By Rolake Akinkugbe, head of energy and natural resources at FBN Capital |
In March, Saudi Aramco concluded a $10 billion standby revolving credit facility deal with 27 international lenders, the largest of its kind in the Gulf region for years. Even revenue-rich Saudi’s NOC needs large pools of capital from abroad.
African NOCs have big ambitions too. Although they have generally lagged behind other emerging-market counterparts, recent years have seen a spate of African NOCs aspire to expand their asset portfolios, invest outside their home countries, transition into world-class operators and raise finance in non-traditional ways, rather than continue their historical reliance on state coffers.
But ambitions have far outpaced these NOCs’ financial capacity. This challenge is further complicated by their desire for a degree of operational and financial autonomy from the state.
Recent news that the state-owned Ghana National Petroleum Corporation (GNPC) will soon finalise a $400 million loan from international markets was met with a parliamentary challenge – later thrown out by the court – on the NOC’s right to independently seek funding sources for its operations.
Some domestic concerns centred on the proposed use of funds by GNPC, reflecting the degree to which the spending and accounting habits of Africa’s NOCs – from the Nigerian National Petroleum Corporation (NNPC) to Angola’s Sonangol – have come under scrutiny of late.
However, a more pressing concern issue is how these NOCs have funded their participation in their country’s oil and gas sector, and particularly now, where low prices have weakened the state’s revenue base.
Costly regional and global expansion
One crucial thread that could significantly position Africa’s NOCs to compete is their financial autonomy and, consequently, their ability to function as commercial enterprises that control and re-invest their own revenues.
Thus far, Sonangol, appears to have been the most successful in this strategy. It probably also has the most ambitious expansion drive for an African NOC. While counterparts like Petroci (Cote d'Ivoire) and PetroSA (South Africa) have regional assets, these still represent less than 40% of African NOCs with operations outside their own borders.
Sonangol’s reach stretches far beyond Angolan shores. The NOC has in the past bid for and won an oil block in Nineveh province in Iraq, and has partnered with China’s oil corporation to invest in Brazil’s oil sector.
Closer to home, its regional expansions such as São Tomé and Principe, and Gabon – where Sonangol has upstream equity through China Sonangol – have also invited Sonangol to assist in the development of that country’s oil sector.
In its goal to compete strongly against established oil multinationals, Sonangol P&P, the NOC’s upstream arm, is hoping to drill additional exploration wells annually for the next two years, an ambition underpinned by support from Sonangol SGPS, a drilling subsidiary of the Sonangol Group. All these commitments to drill, explore and partner are almost north of $5 billion.
Although less than a third of Africa’s NOCs have upstream assets outside their home countries, maturing fields and declining hydrocarbons production in places like Cameroon and Gabon could prompt more NOCs to invest regionally and further afield to secure new supply sources.
Other African NOCs may find it difficult to easily replicate the Sonangol model as a major upstream player, built as it is on a long history as Angola’s cash cow, and an impressive portfolio of subsidiary listings, and assets even in the non-oil sector. Sonangol’s aggressive joint venture and acquisition strategy spans decades, and has effectively enabled it to consolidate its vertical and horizontal integration as an NOC.
Funding options
For Sonangol, private bank funding has looked less attractive than money from China. Over the next couple of years, China will lend Sonangol $2 billion to develop oil and gas projects. The structure underscores years of partnership between China and Sonangol that has seen Angola export 1.7 million barrels per day to China.
These oil-backed loans were pioneered more than a decade ago, and have become a crucial source of funding for Sonangol. Indeed, Sonangol’s $2.35 billion syndicated oil-backed financing was the largest structured commodity finance deal in history, at the time (2004).
NOCs’ financial resources and autonomy are heavily influenced by oil price swings, which can have a significant impact on their cash inflows and expenditures. With the Angola and Nigeria cases, governments in each country have recently suffered from dwindling oil revenues as global oil benchmarks took a tumble, in some cases by up to 35%.
For NOCs like NNPC, this has impacted their ability to meet equity commitments under joint ventures (JVs) – Nigeria’s government recently reduced NNPC’s funding budget for JVs by 40% for 2015.
Many African NOCs or their subsidiary still heavily subsidise domestic fuel, which will often act as an additional drain on their operating budgets and further squeeze funding channels for upstream investment. Predominantly importing NOCs such as Petroci may need to access additional capital to finance working capital and to invest in production and distribution infrastructure as they attempt to meet growing demand.
African NOCs have also sought loans to finance farm-ins – largely in exercise of pre-emptive rights – and then sell-on stakes to international oil companies (IOCs) or other NOCs with the requisite technical expertise.
The funding options available to NOCs will also depend on a host of other factors; strong domestic demand for oil and gas, and the extent of proven reserves in the NOC’s holdings.
