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Alternative Funds Gain Popularity In Oil And Gas

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At the just – concluded Nigeria Annual International Conference and Exhibition (NAICE), hosted by the Society of Petroleum Engineers, Nigeria Council, alternative funding as a measure to sustain oil and gas exploration in country dominated discussions and arguments among critical industry stakeholders, writes CHIKA IZUORA.

Experts have often identified funding as one of the biggest challenges of Nigeria’s oil and gas industry and also international oil companies (IOCs) in the existing joint venture (JV) arrangements have consistently complained that government’s budgetary allocations for cash call purposes had significantly fallen short of requirements over the years, thus stagnating exploration and production developments to reach their real potential. This has negatively impacted capital expenditure requirements for increasing exploration and production levels from the existing joint venture fields, thus leaving the industry in a state of stagnation and preventing its full contribution to the national economy. Also, Nigerian oil companies (NOCs) are equally seeking alternative funding schemes including contractor financing, insurance funds, private equity, pension funds among others to get cash for new projects in an industry where lenders have become weary. In exchange for some of the funds, operators said they have been offering equity participation, profit sharing and various crude for payment schemes supported by the Nigerian National Petroleum Corporation (NNPC) which provides guarantees that gives the lenders confidence. At the conference for instance, Ademola Adeyemi-Bero, managing director of First Exploration and Petroleum Development Company, noted that the contracting financing model the company had with Schlumberger has a win-win element to it, but that would not have been possible without the support its joint venture partner, the NNPC gave to the company.

“Without this confidence to the contractor it would never have been possible,” Bero said. According to information obtained by LEADERSHIP, Nigeria needs over $20 billion in new financing to ramp crude oil production to 2.5 million barrels per day (bpd) but with local banks showing lack of appetite for lending to the sector due to high non-performing loans estimated last year to constitute about 40 per cent banks NPLs, local players said they were being forced to seek for new solutions. LEADERSHIP reports that in June, Nigerian National Petroleum Corporation (NNPC), FIRST Exploration & Production (First E&P) and Schlumberger signed a tripartite agreement for development of the Anyala and Madu fields under OML 83 and OML 85, offshore Nigeria at the cost over $700 million. Under the agreement, Schlumberger would contribute the required services in kind and capital for the project development until first oil, while the joint project team would leverage the technical expertise of Schlumberger and the extensive local knowledge of the partners. Globally the oil and gas industry is evolving with discussions about more prolific technologies that will displace hydraulic fracking, the impact of electric cars, move to low sulphur content which will render all of NNPC’s refineries obsolete, but poor policy, weak fiscal terms and corruption continues to destroy value in the sector. “Our industry cannot go on without having liquidity in country to finance our business, we cannot always go outside to the international banks, during the last three four years, there have been lack of equity in this market, to even raise $5m in our local market has become very difficult, but we have to find the solutions,” Bero said. Local oil companies have found it difficult to place debt structures which are dollar denominated on entities which have found it difficult to pay back in foreign exchange.

The industry is bereft of liquidity and it is beset with all kinds of challenges including absence of sanctity of contracts, vandalisation of assets, infrastructural gaps and difficulty raising working capital. “We cannot all be financing production, we have to finance exploration, appraisal and gas which has a long gestation, and we still don’t have a solution for that type of financing,” Bero added. In his comments, Demola Sogunle, chief executive officer, CEO of Stanbic IBTC Plc said the discussions over alternative funding the industry was having now should have been had since 2005, and progress in the sector has been very slow. Sogunle noted that while other nations had moved forward with progressive ideas, Nigeria lags and continues to consider how to list the NNPC and whether it should convert joint ventures into production sharing contracts. However, identifying this as a huge challenge, the Nigerian National Petroleum Corporation (NNPC), said that the alternative financing model it adopted has led to the sustainable funding of deep-water production sharing contract which currently accounts for 41 per cent of daily national production. Group managing director of the corporation, Dr. Maikanti Baru, disclosed this while speaking at the 42nd NAICE in Lagos. Baru noted that resort to alternative financing mechanism for upstream operations has been on the rise over the years, with over 200 per cent production growth recorded within the last ten years. In his paper entitled: “Revamping the Nigeria Oil & Gas Industry through Alternative Funding: Opportunities, Challenges, Innovations & Solutions,” at the event, Baru said alternative financing has deepened local banks’ participation in the upstream subsector of the industry.

According to the GMD, NNPC’s adoption and execution of alternative financing models for funding its Joint Venture (JV) obligations so far have restored investors’ confidence and stimulated further foreign direct investments (FDI) in the nation’s oil and gas industry, adding that in order to meet government’s expenditure and strategic focus, the corporation had to explore alternative financing, which he further described as important to the sustenance of the industry. He charged participants at the conference to pay attention to the increasing global competition, which he identified as competition for new production centres across the globe (especially in Africa), shale oil in the US, Argentina and other places; and the competition in terms of crude oil quality. “To turn the wheel of the industry
and ensure that funding doesn’t limit our growth, it is important we consider both the traditional and non-traditional funding options,” Baru stated. He observed that traditionally, Nigeria had raised funds utilising equity or self-funding from cashflow, commercial debt instrument or partner funding in form of Carry or Modified Carry Arrangement (MCAs). In 2017, the NNPC said it has obtained $3.7 billion in alternative financing agreements.

Baru revealed the figure while speaking at the 35th Annual Conference of the Nigerian Association of Petroleum Explorationists (NAPE) in Lagos. The NNPC boss argued that with the new alternative funding arrangement in place, the government would be relieved of joint ventures cash call burden. Baru told delegates at the NAPE confers that securing external funding arrangement was crucial to sustaining oil and gas production in Nigeria and ensuring the survival of Nigeria’s energy future. Also speaking on “Revamping the oil and gas industry through Alternative Funding: Challenges, Opportunities, Innovations and Solutions,”another stakeholder, Ekemini Thompson Amos, director, Projects/Technical Service, T&GIL, said that raw crude was what Nigeria has and that is most sought after for now, but revamping the value addition along the chain of production from reserve to finished product was necessary. He said true value addition cannot be achieved in isolation, as there exist series of activities that inter-play before a finished product is delivered



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