Africa: Local financing of oil and gas industry

Oil and gas industry is large capital intensive that requires enormous resources for its finance, management and operation. The inability of local banks inNigeria and south of Sahara to finance massive oil and gas projects are not news anymore. The capitalization of banks in Africa is quite low to engage in large capital financing of oil and gas. But gradually things are changing and local banks are beginning to engage in participation of underwriting and financing   of oil and gas projects through the leverage of consortium loans.

It was widely  reported that, “la consortium of eight Nigerian banks led by UBA, as the lead bank, are in a $265million supplementary refinancing deal for ExxonMobil and the Nigerian National Petroleum Corporation (NNPC). The banks are United Bank for Africa Plc, Oceanic Bank, Standard Chartered Bank, Skye Bank, Zenith Bank, Bank PHB, Access Bank and Union Bank Plc. The deal, which was closed in London last week, marked a further sign of the increasing leadership role of Nigerian banks in oil and gas financing, where until recently they had largely played a more limited role.”

Some hydrocarbon companies with publicly traded stocks are issuing more stocks in order to raise capital in the local capital market. The growing oil and gas industries are raising money at the stock market. The West African energy giant, Oando Plc of Nigeria is set to raise the sum of 21 billion naira ($140 million) by selling shares in the capital market. The capital raised will be used to finance ventures in energy sector and “refinancing the acquisition of upstream assets, providing operational capital to fund the operation of the upstream business, and short and medium term investment in its gas and power business segment.” Oando Plc headquartered in Lagos, Nigeria is the biggest indigenous energy firm in Nigeria that market oil products and involve in oil exploration at its acquired upstream assets, the segment that will receive the largest chunk of the proposed capital infusion. Oando Plc will raise the capital “through a Right Issue of 301,694,878 ordinary shares of 50 kobo each at N70.00 per share on the basis of one 1 new ordinary share for every 3 ordinary shares of 50 kobo each held as at the close of business on Friday, 18 December 2009.” Two powerful and resourceful companies in the capital market: Vetiva Capital Management Ltd. and Stanbic IBTC Bank Plc will participate in the selling of the shares to raise the proposed capital.

Most of financing for the oil and gas projects are from international financial institutions particularly World Bank and International financial corporation (IFC). The Chad’s oil and gas industry was partially financed by the World Bank. But also the continental African Development Bank (ADB) is playing important role in the financing scheme of African based industries. Hasdrubal Oil and Gas Field Development Project in Tunisia was an example of ADB participation as a major player in financing the industry at the tune of $150 million. It was a beginning of local institution flexing its financial muscle in the African based projects.

“IFC has approved an equity investment of up to US$27.3 million in the Lion oil field and Panthere gas field offshore Cote d’Ivoire. The fields are located in Block CI-11, the most significant recent oil and gas discovery in Cote d’Ivoire, and their development is considered one of the country’s highest economic priorities. Production of crude oil from the Lion oil field will help Cote d’Ivoire become self-sufficient in its domestic energy needs. Gas production will be used for power generation in the associated power project, in which IFC is also an investor.”

Another African based financial institution, The Africa Finance Corporation (AFC) is another major player in financing of oil and gas industry in Africa. “AFC is an African-led international financial institution whose mission is to improve regional economies by proactively assisting in the development and financing of infrastructure, industrial and other assets across the African continent.”

AFC is focused on financing and assisting industries in Africa including oil and gas industry. In the 1990s:“The Africa Finance Corporation (AFC) has made an equity investment of $20 million in Seven Energy, an indigenous oil and gas exploration and production firm focused on the monetisation of Nigeria’s discovered but undeveloped gas reserves. The funds are part of a $200 million equity and debt raise by Seven Energy, and will be used for the development of reserves in the rich oil and gas-producing region of Nigeria. This unique transaction is geared towards the domestic use of gas, including power generation and supply to captive industrial clusters.”

“AFC is a lead investor in the US$240 million African-led Main-One submarine fibre optic cable project, which will provide much needed telecommunications capacity in West Africa. It is also the main African participant in a seven-year US$750 million syndicated reserves based lending facility to develop the landmark Ghanaian Jubilee Oil Field—one of West Africa’s largest deepwater offshore developments in over decade .The Africa Finance Corporation (AFC) has made an equity investment of $20 million in Seven Energy, an indigenous oil and gas exploration and production firm focused on the monetisation of Nigeria’s discovered but undeveloped gas reserves. The funds are part of a $200 million equity and debt raise by Seven Energy, and will be used for the development of reserves in the rich oil and gas-producing region of Nigeria. This unique transaction is geared towards the domestic use of gas, including power generation and supply to captive industrial clusters.”

The lack of large capital financing is a major obstacle for oil and gas industry in Africa. For the industry to continue to be viable and buoyant, ways must be devised for readily availability of the capital in local market. African capital markets are improving and continue to be relevant in the oil and gas industry. Banks in the south of Sahara are now selling bonds to international investors and with that come a tremendous growth on the balance sheet. As the indigenous banks grow they can be able to acquire resources and liquidity for capitalization and financing of oil and gas industry