In a world of shrinking credit availability, financiers retain a healthy appetite for Sub-Saharan Africa’s hydrocarbons sector, writes Kevin Godier.

African data is telling one of the continent’s best stories for some decades. According to the UN’s 2008 Economic Report for Africa, regional GDP grew by 5.8% last year, and will grow by an average of 6.2% in 2008, powered by the high prices being paid for the continent’s commodities.

Some 14mn barrels per day (bpd) of the world’s 86mn bpd of liquefied hydrocarbon output already comes from Africa, which is seen as likely to account for 30% of the growth in global production by 2010, according to the US-based IHS Energy. Recent IHS studies show that “Africa rises to the top of spending and activity by companies of all sizes,” notes Bob Fryklund, a consultant with the IHS Energy Group.

Zooming in further, it is undoubtedly the West African coastline that constitutes the prime inroad to Sub-Saharan Africa’s oil and gas wealth. East Africa is generally perceived as a hydrocarbons market of the future, where Mozambique and Tanzania are producing gas, and Uganda will initially lead the oil production charge, but for the specialist banks that are looking for top class oil and gas lending assets, markets such as Nigeria, Angola, Equatorial Guinea and Gabon are providing the mainstream opportunities.

As a general rule, rocketing oil prices have seen most West African producers trying to expand their production, at a time when lending margins are rising, making for a vibrant banking market. “The Gulf of Guinea is key and very interesting – we are seeing lots of exciting deals, often smaller projects and especially marginal fields that are coming to fruition,” says Stephen Enderle, senior manager, energy finance, at Standard Bank.

Despite the ongoing problems in global credit markets, and the concomitant effect on syndicated deals: “Africa’s oil and gas sector seems somewhat insulated from the worst concerns,” he points out. “Banks seem to be split into bulls and bears from the liquidity and appetite viewpoints, but any company producing 50,000 to 150,000 bpd should be eminently bankable. Tenors are broadly unaffected, although there has been some increased pricing, as some banks are saying that libor is no longer an accurate reflection of funding costs.”

Africa’s long-standing ‘credit frontier’ status offers some built-in advantages in the current market, adds Sergey Samokhvalov, director in WestLB’s structured commodity finance team: “For Africa, the margins have always been good, in the 2-3-4% over Libor range, so liquidity is not such as critical factor as elsewhere in the world. And aside from the Nigerian market, for which more banks have an appetite, Africa also has a fairly formed group of followers, in particular the French banks,that are comfortable with the higher risks that the continent offers. These names appear in deals again and again, rather than the scenario in Russia, where you see a rotation of participants.”

Nigerian focus

As Africa’s foremost oil market, and one where borrowers come in a range of sizes, Nigeria is the focal point of bank interest in Sub-Saharan Africa, stresses Enderle. “There has been some major progress in Nigeria, and we are looking at a number of transactions which are in prospective and final stages, which should lead to some interesting developments in the third and fourth quarters.”

At the largest end of the borrowing scale is the state-owned Nigerian National Petroleum Corporation (NNPC), which – in partnership with its joint venture partner, Mobil Producing Nigeria (MPN) – tapped a consortium of Nigerian banks for a N26bn ($220mn) financing agreement in late June.

The proceeds of the 25-year deal, which marked the first project financing to be fully sponsored by Nigerian banks, will be used to complete a 40,000 bpd gas-to-liquids (GTL) project at Escravos, known as NGL II, which Nigeria is hoping will reduce its US$4bn a year dependence on imported fuel.

According to NNPC executive director for exploration and production, Chris Ogiewonyi: “the project financing plan is in line with government aspiration to end gas flaring and monetise gas”.

The scheme first went to market in 2004 for a larger US$1.275bn financing facility involving Credit Suisse First Boston and the Overseas Private Investment Corporation (Opic). The new financing facility shows the strength of the Nigerian banks in their own backyard, mirroring their quest for a more active role in a market once dominated by international finance.

