Recently, there are concerns that foreign investors are unwilling to fund African oil and gas projects.

In some cases, the investors have completely stopped the fund injections into the industry. This sounds very discouraging for stakeholders in the African oil and gas industry. This could pose a major challenge to African economies that rely on oil and gas revenues.

It is time for Africans to finance the African economies. Banks, consulting firms, venture capital and private equity firms originating from Africa need to collaborate to find funding solutions for the Africa economies.

I see it as good news as African experts will finally be in vintage positions to fund and manage the economies in Africa. Let's turn this funding challenge into opportunities for financial sector professionals across the continent.

However, the greater funding challenge is that African banks are also losing confidence in financing oil and gas projects. The inability of oil firms and their EPC contractors to deliver their projects timely and within budget is having trickled down effect on banks’ loan portfolios.

Understanding the funding problems

Cost-effective project delivery requires a sound financial service advisory. Project financing in the oil and gas industry in Nigeria has become increasingly difficult as we are now witnessing an apparent shortage of funds available to finance a huge portfolio of projects.

This is partly due to decreased oil price regime, huge unrecovered loan portfolio, poor knowledge of the dynamics of projects and contracts, and lack of financial discipline.

Banks, oils companies, and "Engineering, Procurement & Construction (EPC)" contractors lack sufficient knowledge of each other's systems, processes and risk exposure. Due to the high level of unrecoverable loans, banks seem unwilling to finance projects.

Some EPC contractors operating in Nigeria have good technical and execution capabilities, but in some cases, they seem to lack effective financial management and best-in-class global management practices.

Nigeria commercial banks’ lending to the oil and gas sector continued to drop even with the recent partial recovery in the global oil price. The loss of confidence by the banks to continue to support oil and gas project financing may also be due to high exposure to large syndicated loans which were not properly risked. And this level of exposure tends to also affect the operations of the banks.

In spite of the current poor funding, the oil and gas industry still has very positive fundamentals and it continues to provide high returns to investors. Especially those investors who are ready to acquire the necessary knowledge and seek the support of experienced and hands-on consultants who have worked in the industry.

Gabriel Domale Consulting helps to mitigate these challenges on behalf of our clients. We make available to clients our expertise in project finance, contract management, cost estimation, engineering, risk management, commercial and project economics.

Credit risk concerns

The business plans earlier developed by oil firms at higher oil price scenario can hardly be implemented at the low oil price regime. EPC contractors that collected loans to finance projects and contracts are struggling to remain afloat and unable to effect full loan repayment.

Even more worrisome is that this trend of lack of loan repayment has historical dimensions. As at 2017, the “Nigerian banks lent an estimated $10bn to local oil and gas companies to buy assets from Royal Dutch Shell, Eni and Total as they retreated from the country’s onshore industry” (Ft.com: April 21, 2017).

According to The Nation newspaper (February 20, 2017), Nigerian banks are battling imminent liquidity crisis over huge exposure and non-performing loans to oil and gas and power sector, which is in excess of N4 trillion.

“Oil, power firms owe banks N5.59tn, says CBN. The N5.59tn represents 30 per cent of the N18.63tn loans advanced to the private sector by the banks as of May 2020” (Punch newspaper: July 12, 2020).

Nigeria commercial banks’ lending to the oil and gas sector continued to drop even with the recent partial recovery in the global oil price. The loss of confidence by the banks to continue to support oil and gas project financing may be due to high exposure to large syndicated loans which were not properly risked.

Restoring Confidence

I am strongly inclined that the current problems and challenges of financing in the oil and gas industry is because the banks and the oils (and their contractors) lack sufficient knowledge of each other's systems and processes. This view was posited by the Former Minister of State for Petroleum Resources, Dr Ibe Kachikwu (Punchng.com: August 25, 2017).

The EPC contractors need to appreciate that the banks need sufficient time (3 months on the average) to conduct proper due diligence on loan requests. Contractors may need to start engaging the banks before the final contracts are signed. Proper documentation backed with historical performance and projects schedules needs to be submitted by the EPC contractors to the banks during loan requests.

On the other hand, the oil and gas industry have very complex systems and processes. Information and knowledge are closely managed because they give the respective oil and gas firm a competitive advantage. Even within the same organization, information within the project space remains confidential for the rest of the organization. This means that those outside the industry will lack an understanding of the dynamics that drive decision making.

