West Africa’s oil windfalls have piqued the interest of international investors; none more so than Asian banks and firms, who appear to be cutting the best deals. Shannon Manders reports.
With global energy needs growing in leaps and bounds, and sanctions on Iran reducing supply, West Africa has been thrown into the international limelight. Although the region’s oil production constitutes a relatively small share of the global market – at 6% or 65,043 million barrels last year – new finds are happening thick and fast.
US company Anadarko Petroleum Corporation (APC) discovered a second oil field off the Sierra Leone coast in February – the same month that a new find was made offshore Liberia. Just a few weeks later Tullow Oil confirmed an oil strike at the Enyenra-4a appraisal well off the coast of Ghana.
Existing oilfields also continue to yield rewards, and in February Kosmos Energy raised a US$67mn senior loan facility from the IFC to finance activities at Ghana’s celebrated Jubilee field.
The promise of increased production has highlighted the region’s importance in the bigger oil production picture and is paving the way for international investment.
“The global crude price environment is very healthy at the moment; creating a number of investment incentives in the industry,” says Rolake Akinkugbe, head of energy research at Ecobank.
“The appetite for West African oil and gas is quite bullish. And it’s not just Nigeria and the Gulf of Guinea. We’re seeing transactions as far as Gambia, where the government this year issued a licence to US company Camac Energy to explore for hydrocarbons offshore. We’ve seen it in Guinea as well,” she adds.
Large oil traders continue to be lured to West Africa’s coast: in April, Lukoil said that it would invest some US$100mn on oil exploration in Sierra Leone. That same month the Russian oil company announced that it had boosted its presence in West Africa with the opening of an operating office in Freetown.
The interest of major oil companies aside, for now West Africa’s oil sector is looking eastwards for the main source of its financial backing. And Ghana is leading the way with its new relationship with China.
The China Development Bank for one has secured a lucrative agreement with the Ghanaian government; state-owned petrol company Sinopec has been lined up to build the infrastructure for a new gas plant in Ghana; and Chinese firm Unipec Asia has just signed an offtake agreement with the Ghana National Petroleum Corporation (GNPC).
While Asia cashes in on these significant deals, there is a ripple of fear that its institutions will crowd out commercial banks that have lending appetite and can play a role in the backing of crude exports.
Commercial banks have historically been more involved in financing the import of oil products into Africa. But in terms of crude exports out of the continent, they are still being left out in the cold.
China’s interest in the continent is unlikely to encourage banks to get stuck in on raising debt for exploration and production companies. “With a big entity from China doing deals [with Ghana], I don’t know whether commercial banks like us would follow that deal,” says a trade finance banker at a regional bank involved in the sector.
What’s more, many are questioning the impact that this support from the East will have on West Africa’s long-term success.
Asia’s growing interest
In 2010, the Ghana National Petroleum Corporation (GNPC) launched its debut pre-export finance facility, led by Deutsche Bank. But the mandate for the US$500mn facility collapsed a while later, leading to claims that the country is afraid of borrowing money from the international market.
Despite this apparent hesitancy, and perhaps due to better terms, in August last year, the Ghanaian government entered into a US$3bn master facility agreement (MFA) with the China Development Bank to finance various infrastructural projects in the West African country.
Ghana’s vice-president John Dramani Mahama told journalists ahead of a visit to Beijing in April that Ghana finds it “easier” to go to BRIC countries, including China, for its investment needs. He reportedly referred to other international sources of finance as being “quite tiresome” and coming with many strings attached.
The China Development Bank credit facility consists of two US$1.5bn tranches, each of which has different terms. The first has a five-year grace period, a 15-year repayment period, an interest rate of six-month Libor, plus a margin of 2.95%. The second tranche’s repayment period is 10 years, and the interest rate is six-month Libor plus a 2.28% margin.
The credit is reportedly secured by a petroleum offtake agreement and escrow account – the same model that China has implemented in other Africa countries for many years.
Earlier this year an offtake agreement was signed by the Ghana National Petroleum Company (GNPC) and Unipec Asia which will require the GNPC to supply 13,000 barrels of jubilee oil a day until the loan amount is fully paid. There is much controversy surrounding the deal terms, and Ghanaian government leaders have argued that the agreement may be detrimental to the country’s economy in the long run.
Points of contention include the tenor of the deal (which according to the 2011 Petroleum Management Revenue Act should be no longer than 10 years), and the fact that the cost of a barrel of oil has been pegged at a low figure (just US$85 per barrel). A Ghanaian MP has estimated that Ghana will end up paying as much as US$8.5bn for the US$3bn loan.
Nevertheless, many say that a country like Ghana is reliant on a development partner to fund initial capital – and that the sector remains difficult to fund until this is in place.
“Once this has come on line, it will be a spur to the industry,” says Nana Ampofo, partner and co-founder of Songhai Advisory.
Nigeria too is now reportedly seeking a loan from China to fund infrastructural projects. The US$3bn facility is part of a multi-billion dollar borrowing proposal that Nigeria’s president is asking the national assembly to approve. It is said to be negotiated at a 3% interest rate.
Plus, the Nigerian National Petroleum Corporation (NNPC) and the Nigerian Liquefied Natural Gas (NLNG) are currently in the market looking for commercial banks to mandate on a deal. Both companies are looking to raise upwards of US$1bn.