“Nigerian banks seem to have an appetite and willingness to back an asset class and an environment that they know and are carving out a growing presence,” says Enderle. “We saw a pool of liquidity in Norway a while ago, which has now moved to Nigeria. For the really big deals, there is likely to be appetite in the international markets. Where the Nigerian banks will be strong is in development risk – and for the smaller, more highly priced deals, where they are on the ground and can acquire a feel for the transaction risks.”

To help pay for an ongoing restructuring process, the NNPC was set to tap both the Nigerian and international capital markets for a facility reputed to be in the US$1bn-$2bn range, as GTR went to press. “People are scrambling for a piece of this,” says a banker with a large European bank, who was unable to detail the NNPC’s financing requirement,or how the NNPC will use the proceeds,due to confidentiality restrictions.

At FCMB Capital Markets, Chuka Mordi, Lagos-based head of infrastructure, notes that: “the oil and gas sector is still replete with decent opportunities which we are aggressively pursuing.” One trend singled out by Mordi is, “the one-year historic appreciation of the naira against a basket of international currencies,” and its concomitant effect upon transactions.

This was seen earlier in 2008, when Nigeria’s largest indigenous oil and gas company Oando raised an innovative US$200mn naira-linked, dollar-denominated loan to help it purchase Nigerian offshore Oil Mining Licenses 125 and 134 from Royal Dutch Shell for US$625.7mn. The two-year bilateral loan, solely arranged and provided by Merrill Lynch International, was fully guaranteed by local banks Zenith Bank and Guaranty Trust Bank, and was both the largest ever naira-linked bilateral loan as well as the first ever equity financing bridge loan made to a Nigerian corporate, according to Oando. It is also seen by the market as the precursor to a larger medium-term non-recourse loan for Oando.

A flow of significant oil-linked transactions for mid-sized exploration and production (E&P) companies working in Nigeria emerged in 2007, including a five-year, US$1.6bn reserves-backed lending (RBL) facility for Addax Petroleum, one of the largest independent oil producers in West Africa. A new two-year, US$450mn-$500mn facility for Addax – lead arranged by BNP Paribas (BNPP), Calyon and Standard Chartered – was in syndication as GTR went to press.

Another independent working in Nigeria, London-listed Afren, secured a US$200mn syndicated reserves-based loan (RBL) loan in 2007, to finance the flagship Okoro Setu project undertaken with its Nigerian partner Amni Petroleum. This recently achieved first oil, in OML 112, on June 12. The deal was “the first time that banks have financed Nigerian development risk, and it has come to fruition”, reports Enderle, whose bank was part of Afren’s debt financing syndicate and also provided US$10mn towards a US$65mn equity placement to facilitate the development. “Afren has done spectacularly well, raising sizeable debt, mezzanine and equity financing from international as well as indigenous sources,” he adds.

Afren has also tapped acquisition financing arranged by BNPP to purchase the assets held by Devon Energy in Angola, Ghana and Côte d’Ivoire.

“It’s a good time to be an African oil company seeking finance – the service provided by the specialist oil and gas banks such as BNPP, Standard Chartered, Standard Bank, Société Générale and Natixis is very good indeed,” claims Erik Jorgensen, chief financial officer at Amni International Petroleum Development Company. “Everything else seems to be tight globally, but oil and gas is still a strong market,” he says, adding that, “healthy debt opportunities are now readily available for companies such as Afren and Amni”.

Angolan market

Meanwhile, rumours of an intended new market raid by Sonangol for fresh funding have underlined Angola’s steadily upward curve in oil output, now standing at around the 2mn bpd mark. Sonangol already has in place some 50 pre-export transactions through which is has borrowed up front against future production, but some reports from the market suggest its most recent US$3bn loan struggled to fly at Libor plus 1. Indeed the Angolan parastatal may have reached a point, say bankers, where its stellar track record is insufficient to hold back the general post sub-prime pressures on liquidity, pricing and structures.