Both the banks and the EPC contractors need help from consultants who have real working experience in the oil and gas firms especially in roles that cover finance, project management, contracting and procurement, cost estimation and scheduling, project economics, and tender board operations.

Making the right oil and gas industry-based assumptions and understanding the key parameters of oil economics and asset valuation is critical for banks if they want to make the right financing decisions. The simple principle of not overtrading (over-lending) is also important for any bank granting loans – sometimes they engage in over-lending.

In conducting a cashflow appraisal of EPC contractors, the banks should be checking for alignment of the cashflow fundamentals with the payment term of the respective oil firm. Supplier financial risk assessment and mitigation plan should be an important tool to be used by banks for evaluating the effective capacity of the contractor to financially deliver the project for which the loan is sought.

Consulting Services - to help banks, oil firms and EPC Contractors

1. We collaborate with banks to create value for project financing in the oil and gas industry.
2. Work with oil and gas firms, and EPC contractors to develop structured loan proposals and financing strategies.
3. Help banks to conduct due diligence on loan proposals, 
4. Provide support to oil firms and EPC contractors to deliver contracts/projects timely and within budget to ensure full loan repayments.
5. Develop innovative project funding strategies.
6. Help banks to properly link the cash release to the project milestones.
7. Facilitate fund availability to contractors for timely execution of projects and contracts.
8. Develop an effective system of contract management - performance review, variations/claims management, cost estimation, and value-based negotiations.
9. Develop strong project performance reporting - monitoring, compliance, reporting.
10. Coordinate risk management process.
11. Conduct contractors’ financial risk assessment and developing mitigation plans.
12. Conduct due diligence on loan requests from the oil and gas companies.
13. Work with local contractors to build their capabilities for effective financial management.
14. Help contractors to meet their obligations to subcontractors and communities and to minimize project delays.

Fundamentals for financing

There must be a clear understanding among all stakeholders within the Africa oil and gas that unless we all work together, it will be difficult to fund the industry from within. If the oil and gas industry collapses, the Africa economies will shrink.

As part of the efforts to find innovative funding solutions, the cost of oil production must reduce significantly, Because, in the regime of low funding, inefficiencies and higher operating costs are unacceptable.

To pursue funding availability with low cost, there should be collaboration among operators, service contractors, local consultants, banks, venture capital and government and host communities. It is beneficial if host communities are treated as business partners.

It is imperative that we begin to witness stability in public policies. African governments should maintain a lid on policy changes for a minimum of 5 years. Investors hate uncertainty. The current practice of changing policies yearly is constraining investment decisions.

The ecology of funding is changing as reliance on big-time investors is decreasing. As more big investors exit, we need to bring more small investors and place more reliance on volume. This shift in thinking will have inherent risks which will be mitigated.

Financing options

 This may be the time for African banks to sweat their footprints. “There is an opportunity for banks to grow their business by tapping the population of adults in Nigeria without bank accounts” – (Ft.com: October 29. 2020).

Funding by the Unit Partners  - as currently done on annual basis. This is the current practice where each venture partner contributes its unit equity share of all funds required for the Unit Operations on yearly basis as cashcall.

Ring fence the budget - for the entire life cycle of the project – The budget for the entire project life should be ring-fenced based on the project life cycle cost with the fund kept in a special account where the Project team could draw from on yearly basis. This is done as part of the national budget approval.

Invoice partnering – this allows EPC contractors and their sub-contractors to fund their direct contracting activities. The operators leverage their reputation and goodwill to provide assurances to banks.

Milestone focused funding rather project focused funding. Milestones are modelled and presented as separate tranches for funding requests. However, this requires alignment in the financial modelling of the entire project.

Cost reduction: It is important that we also treat the drive for cost reduction as a key element in the funding strategy. A reduced cost of operation means that the overall request for funding will be lower. Also, cost savings achieved from cost reduction programs can be channelled to funding other budget components.

How Gabriel Domale Consulting create value for banks and oil industry

A key strategic focus for Gabriel Domale Consulting is to develop the capacity of banks, oil firms, Contractors, and investors in the oil and gas industry to deliver projects timely and within costs. Gabriel Domale Consulting work with bank’s oil and energy team and training school to provide consulting services and conduct training programs.