Despite the debate surrounding Asia’s strategic interest in West Africa, it can be argued that the region would be at a loss without financial assistance from the East.
The biggest financing challenge faced by West African oil producers is US dollar liquidity brought about by a capital squeeze on traditional lenders, mainly European banks. With banks having to rationalise their businesses, it seems likely that not all will maintain their focus on the geography and range of producers.
“We’ve seen a trend over the last few years of banks moving away from smaller producers in favour of the big players and that trend is unlikely to reverse in the current market,” a structured finance head at a European bank tells GTR.
This will inevitably impact on the share price of smaller players who will need to sell up earlier in the cycle. “For example, if five years ago a small producer could get a reserve-based lending deal, then they could fund the development and then sell up.
Now they will need to sell up to someone who can afford to fund the development,” says GTR’s source.
Regional banks are increasing their activity in financing downstream imports and have been stepping in to fill the gap left by the retreating European institutions.
Whether this gap is being filled as quickly as it is developing remains to be seen as African banks continue to struggle with their balance sheets, despite a healthy appetite for West African risk.
It is feared that longer term, as the European banks pull back, so the skills and experience they’ve built up over the last 15 – 20 years will leak away.
One senior trade financier explains to GTR that new players will not be able to institutionalise such know-how quick enough. “This is not a cyclical issue; it’s more of a paradigm shift. There will be unforeseen consequences for many people who are currently wholly unaware of what’s coming,” he says, adding that this will become a real problem in the wider emerging markets natural resources sector.
Reduced financing alone is not the only problem that plagues investment in West Africa’s oil sector.
It is widely believed that the pace of development of the legal and regulatory environment around much of the oil industry in West Africa is lagging behind the pace of discoveries.
As such, although the global economic environment from a crude price point of view is sound, this needs to be underpinned by a sound investment framework for countries and companies that are entering into the industry.
“That’s a real challenge for the companies and the countries,” says Ecobank’s head of energy research, Rolake Akinkugbe.
“Potential new future producers like Liberia and Sierra Leone don’t quite have the legal and regulatory framework in place yet. These countries are going to have to start dealing with things like licensing rounds, how they’re going to deal with the whole structure around fiscal regimes, tax, and so forth. I think they will need to set things in motion quickly,” she adds.
Promises of economic development, along with a lure of easy money, has prompted governments to encourage the rapid growth of an industry in a regulatory vacuum.
“There is often little transparency over tenders, the granting of petroleum concessions or selection of contractors,” says Adrian Lewers, head of political risk and contingency at Beazley.
For all its stated good intentions to put back into the community, “in some countries, the oil sector appears beset by corruption and illegality, with among other irregularities ‘lobbying fees’ paid to members of parliament to facilitate the passage of oil contracts,” he adds.
Oil windfalls have not translated into investment in the region’s deteriorating infrastructure, which has created uncertainty for banks and investors alike.
“The upstream oil industry has traditionally been seen as an enclave industry, where the wider economy doesn’t feel the benefit. I think the real challenge – and one which can provide new investment opportunities – is infrastructure,” says Ecobank’s Akinkugbe. “The challenge for that is financing. Which is why the region has been looking eastwards.”
West Africa’s transport costs are amongst the highest in the world, due, some believe, to a lack of competition in the trucking sector. Road harassment – corruption and delays at police and customs checkpoints along important transport corridors – is also a factor, explains Lewers.
Maritime security – or the lack thereof – has also become a major area of concern for West Africa, given the increase in piracy and armed attacks on the oil industry.
According to a January report by the International Maritime Bureau (IMB), Nigeria and Benin continue to be piracy hotspots. While 10 attacks were reported in Nigeria last year, the maritime watchdog believes that this is not representative of the real threat of piracy in Nigeria. “Underreporting of attacks in Nigeria continues to be a cause for concern,” the IMB said.
As many as 20 incidents against tankers – eight of which were hijacked and had cargoes stolen – occurred in 2011.
Some regional governments in West Africa are looking to cooperate with one another to stem the threats to their oil production. In September last year, Benin and Nigeria launched joint sea patrols to prevent pirates from attacking ships. Threats to oil production are a concern to both government and investors.
Nigeria faces additional problems in the form of illegal oil bunkering; it is estimated that the country loses as much as US$5bn annually to the unlawful activity in the Niger Delta region.
In February the Movement for the Emancipation of the Niger Delta (Mend) attacked and destroyed a crude oil trunk line belonging to Agip, Italy’s oil multinational subsidiary.
Special intelligence company Exclusive Analysis tells GTR that Mend militants are likely to target energy firms that are seen as government allies.
“Capability is likely to be limited to small-scale attacks on targets such as pipelines and telecommunication masts. Trunk lines and manifolds in the Delta creeks, particularly those of oil parastatal NNPC, Agip and Shell, are most at risk,” says Natznet Tesfay, head of Africa forecasting at Exclusive Analysis.
The country is expected to intensify security operations in the Niger Delta, and it is believed that plans to do so will mitigate the risks of a full-scale militant activity.
“In Nigeria’s 2012 budget, the proposed US$5.67bn for security will likely fund efforts to ensure the government’s target oil production rate of 2.48 million barrels per day,” says Tesfay.
It is hoped that with an increase in revenue on the back of exploration, some of the challenges in the region will be overcome. Until then, it remains to be seen if the rush to Africa will improve the world’s energy security.