Atiku Got It Wrong On NNPCL’s $3.3bn Crude Oil Prepayment Deal

In the past few days, there has been a lot of interest from the public and stakeholders regarding the Nigerian National Petroleum Company Limited $3.3bn crude oil pre-payment loan, also known as Project Gazelle.

The latest of such interest was from former Vice President Atiku Abubakar through a statement asking President Bola Tinubu to account for the Nigerian National Petroleum Company Limited’s $3.3 billion emergency crude repayment loan.

Atiku, who was the 2023 presidential candidate of the Peoples Democratic Party had on Thursday insisted that there are questions to be answered on the integrity of this deal, and charged the federal government to talk directly on details behind the deal.

He had asked, “Has the federal government accessed the loan? Is the loan in the government’s borrowing plan as approved by the National Assembly? Who are the parties to the loan, and what specific roles are they expected to play? What are the conditions of the loan, including tenor, repayment terms, the collateral, and the interest rate? And, lastly, why register an SPV in the Bahamas knowing the recent scandal of the country’s notoriety for warehousing unclean assets?”

This piece will attempt to provide answers to some of the issues raised by the former VP.

For a start, the financing agreement secured by the NNPCL to prepay future royalties and taxes to the federal government is a crude oil-backed, forward sale structured finance facility sponsored by the National Oil Company, which acts as the seller and sponsor. The facility involves the forward sale of a specific number of barrels of crude oil to a Special Purpose Vehicle (SPV), which has approached international financial institutions for the required funding.

Under this project, NNPC Limited agrees to sell a predetermined quantity of future barrels of crude oil production in advance while securing upfront payment from a special purpose vehicle (SPV) backed by international financial institutions.

This project provides immediate United States dollar financing for NNPC Limited’s operational needs, including paying its tax and royalty obligations to the Federal Government upfront.

By using the upfront funding, Nigeria can maintain the stability of its currency, the Naira, and increase its foreign exchange reserves. This can also be achieved by increasing oil production and exports, but due to current investment limitations, forward-sale contracts, such as the one used in NNPC Limited’s Project Gazelle, offer a more immediate solution. Forward-sale contracts enable resource-producing companies like NNPC Limited to receive significant upfront funding for new projects before production and export.

The funding can then be used for investments in existing and future resources, leading to increased oil and gas production and higher exports, resulting in more dollars and foreign currencies entering the country. International banks have a history of providing forward-sale financings, which can bring new foreign direct investments (FDIs) into Nigeria.

Already, an initial disbursement of $2.25bn has been made, and a second tranche of $1.05bn is expected to be disbursed subsequently.

United Bank for Africa Plc (UBA) acted as the Local Arranger and Onshore Account Bank for the transaction, which is expected to ease the foreign exchange illiquidity and stabilise the Nigerian currency market.

The transaction is seen as a significant further step in unleashing Nigeria’s economic potential. This landmark financing is Nigeria’s largest crude oil prepayment facility and one of the largest syndicated loans raised in Africa in 2023.

Atiku, in his statement, also made a claim that the facility was secured at a 12 per cent interest rate.

He had said, “It is inconceivable that the federal government will lead the country to take a loan of $3.3bn with an interest rate that is not more than 12 percent, but with estimated repayment amounting to $12bn.”

But the former VP’s claim appears to be wrong because the facility is for a five-year period, and it carries a margin of 6.0 per cent per annum above the 3-month secured overnight financing rate (SOFR).

The transaction structure has an embedded price balance mechanism where 90 per cent of all excess cash from the sale of the committed barrels (after debt service) will be released to the borrower, while the balance of 10 per cent will be used to prepay the facility, effectively shortening the final maturity of the facility and freeing cashflow from future pledged cargoes for use by Nigeria.

The initial participating lenders are Afreximbank, Africa’s multilateral trade finance institution, Gunvor International BV, a Geneva-based multinational energy and commodities trading company and Sahara Energy Resources Limited, an African-owned, leading international energy and infrastructure conglomerate.

Afreximbank’s extensive structuring and technical experience in arranging similar complex oil & gas financing facilities in Angola, Republic of Congo, South Sudan, Chad Egypt, Cote d’Ivoire. Ghana, was brought to bear in the successful closure of the facility, notwithstanding a very challenging market environment.

The Bank acted as Sole Mandated Lead Arranger, Technical and Modelling Bank, Bookrunner, Facility Agent, Offshore Account Bank, Intercreditor Agent and Collateral Agent.

It may interest the former VP to note that the NNPCL
$3.3bn crude oil pre-payment loan deal deal has been lauded by foreign institutions like JP Morgan Chase & Co and several Nigerian analysts, who said the $3.3bn is a quick fix that would alleviate the FX situation.

If the deal was flawed as claimed by Atiku, renowned foreign institution such as JP Morgan would not say that it will boost foreign exchange liquidity into the country and prop up the value of the naira against the dollar.

For the records, JP Morgan had, shortly after the deal was announced by the NNPC in August last year said, “The President’s policy advisory council has recommended the government sell down its stake in the most joint-venture oil and gas assets, a proposal that is estimated to bring in up to $17bn. In addition, the recently announced $3bn loan to NNPC could help partly improve FX liquidity conditions in the market.