We deliver consulting services to banks in the following key areas: (1) Training: Conduct training and transfer our deep knowledge and insights of the oil and gas industry to banks’ oil and energy teams, and (2) Consulting services: Work with oil and energy teams to enable them effectively review and make the right decisions on transactions coming from the oil and gas industry.

The training sessions and knowledge sharing will be led by our CEO, Dr Leesi Gborogbosi, an expert in finance, strategy, corporate governance, transformation, due diligence, cost reduction and contract management.

This training can be provided as in-house training sessions or presented at your training school. Our training will help to develop the capacity of member key industry players to understand the dynamics of project execution, contract management, and externalities.

We help Finance and Business Leaders optimize performance and to make critical decisions through financial excellence in budgeting, cost reduction, finance transformation, finance and accounting operations, financial analysis, finance systems and SAP, governance, risk, and compliance

Also, we work with Business and Finance Leaders to identify growth opportunities and create value through operational excellence in strategy implementation and capital efficiency by delivering projects within costs, building strategy and planning frameworks, forecasting, and developing innovative funding solutions.

The growth of our firm is hinged on the strategic perspective of growing a strong relationship with our clients and working with them to achieve competitive advantage and viable market growth.

We have a team of experienced Managers from Shell (ex-staff) with competences in finance, contracting, business planning, strategy, project management, knowledge management, risk management, and engineering.

Author

Dr Leesi Gborogbosi

Bio - Dr Leesi Gborogbosi – CEO, Gabriel Domale Consulting

Dr Leesi Gborogbosi is the CEO of Gabriel Domale Consulting, a management consulting firm based in Nigeria, that helps companies in Africa to grow, provides insights to leaders and transforms institutions.

He has about three decades of leadership experience in the oil and gas industry (Shell Nigeria). He is an expert in finance, strategy, corporate governance, transformation, cost management, leadership development and due diligence.

Dr Leesi Gborogbosi was Project Finance Manager of Upstream Oil & Gas Projects (7 projects - Headline size: $8 bln) - Southern Swamp Associated Gas System, Forcados Yokri Integrated Project, Otumara, Adibawa, Agbada and Assa North/Ohaji South Projects.

He provided advisory services namely, strategic planning, budget management, funding strategy, risk management, governance, due diligence and investment plan covering the full life cycle of the seven major upstream oil/gas projects, power facilities and export pipelines.

He collaboratively works with business leaders and their organizations to identify growth opportunities and create value through operational excellence in strategy implementation and capital efficiency by delivering projects within costs, building strategy and planning frameworks and crafting of innovative funding solutions.

Dr Leesi Gborogbosi provides support to finance leaders to make crucial decisions and optimize performance through financial excellence in finance systems and accounting operations, budgeting, finance transformation, cost reduction, governance, risk, and compliance.

He has doctoral degrees in strategy and business studies and MSc (Research Methodology in Management) from IE Business School, Madrid and an MBA (Finance and Banking) from the University of Port Harcourt, Nigeria; and BSc (Accountancy) from the University of Nigeria, Nsukka. He had his secondary education at Federal Government College, Jos, Nigeria.

His doctoral dissertation focuses on strategy implementation, collaboration, the role of middle managers, and the dynamics of social movements (host communities).

Dr Leesi Gborogbosi leverages his professional experience as a Certified Management Consultant (CMC); Fellow, Institute of Chartered Accountants of Nigeria; and The Institute of Management Consultants. He is member of the Chartered Institute of Procurement & Supply, London; Nigerian Institute of Management (Chartered); and Strategic Management Society, Chicago, United States.

He was nominated by the Strategic Management Society, Chicago for "Best International Conference Paper Prize Awards" in 2017 and 2015. He was appointed the Chair for the Session on “Leading change implementation processes” at the Strategic Management Society conference in Denver, United States in 2015.

Dr Leesi was a member of the Strategic Management Society “Special Committee on Diversity and Inclusion”, Chicago, USA, with the responsibility of providing the Strategic Management Society Board of Directors with a good audit of where the Strategic Management Society stands with respect to inclusiveness in its activities.