Increasingly, there has been a loss of confidence for project financing in the oil and gas industry. Yet the industry remains a big attraction in terms of returns for the banks and other oil industry players.
Constantly, we see sensational headlines on the concerns, expectations, and hopes in the oil and gas project financing space. These headlines include:
· Nigerian banks suffer from exposure to oil groups (Financial Times - April 21, 2016)
· Banks’ loans to oil, gas, power firms hit N4tr (The Nation - February 20, 2017)
· Banks’ lending to oil, gas sector down by 1.33% in Q2, 2017 (Sun Newspaper)
· Banks losing appetite for oil, gas loans (Punch - February 26, 2017)
· Chinese banks invest $250m in Nigeria’s oil sector (Vanguard - August 15, 2017)
· Despite price slump, banks prefer oil sector to manufacturing, agriculture (Daily Trust - August 28, 2017)
· Banks lack oil, gas industry knowledge — Kachikwu (Punch - August 25, 2017)
Challenges
Financial institutions seem to be highly exposed due to trick-down effect arising from the inability of oil firms and their EPC contractors to deliver their projects timely and within budget. The business plans earlier developed by oil firms at the $100 per barrel scenario can hardly now be implemented at the low oil price regime. The EPC contractors that collected loans to finance projects and contracts are struggling to remain afloat and unable to effect full loan repayment as the oil price crash continued to gather momentum, though we are witnessing a bit of reversal.
Even more worrisome is that this trend of lack of loan repayment has historical dimensions. As at 2014, the “Nigerian banks lent an estimated $10bn to local oil and gas companies to buy assets from Royal Dutch Shell, Eni and Total as they retreated from the country’s onshore industry” (Ft.com: April 21, 2017). According to The Nation newspaper (February 20, 2017), Nigerian banks are battling imminent liquidity crisis over huge exposure and non-performing loans to oil and gas and power sector, which is in excess of N4 trillion.
Nigeria commercial banks’ lending to the oil and gas sector continued to drop even with the recent partial recovery in the global oil price. The loss of confidence by the banks to continue to support oil and gas project financing may be due to high exposure to large syndicated loans which were not properly risked. And this level of exposure tends to also affect the operations of the banks.
Profitable Terrain
In spite of the current poor funding, the oil and gas industry still retains very strong fundamentals and continue to provide high returns to investors who are ready to acquire the necessary knowledge and seek the support of experienced and hands-on consultants who have worked in the industry. While the Nigerian financial institution is worrying about their burnt fingers, the Chinese banks are moving in. As reported in the Vanguard (August 15, 2017), Chinese banks have invested $250 million in the Nigerian petroleum industry. Furthermore, the Chinese banks have made commitments to bring in as much money as might be needed to finance oil and gas investments in Nigeria. Intriguingly despite all the undercurrents, the banks prefer the oil sector to manufacturing, agriculture.
Restoring Confidence
I am strongly inclined that the current problems and challenges of financing in the oil and gas industry is because the banks and the oils (and their contractors) lack sufficient knowledge of each other's systems and processes. This view was posited by the Minister of State for Petroleum Resources, Dr Ibe Kachikwu (Punchng.com: August 25, 2017).
The EPC contractors need to appreciate that the banks need sufficient time (3 months on the average) to conduct proper due diligence on loan requests. Contractors may need to start engaging the banks before the final contracts are signed. Proper documentation backed with historical performance and projects schedules needs to be submitted by the EPC contractors to the banks during loan requests.
On the other hand, the oil and gas industry have very complex systems and processes. Information and knowledge are closely managed because they give the respective oil and gas firm a competitive advantage. Even within the same organization, information within the project space remains confidential for the rest of the organization. This means that those outside the industry will lack an understanding of the dynamics that drive decision making.
Both the banks and the EPC contractors need help from consultants who have real working experience in the oil and gas firms especially in roles that cover finance, project management, contracting and procurement, cost estimation and scheduling, project economics, and tender board operations.
Making the right oil and gas industry-based assumptions and understanding the key parameters of oil economics and asset valuation is critical for banks if they want to make the right financing decisions. The simple principle of not overtrading (over-lending) is also important for any bank granting loans – sometimes they engage in over-lending.
In conducting a cashflow appraisal of EPC contractors, the banks should be checking for alignment of the cashflow fundamentals with the payment term of the respective oil firm. Supplier financial risk assessment and mitigation plan should be an important tool to be used by banks for evaluating the effective capacity of the contractor to financially deliver the project for which the loan is sought.
Gabriel Domale Consulting firm is uniquely positioned to help banks, oil firms, and EPC contractors. Our managers, each have a minimum of 20 years’ hands-on experience working in the oil and gas firm (Shell Nigeria). We are providing due diligence, advisory and support during loan negotiations, and training. During our consulting services, we transfer our knowledge of management practices and insights in finance, project management, contracting and procurement, cost estimation and scheduling, project economics, and tender board operations.
Gabriel Domale Consulting is planning to engage key industry players to hold a high-level workshop in 2018 where decision-makers in the financial institutions, and oil and gas industry will discuss the challenges of project finance and the structure of building the knowledge required to restore the desired confidence in the sector.
This piece is contributed by:
Leesi Gabriel Gborogbosi
The author, Leesi Gabriel Gborogbosi, CFO & CEO of Gabriel Domale Consulting. He is an Independent Advisor in the Upstream Oil and Gas Industry. Leesi is experienced in finance and strategy with an emphasis on finance transformation, project finance, strategy implementation, performance management, due diligence, cost reduction, corporate governance, and collaboration. He is also a Doctoral Candidate in Strategy at IE Business School, Madrid.
I am a Management Consultant and Independent Advisor.
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Nigerian banks suffer from exposure to oil groups (April 21, 2016)
Banks’ loans to oil, gas, power firms hit N4tr (February 20, 2017)
Banks’ lending to oil, gas sector down by 1.33% in Q2, 2017
Banks losing appetite for oil, gas loans (February 26, 2017)
Chinese banks invest $250m in Nigeria’s oil sector (August 15, 2017)
Despite price slump, banks prefer oil sector to manufacturing, agriculture (Aug 28 2017)
Banks lack oil, gas industry knowledge — Kachikwu (August 25, 2017)
Labels: Finance
