*Oil price hovers at $50 per barrel
*IOCs, indigenous firms adopt alternative funding option

By Udeme Akpan and Michael Eboh

When crude oil price rose to over $100 per barrel in 2012, many observers of the volatile global oil market did not expect it to drop to the present $50 per barrel for some reasons.

Source: Sweetcrude

First, the demand for oil was very high, thus giving impression that it would culminate in even higher prices.

Second, the Organisation of Petroleum Exporting Countries (OPEC) and others were expected to review, as well as adopt measures to stabilise the market.

But these have not yet been the case despite the interventions as oil price has, at different times, dropped as low as $30, before leaping to $50 recently.

Expectedly, this has affected many stakeholders, including Nigeria and other oil producing nations, International Oil Companies (IOCs), indigenous producers and service providers.

Many financial institutions that provided loans to investors are not also worried, but also making efforts to recover their loans.

But Sweetcrude gathered that some oil and gas companies are not financially ready for negotiation and settlement.

It was gathered that the loans were acquired from the banks, using $100 per barrel of crude oil in their repayment plan, or a bit lower, the sharp drop in the price of the commodity had put the oil and gas firms in dire financial straits.

Sweetcrude learnt that the situation is not different in the downstream sector, as a number of oil marketing companies currently owe banks about $2 billion.

As a result of the huge loans and the inability of the companies to service the loans, the banks had suspended extending further credit to the companies, while the companies had cut down their fuel imports drastically.

The oil marketers blamed their indebtedness to the refusal of the Federal Government to pay them their subsidy claims, put at a little over $2 billion.

CBN’s caution

The CBN had consistently raised concerns over the level of the banking sector exposure to the energy sector.

The CBN, in its Financial Stability Report for December 2016 released in May, disclosed that Energy firms’ borrowings from the Nigerian banking sector rose to N5.617 trillion as at the end of December 2016.

The CBN revealed that the banking sector credit to the energy sector appreciated by 8.12 per cent, representing an improvement of N422 billion from N5.196 trillion recorded at the end of June 2016 to N5.618 trillion at the end of 2016.

Giving a breakdown of the exposure, the CBN noted that credit to oil and gas firms rose by 8.42 per cent to N4.891 trillion at the end of December 2016, from N4.511 trillion recorded at the end of June 2016.

In addition, the banking sector credit to power and other energy firms stood at N726.29 billion by end December 2016, rising by 5.99 per cent from N685.2 billion as at June 2016.

In general, the report stated that total banking sector credit to the economy stood at N16.293 trillion as at end-December 2016, rising by 3.93 per cent or N616 billion from N15.677 trillion recorded in June 2016.

Prior to that, the CBN had expressed concerns over banks’ exposure to the oil and gas sector, stating that the huge exposure was capable of triggering systemic risks in the financial sector.

In its June 2016 Financial Stability Report, the CBN stated that the huge exposure of banks to the oil and gas sector, coupled with the low price of crude oil in the international market, continued to generate concerns, especially regarding the capacity of the obligors to meet their obligations.

According to the CBN, at end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the gross loan portfolio of the banking system as credit to the sector grew to N4.5 trillion, compared to N3.31 trillion at end-December 2015.

This, the CBN explained, was in comparison to the manufacturing sector, which accounted for 12.95 per cent of the total credit, compared to 13.91 per cent in the second half of 2015, while agriculture, forestry and fishery accounted for 3.08 per cent of the total, indicating a 0.69 percentage point decline compared to 3.77 per cent in the preceding half year.

Consequently, CBN stated that, “Given the persistent weakness and volatility in the price of crude oil, the CBN will continue to closely monitor the exposure of banks to the oil and gas sector and take appropriate actions to curtail systemic risks in the industry.

“To proactively address these concerns, a review of the exposure of banks to the sector was conducted and appropriate actions implemented.  Following the review and in line with the provisions of the Prudential Guidelines of July 2010, a sizable number of the facilities were downgraded and re-classified as non-performing with additional provisions effected.

“The bank enhanced the supervision of the exposure of banks to the oil and gas sector and the foreign exchange market. Cross-border supervisory collaborations were also sustained.”

Sources in the industry said there had been series of talks among the banks, oil and gas companies, Central Bank of Nigeria, CBN, regulatory authorities in the oil and gas sector and officials of the Finance Ministry and key officers from the Presidency.

In particular, Acting President Yemi Osinbajo and the Minister of State for Petroleum Resources, Mr. Ibe Kachikwu, had met with oil companies and oil marketing companies and had tried to assure them the government would fulfill its financial obligations to the firms.

 Impact on projects

Currently, only a handful of projects are ongoing in the country. While the Egina Floating, Production, Storage and Offloading, FPSO, vessel is almost set to sail into the country, the Zabazaba and Etan projects, among others, are yet to flag off.

Providing insights on the major funding challenge facing the oil and gas industry, Andy Brogan, Global Oil & Gas Transactions Leader, Ernst & Young (EY) stated that prior to the volatility in the crude oil market, most companies had in place a corporate revolving credit facility, often syndicated across a number of banks that gives them financial flexibility for their day-to-day operations.

However, he stated that today, companies without cash flows from operations, lacking in scale or with risk concentrated in a single project or country are likely to face a more challenging funding outlook.

He noted that companies that are able to deliver, and also communicate, exploration and commercial success would  face fewer challenges in accessing fresh capital, adding that companies that have a proven track record and the ability to communicate it, can enable investors to understand and price risk, which facilitates investment.

