Running on empty: oil production in the Niger Delta has been hit by sabotage © Bloomberg
This year’s militant attacks in the Niger Delta, combined with the downturn in crude prices, have compounded a funding crisis that has hit Nigeria’s domestic oil companies especially hard.
Most local producers — from Oando to Seplat — operate onshore fields that require infrastructure in the southern oil-producing region for exports. Sabotage by militant groups such as the Niger Delta Avengers has damaged pipelines and other infrastructure, which has restricted oil flows. The resulting drop in foreign sales has only further hit domestic companies’ battered finances.
“Security and access to funding are the biggest challenges right now to private sector players,” says Kola Karim, managing director of domestic producer Shoreline Energy. “The situation is really tough.” Mr Karim’s company relies on sending tens of thousands of barrels of oil a day through a pipeline that feeds into the Forcados terminal near the city of Warri, which has the capacity to export 200,000 barrels a day. The pipeline has been inactive for most of the year.
“The militancy has disproportionately hit domestic players,” says Mr Karim, who adds that the company is shifting its focus towards gas and offshore exploration and production as its funding crisis bites. “The days of $100 oil are long gone.”
Many companies, including Shoreline Energy, gained influence and access to the country’s resource wealth in recent years, as international oil majors sold off assets to local companies as part of an indigenisation programme under the previous government. Royal Dutch Shell, Total and Eni were among foreign companies that sold off prime oil production areas before the oil price dropped in 2014.
Domestic companies took on a lot of debt to buy these assets. But executives and bankers say they have not reaped the rewards they had hoped for and now they are struggling to repay loans.
The plight of Nigeria’s oil and gas producers is a window into Nigeria’s crippled economy. The militancy has intensified problems for a country that has failed to absorb the effects of oil prices that have dropped from $115 a barrel in 2014 to under $50. The downturn has curtailed revenues from foreign crude sales, slashed more than $13bn from dollar reserves, sunk the country into recession for the first time since 1991 and led to mass capital flight.
Oil represents about 90 per cent of Nigeria’s exports and provides the bulk of foreign exchange for the economy. Dollar revenues earned by indigenous producers feed into the local banking system through savings and loan repayments. “Domestic oil companies are caught in the middle,” says Lagos-based Dolapo Oni, head of energy research at Ecobank. “Local banks can’t supply foreign exchange to these companies that need money. So many are having to collect revenue in naira. This means there is still a massive gap in terms of what they owe to banks. They’ve found it very difficult to service loans.”
Nigeria’s domestic oil producers run on debt from local banks, comprising around 90 per cent of their operating expenses, Ecobank says. Banks provided more than $20bn to oil and gas companies in 2014, mostly to local businesses.
In June the Buhari administration reluctantly dropped its currency peg hoping the overvalued naira’s fall would attract investment into what was then Africa’s biggest economy. But the delay in devaluation had already caused lasting damage. Five months on, the spread between the official naira rate and the one offered on the black markets remains wide and investors are staying away, making it harder to buy dollars.
One executive at a domestic producer says foreign exchange controls are the biggest block to new investment. “If you don’t have a rational foreign exchange policy, if you can’t get your money in and out, you’re not going to get much in the way of foreign investment,” he says.
Many of these guys got into the oil business right as the oil price crashed
In the absence of dollar funding at home or from abroad, domestic producers have been forced to borrow naira from domestic banks, but interest rates are prohibitively high at 18-21 per cent, say industry analysts. “A lot of debt for commercial operators dried up. The regulators too are very risk averse to the domestic oil industry,” says Rolake Akinkugbe, head of energy and natural resources for Lagos-based investment bank FBN Quest. “If you can’t lend, how can they produce?”
Domestic companies have had to restructure their loans at least twice since 2014 as revenues no longer matched debt repayments, say energy sector analysts. Some sought access to alternative sources of funding to finance operations and acquisitions, but many initiatives have been unsuccessful.
Seven Energy issued $300m of debt in 2014, but the company — which buys gas from fields linked to the Forcados pipeline — has since suffered a bigger funding crisis. As a result it missed a payment and had to restructure its debt with international bondholders. Separately, Sahara Group planned an initial public offering and bond sale aimed at financing more oil asset purchases, but this has had to be put on hold, bankers say. Other companies have sought foreign funding from investors in the Gulf.
Meanwhile, bankers report that companies such as First E&P tried to sell equity stakes in order to pay off debt. But others have been reluctant to engage in mergers and acquisitions. “Many of these guys got into the oil business right as the oil price crashed so they feel they haven’t got the full benefit of these assets,” says Mr Oni. “They would be selling themselves short.”
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