A decade ago, the West Africa Growth Fund’s (WAGF) successful $2.5 million income bond financing of Petroci’s Foxtrot gas field – estimated to hold 1,502 billion cubic feet in reserves – was driven by strong local demand for natural gas in Cote d’Ivoire, and the substantial proven reserves in the Foxtrot field, which were independently verified by several firms.
Crucially, payment default risk was largely mitigated because the pay structures of the operating agreement also involved the sale of Petroci’s oil share to generate revenue in servicing the debt. Although external factors, such as oil price volatility, could have trumped the deal, bullish oil prices in that period eventually contributed to higher revenues for Petroci. WAGF actually returned close to five-times its invested capital.
Learning from peers
Nevertheless, compared with the likes of NOCs in Asia-Pacific – Petronas (Malaysia), ONGC (India), KNOC (Korea) and PTT (Philippines) – Africa’s NOCs still lag behind, not just in the domestic field operators ranks but in the global expansion field.
But the reasons for this limitation are all too familiar. The constraints facing Africa’s NOCs range from a dearth in human capacity to a lack of financial resources, and in this day and age, limited deep-water experience and technical experience, which affects even the more experienced NOCs like Sonangol and Algeria’s Sonatrach.
Recruiting and retaining qualified workforces remain a perennial challenge. Many African NOCs are also facing infrastructure and development obsolescence, further hampered by the slow pace of their reform.
Finding and using the appropriate technology needed to move fields from exploration to development will also be difficult for the less-experienced NOCs in the absence of strategic partnerships and alliances. Some of these new partnerships may well be with NOCs from elsewhere (e. StatoilHydro, Chinese NOCs, Petrobras, Petronas). IOCs will also remain attractive venture partners, which offer access to capital and which can also offer the most progressive and modern oil recovery techniques.
Transparency and regulatory imperatives turn the tide
The ambition to raise funds commercially will open up NOCs to greater scrutiny and incur greater compliance costs. Current trends, however, suggest that the tide has to turn, driven by regulation and financial necessity.
Reform of the governance structures and administrative process within NOCs will also send a strong signal to capital markets and investors keen on tapping into NOCs’ unrivalled reserves base – NOCs control a large portion of the world’s remaining conventional hydrocarbons.
While African NOCs account for an average of 20% of total production relative to IOCs across the continent, they account for more than 50% of producing countries’ reserves base, relative to their private-sector counterparts.
NOCs like GNPC and NNPC will also require this type of re-positioning and that permanently severs their regulatory functions from their operational functions, while simultaneously ending any structural indebtedness to government and thus dependence on the state’s budget.
To be sure, a fundamental obstacle to the upstream ambitions of entities like GNPC and NNPC, and other similar African NOCs, has been the distraction of playing a dual, and often conflicting, regulatory role. Ghana has attempted to overcome this hurdle by creating an upstream E&P operating arm, called Explorco. Time will tell if Explorco can loosen the apron strings.
While we expect that GNPC will, at least in the short term, continue to rely on the state’s budget process for its capitalisation, operational and direct expenditures, a crucial factor that is likely to determine the way GNPC will eventually operate will be whether it can resolve the issue of parliamentary approval to engage in debt-funding discussions.
Evolve or die
Without a clear path to funding, even experienced African NOCs are in the very near-term likely to remain largely focused on overseeing licensing for E&P and managing their oil sectors, whilst leaving deep-water drilling and complex technical operations to IOCs and other foreign NOCs.
In a marked departure from any of the NNPC’s current JVs, the Nigeria Liquefied Natural Gas (NLNG) company has become one of the most successful operators in the oil sector.
Although it remains a special case, given its majority private ownership – led by IOCs (NNPC owns 49% of NLNG), the arrangements that led to its establishment perhaps provide a future reference point for Africa’s NOCs on the merits of financial and operational autonomy.
Implied in the NLNG example is a more radical approach underpinning an idea currently being touted in the Nigerian example. That is to have NNPC divest more of its equity in JVs to the private sector. It would free up more capital. However, the perceived strategic implications of such a move are subject of discussion for another chapter.
Rolake Akinkugbe is head of energy and natural resources at FBN Capital, Lagos, Nigeria. |
ABOUT FBN CAPITAL
FBN Capital is the wholly owned Investment Banking and Asset Management subsidiary of FBN Holdings in Nigeria, providing financial solutions to a broad range of high net worth clients, institutions and governments. FBN Capital offers financial solutions through five key divisions: Investment Banking; Markets; Trust and Agency Services; Asset Management; and Alternative Investments.
FOLLOW FBN CAPITAL
You can follow FBN Capital on twitter @FBNCapital
Follow us on LinkedIn
Like us on Facebook
Follow us on Google+