He declared that equity issuance is often the first or only option for pure-play exploration companies, which lack tangible assets, but offer material upside in the event of exploration success.

According to him, these companies generally have low debt capacity due to a lack of proved reserves and cash flow, noting that companies experiencing capital constraints would be forced to be more innovative as they assess all the funding options available to them.

He said, “In addition to conventional finance, companies are engaging in higher volumes of farm-out transactions, mergers and loan arrangements with service providers.”

In addition, he said, “Independent oil and gas companies are the largest users of reserve-based lending (RBL) facilities. These players typically use RBL structures for development financing and general corporate purposes.

“However, the covenant light nature of alternative funding sources is attracting companies towards non-traditional sources of finance and away from the bank markets. Bond markets are increasingly being accessed to finance new development opportunities within the mid-cap exploration and production sector.”

Mr. Dolapo Oni, Head of Energy Research, Ecobank Group, listed the capital that oil and gas companies need to include equity capital, such as through the conduct of public offers, right issues, private placements, private equities; debt capital, such as reserve base lending, project finance and structured trade finance, and mezzanine capital, such as convertible bonds/loans, convertible preference shares, and hybrid financing.

Others are patient capital, comprising financial & technical service agreements (FTSA), private equity and private placements; and creative capital, comprising farm-outs, strategic agreements and carry arrangements.

He argued that Nigerian oil and gas companies urgently need equity, adding that the dependence on debt is unsustainable.

According to him, debts could be used at any stage with companies that have very stable high volume production, but often through a borrowing base structure.

Oni further listed critical factors that would ensure success in capital raising for oil and gas companies to include a transparent and accountable corporate governance structure.

He added that “Communication with market, stakeholders and regulators must be concise and clear. Management guidance must be reasonably optimistic and technically conservative.

“Putting the right team together is also key. The team should know where to look, while creativity in structuring and distribution is key.”

Already, the Nigerian National Petroleum Corporation, NNPC, has kick-started the process of accessing fresh capital.

It has entered into strategic agreements with some multinational oil companies and had also secured funds from some banks to finance crude oil exploration in some new oil wells.

 Expected impact of new petroleum policy

The Federal Government’s new National Petroleum Policy may make positive impact as it is targeted at restructuring, new legislation and value addition in the oil and gas industry.

According to the Ministry of Petroleum Resources, it establishes the medium to long-term targets for oil reserves growth, and utlisation and record strategies to be pursued to ensure the successful implementation of the policy in accordance with Nigeria’s national socio-economic development priorities.

It disclosed that the policy articulates the vision of the government of Nigeria for the petroleum (specifically oil) sector, sets goals and strategies, promotes a level playing field between state owned-enterprises and the private sector, proposes fundamental reforms to improve the operational efficiency and performance of NNPC and proposes a long-needed overhaul and modernization of the existing petroleum industry legislation.

The ministry stated that the policy, intended to remove the barriers affecting investment and development of the sector, will be reviewed and updated periodically to ensure consistency in government’s policy objectives at all times.

The policy may also be effective as it stressed the need for new legislations that would enable the nation to accomplish set objectives in the industry.

The policy disclosed that, “The existing petroleum industry legislation in Nigeria dates back to 1969. There are also several other disparate pieces of legislation on petroleum, some of which are no longer relevant or applicable to Nigeria’s circumstances. Significantly, the Petroleum Act (1969) did not legislate sufficiently for gas as a hydrocarbon and industry in its own right, nor for a mid and downstream gas industry.

“The government will promote new legislation to overhaul and modernise the Nigerian petroleum sector by addressing a broad range of issues, including sector governance and institutional framework, fiscal regime, corporate structure of state-owned enterprises, transparency and accountability, environmental issues. Main Provisions of Legislation New legislation, the Petroleum Industry Reform Bill (PIRB) is proposed by the government.”

Improved funding and new reserves

There are strong indications that the funding of projects and programmes would improve in the coming months, especially as the policy stated that the existing JVs are to become independent and self-funding.

It stated that the most effective way to allow this is for them to become incorporated Joint Ventures (iJVs).

“The existing JVs are to be closely monitored for effectiveness and performance; compliance to agreements; allocation of oil licences and leases oil and gas licences and leases will no longer be awarded under opaque procedures with allocations of blocks or production.

“Under the Petroleum Policy, all petroleum blocks, licences, leases, licence renewals and licence extensions will be awarded following the Nigeria National Petroleum Policy Ministry of Petroleum Resources 85, a transparent competitive process. The process will also allow local community participation through local community vehicles.”

According to the policy, the nation would have the capacity to produce three million barrels per day, bpd in 2017, before dropping to two million bpd by 2026.

“In order to maximise existing production from existing production blocks, hindrances to maximising production will be investigated and actions taken. A clear vision and strategy from the government to the investor for how to fund projects is one critical part of ensuring continuing and growing production.

“The second aspect is to increase accountability for production. Through the new enhanced regulatory measures under this Petroleum Policy, the government will take steps to ensure full accountability for and transparency of production figures from operators. This will be made through improved regulatory monitoring plus transparency and other improvements as may be necessary.

“Future production of hydrocarbons depends on making additions to reserves. The gas policy shows how the government is determined to move Nigeria to a gas based industrial economy, with the expectation for the upstream sector that there will be dedicated exploration for gas, rather than finding associated gas during a search for oil reserves.

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