In Nigeria’s oil and gas sector a big deal has finally come good and another clutch of projects are slowly incubating. Lenders and sponsors have grown weary of waiting for Nigeria’s Petroleum Industry Bill to create a market, though they have long viewed it as the solution to the funding crisis in the industry. Signs of progress, like oil giant Exxon Mobil renewing its licence last February and state oil firm Nigerian National Petroleum Corporation’s search for funding, hint that the market may finally be showing signs of life.

Locally content

Exxon Mobil and NNPC’s $1.4 billion reserve-based financing, which funds additional production at their joint venture’s various oil wells, awaits final signatures before its disbursement. It’s a deal that is unusual on two counts. On the one hand French banks, traditional stalwarts in the sector, but now hit by crisis in the Eurozone and struggling to raise dollars, are absent. On the other, Nigerian banks, increasingly clamouring to participate in these kinds of deals, have jumped in with unprecedented enthusiasm.

International lenders include bookrunner Standard Chartered, HSBC, Barclays Absa and Nedbank while the local cohort comprises Nigeria’s strongest names like UBA, Stanbic IBTC, Ecobank and Fidelity, on a deal with a seven-year tenor. Pricing on the deal is “a touch higher, but not significantly” and in-line with “an upward trend”. Bankers call this a correction from historically low margins and a better reflection of dollar scarcity. French banks’ absence helped nudge the average cost of funds higher but the standing of the sponsor and the reserve-based deal meant the deal’s risk profile remained low.

And it is on this point that Nigerian bank presence is truly noteworthy. Local banks have traditionally shied away from upstream reserve-based lending, leaving it to be the preserve of international banks with experience of the product elsewhere. But Nigerian lenders have gained confidence from lending against onshore reserves that local groups bought from oil major Shell. “This deal really shows that the split between local and international funding of projects is starting to get a little more balanced,” said one banker. Local bank appetite has also grown sharper because of the dearth of deals last year – not all the Shell deals have closed yet and elections as well as ongoing uncertainty around the petroleum bill have clogged the pipeline.

French banks are not likely to be absent from the Nigerian market for long and may be able to bid by using Eurodollar funding structures. However, edging their way back in may be tougher, since other lenders, especially liquid Chinese banks, have seized the opportunity created by the dip in appetite. European banks are still more comfortable than Chinese lenders with Nigerian oil and gas sector risk and most Chinese investment in Nigeria is still at the government-to-government level.

Nonetheless, China is increasingly influential in the sector via another route. The crisis in Europe means that many non-European banks active in Africa, which have traditionally funded themselves through European lenders and then lent these funds on to local projects, are turning east for cheaper money. Standard Bank, 20% owned by China’s ICBC Bank, is “incredibly competitive”, claims one local banker, because of its access to cheap Chinese finance.

Onshore education

The scramble to support emerging oil groups buying Shell’s onshore assets may have emboldened Nigeria’s local banks but it hasn’t been without its hiccups. Some of the six-odd disposals have gone through without a hitch. In the first financing of an upstream operation by local banks, First City Monument Bank and Stanbic IBTC structured and financed First Hydrocarbon Nigeria’s purchase of one of the Shell disposals with a $280 million loan. FHN, 45% owned by UK-listed Afren, will operate the block, alongside the producing arm of NNPC, which holds the majority stake.

But the sale of the biggest block, OML 30, to indigenous firm Conoil, controlled by Nigerian billionaire Mike Adenuga, has not yet closed. The market, suggests one banker, failed to grasp whether the acquiring companies or NNPC would actually operate the oil blocks. “The private sector expected to step into Shell’s shoes and be in the driving seat but the government believes it should have first right of refusal,” says this banker.

The issue does not seem to have caused widespread alarm amongst the banks lending to this emerging group of buyers. They point to Ghana, where banks lent to Kosmos Energy against its Jubilee field even though the UK’s Tullow Oil operates the field, and last year increased its stake in the field to 35%. “It’s not unusual to not have the owner operating the block – lending should not be dependent on this,” said the banker, adding the process has been a valuable learning curve and that a compromise is imminent.

In fact there is widespread optimism that the Shell disposals will pave the way for a larger number of divestments. Shell’s assets sparked demand from a variety of bidders, from international independents to sovereign wealth funds, all vying to hook up with local companies to buy the assets. The Shell deals may encourage Nigeria’s other oil majors to do something similar with their onshore assets, sparking a sell-off that could be worth between $10-$20 billion. “There was demand that, in our observation, has not gone away,” said one banker.

