Professor Gbolahan Elias
…Financial support from banks cumbersome
…Condition Precedents most critical for transactions
…$163 billion worth of oil and gas projects awaiting fund
…Oil trading companies now lend money to the industry
-By Felix Douglas
The oil industry is one of the lucrative businesses across the globe with huge cost implication to come onstream, it could take an exploration company up to five or seven years to attain production due to fund. To get fund from financiers entails cumbersome processes which must be met.
A renowned legal practitioner with almost 40 years of practice and Senior Advocate of Nigeria (SAN), Professor Gbolahan Elias, Partner, G. Elias & Co gave his perspective on oil and gas financing and recent developments at the Centre for Petroleum Information (CPI), Oil and Gas Law Forum.
Professor Elias disclosed that the work of a transaction lawyer in helping to organize Condition Precedents (CP) document is probably the most critical thing in getting expeditious conclusion of transactions. In any major transaction there is likely number of conditions.
These conditions include: Engineering Procurement Construction (EPC) Contract, offtake agreements, license from Department of Petroleum Resources (DPR), Environmental Impact Assessment (EIA), corporate document, shareholders’ agreement are all required for any oil company to get fund.
He said, “without these things being in place, those who write the big cheques will never write the cheques.” There has to be financial agreement and “If you want an expeditious closing, you will start from the CPs and the constitutional documents must be in order.”
For EIA, it could take up to one year and for early closure it has to commence about six months from time schedule. CPs should not be underestimated because it takes time to sort out.
Professor Elias explained that there are $163 billion worth of oil and gas projects awaiting financing and government intervention to bring them alive. If this is converted into naira is about N60 trillion which is almost six times the current size budget of the country. This is also six years federal government fund, unfortunately, the projects are lying down which is an imaginable loss to the economy. These potentials are within the country and they are not generating revenue.
The legal luminary was of the view that there are two other major statistics that people often overlook and one is in relation to the importance of oil and gas sector. Some International Oil Companies (IOCs) have made it known that they preferred to be called energy firms. For instance, the CEO of Shell once said, “In ten years, the company doesn’t really want to be an oil company, oil will be part of the show but not at the centre of it, they want to be an energy company.”
To buttress this fact, the Nigerian National Petroleum Corporation (NNPC) has a renewable energy department which the corporation expects to grow aggressively and be a major contributor to revenue over the next ten years. This does not mean that the oil and gas sector will be irrelevant but other things will compete with it. It has been the major economic main stay of the country and projections about the oil sector will be pertinent. As a contributor to federal budget, oil is earning is less. “If we were a sober public functioning country, it will be smaller because the contributions of VAT is gradually increasing, while the GDP rate would have been 20% rather than 5% the country has.”
Professor Elias stressed further that in terms of contribution to forex revenue the International Monetary Fund and World Bank have revealed that the biggest contributors to Nigeria’s foreign exchange are Nigerians in the Diaspora sending money back home. It is almost at par with oil.
He revealed that to develop a project, the lenders will be involved to lend money for a special purpose to buy production for some years. For instance, if a company needs N10 to develop a plant and bring out gas from the ground and sell rather than lend money to the company that own the gas in ground and wants to develop it. The option is to lend money to a foreign company solely for that purpose. The company buys the production. There will be an agreement as to how many cubic feet of gas will be given for the next five years. What the special purpose agreement does is to undertake. For instance, it would buy N10 million worth of gas for five years and N2 every year and then pays for the gas. The payment will be used to buy plant and develop projects. In the future there will regular periodic of product delivery. Technically speaking, the production company will not have any borrowings on its books. All it has is an obligation to pay the price installment over time including some barrels of oil. This gesture has been convenient for NNPC and its founders. The corporation is authorized by status to sell oil and it does not borrow. NNPC does not contend with government regulations.
According to Professor Elias, there had been major insolvencies in the oil industry which has affected some E&P companies while some have been listed into local and foreign capital market. He noted that “It isn’t that insolvencies are entirely new to the industry, every industry has some insolvency to a greater lesser degree for a long time but the scale of insolvencies have grown greatly in recent times.”
There has also been some scale of indigenous producers that have had challenges and are in excess of $500 million. He appraised Seplat grand breaking listing in London foreign exchange while other producers are thinking of the same direction of the company.
Besides, new rules in the oil industry shows that DPR secures assets. This was not the tradition ten years ago in the country and some companies are not willing to pay debt to the regulatory agency since the rules came before insolvency.
He spoke on the bond tax relief which assisted the industry with a tax free for ten years given by the federal government. This enhanced the bond market which is bigger than the capital market. “What the bond tax relief does is that, if an investor is investing in bonds whether they are issued by an oil production company or not, it will enjoy an exemption of tax,” Elias added.
FUND PROVIDERS
Professor Elias disclosed that there are some oil trading companies that are professional traders like Trafigura and Vitol. They have become major financiers to the oil industry. Formerly, it was the production companies or banks lending money to support production, but recent trends have seen the traders taking over the market. They approach oil companies and support them with fund for a long period. This development is like borrowing money from the bank but in another dimension, it has become an increasing source of finance. The biggest lenders in the oil industry is not the banks but trading companies.
The legal expert stressed futher that another big lender in the oil industry is Shell Western. Shell Western was involved virtually in all the oil blocs that Shell has sold over the last decade. The blocs were sold but Shell Western still has a contract to be buying the offtake. Whatever is produced is sold to the company. They put in Shell pipelines and take it out to Forcados. They could buy all that will be produced by the company for five years and support it with fund for expansion. Shell Western finds it easy to borrow money to companies that have contract with it provided it could be recouped from the borrower.
The EPC contractors like Schlumberger also assist with fund in the industry. Schlumberger recently had a contract with NNPC in the tune of $724million essentially for service works. The contract entails that oil will be given to the company. Schlumberger is a renowned service company with state-of-the-art equipment from start to finish. They preferred oil production in place of cash so as to sell to production companies and monetized it, although premium is paid since risk is involved.
Another big lender is General Electric (GE) that has delved recently into oil services. It has a finance company known as GE Capital and the balance sheet of the company is $500 billion which is bigger than most banks.
In future in Nigeria, Professor Elias stated that pension fund managers will also be relevant in terms of financing because they are the biggest holders of cash in the country. Pension managers controls 2/3rd of the country’s treasury and total money on the management is about N10 trillion. The only challenge with pension fund is that it is not dollar dominated, it is in naira making it insignificant player to support the oil industry.
Notwithstanding, NNPC has pension fund which is largely unknown to the public. It has some Forex that could be used to fund production. If the risk could be well managed, it provides a source of finance.
He said marginal operators could pull resources together to develop infrastructure and manage cost better. They also interest major financiers and off takers.
He expressed his opinion on the notion that the IOCs are making enormous money in the country hence they should give part of their proceeds and profits to the nation, “this is an unnecessary emotional way of looking at things.”
On the issue of Mozambique and Angola becoming countries of interest, if what the IOCs get in these countries are better than Nigeria, obviously, there will be investment reassessment and realignment. This is a simple arithmetic, “The CEO sitting down in his office in Houston and has to defend decision is making to his board of directors, his financial advisers are telling him, if you go to Mozambique, you will quadruple your money but in Nigeria, you cannot double it, it is very easy decision to make and he will not come to Nigeria.”
The aspect of risk management in the oil industry cannot be overemphasized, Professor Elias said to manage it, there is need to assemble experts that will advise on what the company should do. This will involve an experienced Chief Finance Officer who understand the risk and how to manage it like the Nigeria Liquefied Natural Gas that was set up by experts.
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