“We expect NNPC to sell the dollars to CBN and remit the naira proceeds to the government as upfront payments for oil revenues and taxes. That being said, the large external financing needs of the private sector will sustain FX pressure.”

For a renowned institution like JP Morgan to have taken this position as regards the NNPCL deal with Afreximbank speaks volume. It is a confirmation of the well-known fact that the NNPC Limited, under the visionary leadership of the Group Chief Executive Officer, Mele Kyari, is getting things right.

Another area where Atiku got it wrong in his statement was his claims that that the federal government will be repaying $12bn on the $3.3bn loan based on his simple multiplication of the 2024 crude oil budget benchmark of $77.96 per barrel with 164.25 million barrels for the repayment loan.

Quoting him, “Curiously also, Nigeria’s current Barrels Produced Daily (BPD) is 1.38 million, and according to the Project Gazelle deal, Nigeria is to supply 90,000 Barrels of its daily production, starting from 2024 till it is up to 164.25 million barrels for the repayment of the loan.

“Now, this is where the details get disturbing because Nigeria’s benchmark for the sale of crude per barrel in 2024 is $77.96. A simple multiplication of that figure by 164.25 will give us a whooping $12bn.

“It is on this note that we are calling on the Federal Government to speak up on this shady deal.

“It is inconceivable that the Federal Government will lead the country to take a loan of $3.3b with an interest rate that is not more than 12 percent, but with estimated repayment amounting to $12bn.

“That is a humongous differential of about $7b between what is in the details of the deal on paper and what indeed is the reality.”

This claims by the VP is wrong and his analysis is misleading. For the records, Project Gazelle was based on a conservative crude price of $65 per barrel to calculate the allocated crude to be produced and sold in the future. This provides a safety margin for price fluctuations in future.

The NNPC Limited has reserved up to 90,000 barrels of crude for Project Gazelle, ensuring sufficient cash flow for repayment and other financial obligations. If oil prices rise, more money will come in from selling the 90,000 barrels, allowing for faster repayment.

The quantity of crude earmarked (90,000 barrels) is sized to ensure enough cash is available for the repayment of the facility when it is due. This also ensures that NNPC Limited can meet other cash flow obligations, considering the expected future price of crude oil globally.

Let’s use a simple scenario to explain this. For example, let us assume a loan of $100m was given to be repaid from one million barrels of future oil sales; the repayment would vary depending on the eventual price per barrel of crude oil. If the oil were sold at $150 per barrel, one million barrels would fetch $150m, and the loan would be fully repaid with the excess proceeds going back to the crude oil seller. However, if the oil were sold at $60 per barrel, one million barrels would only fetch $60m, and the loan repayment would be lower.

The lower crude price in this arrangement is due to the conservative pricing strategy that accounts for the volatility of oil prices. This strategy helps in reducing the risk of default and ensures financial stability. Oil prices are highly unpredictable, meaning prices can fluctuate up and down within any given period. Lenders prefer a low price for safety to ensure a limited risk of default.

An eventual increase in oil prices will result in the SPV returning all excesses to the seller (NNPC Limited) while the risk, which could lead to a rearrangement of the terms, is a significant decrease in the agreed price (this case $65 per barrel)

Oil has been averaging $70-$75 per barrel since the deal was agreed, and if things stay the same way, Nigeria will be getting refunds of excess amounts from the SPV once the payment is concluded.

There is a very big chance that the repayment will be concluded before the agreed time, if oil prices continue to increase, as NNPCL had penned a 90,000 barrel per day, which will eventually be calculated at the current prices.

It must also be emphasised that repayment stops when the agreed amount and interest is fully paid and Nigeria may be liable to refunds, were there to be excesses.

Nigeria has over 35 billion barrels of proven reserves that are yet to be exploited, and these reserves can be used to raise the required funding, amongst other things, by utilising a forward sale financing. This strategy helps securitise Nigeria’s proven oil reserves, which can immediately improve the inflow of foreign currency rather than waiting for years. Forward-sale financing can significantly boost the availability of foreign currency for an oil/gas-dependent country by supporting more exports and bringing in overseas funding. This helps to improve the country’s ability to pay for imports and manage its overall economy.

The forward-sale investments are repaid using the money earned from exports when they finally start by improving the country’s balance of payments, providing the government with more stable and predictable oil earnings, which helps in planning budgets and managing foreign exchange reserves.

NNPC Limited’s Project Gazelle is a forward-thinking financial strategy that aligns operational needs with broader economic goals by utilising future crude oil sales for immediate funding, enhancing liquidity, and contributing to Nigeria’s foreign exchange reserves.

This project showcases NNPC Limited’s operational autonomy and financial acumen while ensuring immediate liquidity, minimising the impact on future earnings, and potentially enhancing Nigeria’s credit rating. The repayments are strategically planned and tied to future oil sales, with conservative pricing in oil sales contracts mitigating the risks associated with oil price volatility.

In line with the provisions of the latest PIA and NNPC Limited’s journey towards operational excellence and economic contribution as a Limited Liability Company, Project Gazelle balances immediate financial requirements with long-term sustainability.

Rather than criticize with the sole objective of harming an institution or the government, it is more rewarding if criticisms from an elder statesman like Atiku are done for the purpose of nation-building.

Onuba, a Chartered Accountant, wrote from Abuja