And again, local banks will be first to lend to any new indigenous operators. Nigeria’s Central Bank has ruled that banks have to separate their investment banking business from their retail arms by May. Rather than view the latest legislation, part of a raft of reforms to the banking sector, as a brake on growth, bankers hope it will spur the development of project finance even further. “It will free us up to do more; we can raise money independently and pursue ventures that our retail arms wouldn’t have sanctioned,” says one Lagos banker. It could also see more local banks, freed from the constraints of their retail operations, able to pay higher salaries to attract top talent – the area they say that holds them back most. Local banks still lack the skills to take on the more lucrative advisory or structuring roles and only come in on syndication.

If local banks leap at the chance to participate in any future disposals, the borrowers will be a new wave of independent oil producers. Demand for debt from the likes of Tullow, Kosmos and Afren, with both producing assets and exploration prospects, is proving a rich seam for bankers. Graduating from oil explorers to producers has led to “a progression in their capital structure”, according to one banker, who notes that initial funding for these groups came in as equity, graduated to project finance, reserve-based lending, pre-export finance, and finally bonds. “Once they move into debt, one product replaces the previous one. From where we sit this is quite a buoyant end of the market. We had a good 2011 and look all set for an even better 2012”

Major discoveries

But it’s not just the private sector coming into the market. Lagos sources say that NNPC is looking to raise $1.5 billion in pre-export finance and its upstream subsidiary, the Nigerian Petroleum Development Company is looking for $700-$800 million to develop assets and boost production. Part of the push has come as oil majors finally begin to renew licences with the government that expired as far back as 2008. After months of negotiating, Exxon Mobil has just signed a new 20-year licence and Eni, Shell and Chevron, all with outstanding shallow-water or onshore oil licenses to renew, will be next. It means the NNPC has to raise funds for its joint ventures with these companies.

Liquefied natural gas got a recent boost with a new deal to process liquids from gas fields for the export market. Nigeria Liquefied Natural Gas Company, NLNG, plans to raise $1 billion internationally to buy six LNG carrier ships and is appointing financial advisers on the deal. The loan will fund the expansion of NLNG’s shipping subsidiary Bonny Gas Transport Limited, which currently has 24 LNG carriers.

The borrower has long-term supply contracts with buyers in Italy, Spain, Turkey, Portugal and France and also sells on the spot market. Market appetite for LNG was evident in last year’s Exxon Mobil and NNPC NGL (II) refinancing where sponsors and existing lenders amended an existing financing to allow for an addition of $1.1 billion in new debt facilities from international and Nigerian commercial banks. The deal underscored the robust appetite from both Nigerian and international lenders – both tranches were oversubscribed.

Brass Liquefied Natural Gas, whose shareholders include majors Eni, ConocoPhillips and Total, opened bids for engineering, procurement and construction contracts in 2011. This project, to build an $8 billion liquefied natural gas project at Brass in Bayelsa State, got a recent boost when NNPC reduced its stake to 30% from 49% by selling stakes to LNG Japan, Itochu Corporation, and a joint venture between Nigeria’s Sahara Energy and Sempra Energy of the US. NNPC has lined up a $2 billion loan from a Japanese group of lenders, led by Japan Bank for International Co-operation, to help fund its share of the project.

Piping problems

The dealflow is also poised to pick up around gas infrastructure, as projects to finance pipelines to carry gas to new industrial parks come to fruition. Here indigenous companies like Oando and Septa Energy, the Nigerian subsidiary of Seven Energy, are leading the way. Oando probably has the hardest job. “Oando has borrowed a lot in the past and has a highly leveraged balance sheet; the company is considering options to restructure and finance off-balance sheet,” said one Lagos banker.

In 2010 Septa, through its affiliate AccuGas, closed on the first phase of a pipeline that brings the Niger Delta’s gas reserves to business users and power plants. AccuGas showed that projects can be bankable if they benefit from long-term offtake agreements stretching beyond the life of a loan, gas prices that escalate over time, and – crucially – the willingness of state governments to provide guarantees.

Project sponsors say gauging the creditworthiness of customers is a challenge and gas fields have to be big, and close enough to market, to ensure a profit. Putting infrastructure into the Niger Delta is still a challenge – AccuGas has green, amber and red zones that outline where it can invest. Unsurprisingly bank appetite for gas pipeline projects that feed industrial zones is stronger than for assets that supply power stations and the consumer market. Here, lenders fear that the price set by the government won’t guarantee a commercial rate of return and worry about how operators will best collect payments from consumers.

Lenders and project sponsors in Nigeria’s oil and gas sector have to negotiate terrorist attacks, ongoing regulatory uncertainty and all the challenges of working with the NNPC. But when a good project comes along, bank appetite for the sector is undiminished. It may add to the frustration and impatience around Nigeria’s oil and gas sector, but it also shows the potential.