This may not be such a bad thing, says Jan de Laat, Rabobank’s global head of energy. “Rabobank passed on the last Sonangol deal, because the return was too meagre. The name is classic but the competition to lend has seen the Sonangol loan tenors getting longer and the pricing getting thinner, which has not been attractive for us.”

Another banker argues that Sonangol’s relative unattractiveness presents a quandary for a cluster of lenders that know little else in Africa. “For some banks, stepping outside of Sonangol into other African deals is quite a big step, which means that there is slightly smaller number of competitors for all the other deals that Africa is throwing up, in reserve-based lending (RBL) and project finance structured financing.”

He continues: “Some people are saying that Sonangol has no need to return to market with oil prices so high, but I would be very surprised if we don’t them in the market later this year.”

Looking further ahead, Sonangol has already disclosed plans to list, by 2010, on the New York Stock Exchange. It is also advancing with its long-held proposal to build a liquefied natural gas (LNG) project in Angola, which carries an estimated US$4bn development cost. The signals so far are that Sonangol and its partners will bypass the project finance market in favour of equity funding.

Sonangol’s shadow lays long over Angola’s oil and gas financing landscape, but there remains a chance that a couple of independents drilling onshore, including Roc Oil, may require RBL or equity financing at some stage, given the rising cost of the capital expenditure needed to develop new fields.

African plays

Ghana is an obvious West African target market in this respect, as partners in the seemingly world-class Jubilee oilfield such as Anadarko Petroleum, Kosmos Energy and Tullow oil hone their plans to bring oil ashore in the next two years. “Ghana country risk is new to the oil banking world, but everybody is looking at the possibility of financing a very large capital expenditure deal,” says Olivier Serra, head of the upstream oil & gas group, EMEA, at BNPP.

Some companies are tapping equity markets. The privately held Kosmos Energy recently tied up US$500mn of equity financing from Warburg Pincus and Blackstone Capital Partners. In a statement on June 19, Kosmos’ chairman James Musselman said the funding provided the “financial means to pursue aggressively our organic growth strategy and build an exploration and production company of scale in West Africa.”

Financiers are also busy in other West African acreage. In June, Ophir Energy mobilised a £168mn capital raising, primarily from equity sources, to fund exploration of its assets in Equatorial Guinea and Gabon. A separate RBL deal for Equatorial Guinea is “ongoing”, says one banker, while Gabon was the destination for an eight-year, US$600mn RBL transaction tapped in May by Total Gabon. Calyon acted as mandated lead arranger and technical bank for the facility, whose proceeds will be used to finance the re-development of an oil field offshore Gabon.

In Côte d’Ivoire, BNPP and Fortis Bank have recently closed a US$45mn financing for the national oil company Société Nationale d’Opérations Petrolières (Petroci Holding), to cover some of the latter’s US$220mn investment cost in a 400km product pipeline from Abidjan to Bouaké. The pipeline project “is being financed through Petroc’’s operational cash flow and the remaining through domestic and international financing,” notes Frédéric Stehlin, in the energy and utilities team at Fortis Merchant Banking.

East African prospects

By contrast with West Africa, the eastern half of the sub-continent is chiefly a story of production potential. “There are some exciting prospects in East Africa, especially in Uganda, but we view it as more of an equity play at present,” says Standard Bank’s Enderle. “We are seeing more interest in the likes of Tanzania and Mozambique. The growth of the local economies could be an important development for local gas, and make marginal projects more bankable,” he adds.

Rabobank has a distinct strategy in this region, underlines de Laat. “We have sought to take stakes ranging from 39% to 49% in local banks in markets such as Mozambique, Tanzania, Zambia, Rwanda and Uganda, which are all challenging countries, but also likely to be oil and gas producers of the future. These are exciting countries where we have a presence, which can be built into an involvement in oil extraction projects.”