A year ago Nigeria’s oil and gas industry would have struggled to raise any money in the local debt market. The banking sector took a collective battering in 2009 when nine banks failed, some of them national champions, forcing a humiliating $4 billion gov­ern­ment bail­out. Now a brisk $1.1 billion debt financing for Nigeria’s state oil com­pany NNPC and Exxon Mobil’s natur­al gas liquids project NGL2 shows that signs of life and liquidity returning to the country’s pro­ject finance market. It’s a rare bright spot in a sector where the deal pipeline has all but ground to a halt ahead of elections in 2011 and as a Petroleum Industry Bill remains stalled.

NGL2 has local fans

Lead arranger Standard Chartered and Nigeria’s United Bank for Africa (UBA) expect bids in by mid-December for NGL2, in time for a year-end close on the seven-year deal, with pricing peg­ged around 350bp above Libor. Spon­sor ExxonMobil is providing 51% of the total, with the rest coming from international and local banks for a project that will fund expanding facilities connected to Exxon’s Qua Iboe energy complex in Akwa Ibom state in the Niger Delta, including new oil and gas wells.

The deal will also refinance the final portion of a three-year $265 million term loan that the sponsors put in place in 2009 to cover completion costs of the expansion, say bankers close to the deal. The NGL2 plant processes around 950 cubic feet per day of rich gas and produces 45,000 barrels per day (bpd) of natural gas liquids for fractionation into butane, propane and pentanes.

Although international banks will finance the bulk of the project, local banks are able to compete on margin and tenor, and are expected to soak up an estimated $200 mil­lion between them. Lagos-based bankers say it’s a sought after deal amongst top-tier names including First Bank, Guaranty Trust, Stanbic IBTC, the Nigeria unit of South Africa’s Standard Bank, and Zenith Bank, since local lenders now have repaired balance sheets and renewed naira and dollar liquidity.

The start of a domestic independent sector

These banks will also benefit from a steady pipeline of small upstream deals that are within their funding reach as international oil companies start to hand over their fallow, shallow and onshore acerage. They are set to bene­fit from a shift towards local content, outlined both in the new petroleum bill, which seeks to end the major oil groups’ grip on 90% of Nigeria’s re­serves, in favour of newcomers and independents, and in Nigeria’s Local Content Bill, passed in April, which gives domestic firms priority in the awarding of oil blocks. The bonanza, which could see local groups accessing an estimated 120 fallow fields off Nigeria, holding up to 120 million barrels of oil, has already begun.

Last March independent oil and gas producer Afren closed a $450 million reserve-based debt facility for the development of its offshore Ebok field. BNP, Natixis and Credit Agricole led the five-year loan, repayable semi-annually with a margin of between 450bp and 550bp over Libor. The initial deal is for $150 million but the loan can be increased to the full amount to fund any subsequent phases of the Ebok field, in which Afren bought a stake in 2007. Exxon discovered the field in 1968 and thought it had a capacity of 25 million barrels of oil. That is now at 105 million with an upside of 600 million barrels.

A flurry of local interest has also centred around oil giant Shell’s decision to sell three onshore and shallow water assets located in the northwestern part of the Niger Delta that includes 30 wells, with a production capacity of around 50,000 barrels of oil equivalent per day. The Shell sale was the spur for the formation of a consortium of indigenous groups seeking both new financing and to refinance existing deals from the local market, say Lagos bankers.

But bank debt won’t come cheap for Nigeria’s new players. International banks are increasingly wary of financ­ing onshore and shallow water assets in the Nigeria Delta, where the in­surgency has pushed projects offshore and pricing skywards. Local banks are less worried about the risk but spon­sors will still have to pay a high price for liquidity. It could push prices up to between 700-800bp over Libor, pre­dicts one banker. Tenors beyond seven years are also a stretch, given Nigeria’s banks’ ongoing struggle to match liabilities with long-term borrowing themselves.

Pausing for breath but LNG looks promising

Upstream and development financing activity for small indigenous operators may have picked up, but demand from international oil companies has all but ground to a halt. The big groups have stalled financings on projects until the much-anticipated petroleum bill is passed, when uncertainty around the future regulatory and tax landscape should clear up. Shell says it has some $40 billion worth of potential investment in deepwater oil projects in Nigeria on hold and UN figures show foreign direct investment, mostly in the petroleum sector, sank to $5.85 billion in 2009 from $13.96 billion in 2006. Political uncertainties ahead of next year’s election have acted as another brake, as project developers hold fire lest the investment landscape changes again. “The Nigerian government is the biggest player in the oil and gas industry,” laments one banker.

Bankers are looking to a future pipeline in 2011/2012 when the bill should have passed and would stimulate a steady deal pipeline both from internationals rejuvenating mothballed projects, and Nigeria’s reformed NNPC coming to the market in search of debt. Under the proposed legislation NNPC will be stripped down to a profit-driven firm that can fund its own share of the joint ventures through its own earnings and by raising money on the capital markets.

While greenfield programmes are on hold the market has turned its focus to brownfield sites. Bankers hope the NGL2 project will be followed by more loans from the programme and by a significant new satellite financing, the $4 billion Satellite 2 oil field financing. The first Satellite field closed in 2005, with a margin of below 200bp. It directly funded three new oil fields with a seven-year uncovered deal split into a $270 million international loan, a $90 million local bank loan and a $250 million direct loan from ExxonMobil.

Other deals in the pipeline include Nigeria LNG, or NLNG, a joint venture that liquefies natural gas for export, and whose shareholders includ NNPC, Shell, Total and Eni, which is reportedly approaching international banks in search of $2 billion in financing. Standard Char­tered and UBA are work­ing on the deal, with quotes for tenors put bet­ween 7 to 10 years, one banker said. It is believed that part of the new loan will be used for upstream gas gather­ing facilities to ensure gas sup­plies to the existing six trains. The $1 billion project loan from 2002 on the asset has nearly been repaid.

There is still no final investment decision on the $3 billion Brass LNG venture, which has suffered long delays since the joint venture between the NNPC, Agip, ConocoPhillips and Total got off the ground in 2004. The pro­ject, which is designed to export 10 mil­lion tonnes of LNG per year from 2012, has been hit by violence and in­stability in the Niger region and changes to the tax regime. LNG liquefaction plants in Nigeria have also suffered from political prevarication and a shift in energy policy towards diverting gas away from export and towards inter­nal use to feed Nigeria’s own desperate power needs.

Still, this shift made local gas oper­ators more confident in their plans to invest and borrow. AccuGas, a wholly owned subsidiary of Seven Energy International, which trades as Septa Energy in Nigeria and is a first-mover in the domestic gas market, signed a $70 million eight-year project finance facility with Stanbic IBTC Bank and UBA in June. Priced at 800bp over Libor, the facility finances AccuGas’s pipeline project in Akwa Ibom State and includes the construction of a new 65km pipeline and a gas and liquids processing facility. It’s the first phase in Septa Energy’s plans to use the Niger Delta’s gas reserves to meet the growing energy demand from power plants and industrial users in the region.

The developments constitute good news, in that Nigeria’s banks are again putting their balance sheets to work for the right projects. Their appetite for NGL2 illustrates how the banking crisis weeded out weaker players, allowing a flight to quality. In fact, Lagos executives say banks’ ability and willingness to lend has never been as much of a problem as Nigeria’s shifting political terrain and a desperate need for reform. The stalled bill is their main hope, but until it is passed, the industry remains in a state of limbo. n