapse when they serve the purpose of jumpstarting an industry.
Victor Eromosele, one of the founders of CPI, countered that it may not work in all instances. He gave the example of the NLNG that could not come on stream for over 30 years until generous concessions were given and has become a significant contributor to the economy despite these concessions.
ISAAC ANYAOGU
