Calag Capital and Consulting Limited

FINANCING OIL SERVICE SECTOR COMPANIES: A CASE STUDY FOR NIGERIA

XAVIER ABEL EDZIWA

Chief Operating Officer

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NOT AN OFFICIAL UNCTAD RECORD

Introduction….CALAG CAPITAL AND CONSULTING LIMITED (3C) IS INCORPORATED IN NIGERIA AS A FINANCIAL ADVISORY SERVICES FIRM. IT IS AN ASSOCIATE COMPANY OF PIVOT CAPITAL PARTNERS (PROPRIETARY ) LTD, A SOUTH AFRICAN REGISTERED FINANCIAL ADVISORY SERVICES COMPANY

3C’S CLIENTS ARE DRAWN FROM THE HOSPITALITY, OIL AND GAS, FINANCIAL SERVICES, MANUFACTURING, AGRICULTURE, AVIATION AND REAL ESTATE SECTORS OF THE NIGERIAN ECONOMY.

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BACKGROUND (to put the topic in context)

Nigeria is one of the world's leading oil exporters and the largest producer in Africa

Its oil reserves constitute 2.5% of total world reserves

Favorable geology and high quality crude make Nigeria a country of continued interest for investment

The oil and gas industry remains the country's principal source of revenue and foreign exchange, and as such, it is vital to Nigeria's economic development

Petroleum export contributes over 90% of the country's foreign exchange earnings and over 75% of government revenue

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Oil service sector financing

Up Stream Oil Sector

The bulk of Nigeria's oil and gas is produced by multinational companies operating under joint venture arrangements with the Nigerian National Petroleum Corporation

The companies with the largest participation in joint ventures are the Royal Dutch/Shell group (Shell), Exxon Mobil, Chevron Texaco, Agip, and Total

Government is encouraging greater indigenous participation through local content policy

Indigenous Producers

Local Nigerian's participation in the country's upstream oil sector is just 14%

Experts believe that Nigerian companies have difficulties meeting high costs of entry because of the technical and financial requirements of that sector

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Up Stream Oil Sector

Main operators are the international Oil Majors

Oil Majors out-source: Engineering Work-over Drilling Laying of pipes Marine services Maintenance Procurement Supplies etc

+/- 80% of cost of producing a barrel of crude oil is in terms of oil services

Hence the need to support the oil service companies

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Down Stream Oil Sector

The downstream sector includes the refining and sale of gasoline, kerosene, and other petroleum products

Major marketers currently control about 65% of the fuels business

The major marketers include foreign oil companies as well as Nigerian companies

The independent marketers are mainly Nigerian companies

Currently CALAG is structuring a US$70 million line of credit for a leading bank to finance Independent Marketers

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Local Companies Funding Constraints

Indigenous companies have unfortunately, for several reasons, not been able to take full advantage of the vibrant industry

Experts believe that Nigerian companies have difficulties meeting high costs of entry because of the technical and financial requirements of that sector

It is worth noting that the Nigerian community is now aware and very sensitive to the need for a participatory role in the industry

Huge volumes of financing required can not be supported due to lack of market depth and inability to provide medium to long term financing

Bank debt funding is typically small, high interest bearing and mismatched tenors

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Financing Structure for upstream OSCs

mitigate risks to financiers of the perceived risky OSCs

appropriately priced funding

appropriately tenured funding

Transaction financing NOT balance sheet financing

Structure to recognise the quality of the underlying contracts

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Transaction structuring...

OSCs Pre-qualified by:

arrangers, International lenders local bank guarantors

Key to prequalification is track record and quality of contracts with oil majors; current contracts and likelihood of future contracts

Not balance sheet financing, which is the reason why most OSCs struggle to get financing, because financiers apply inappropriate OSCs financing structures; emphasis is on contracts, hence it is like financing Oil Majors themselves

Risks managed: Default: assignment of contracts Performance: pre-qualification ensures credible OSCs access the facility

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Transaction structuring... Local bank guarantors

Pre-qualified and limits set based on capacity of each

Guarantee obligations on pro-rata

This also address local bank risk as may be feared by international financiers, as risk is pro-rata

Loan monitoring to safe guard own guarantee exposure

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Transaction structuring... Credit enhancing international institutions

Guaranteeing lenders on non-performance by local banks

First loss guarantor : For example guaranteed the first $30m Second loss guarantor: For example guaranteed the next $35m

International lenders’ overall exposure not covered by loss guarantors is $10m (but then this is covered by assignment of contracts, hence in reality almost zero exposure to local vagaries)

Structured risk management to be reflected in pricing and other terms of the facility

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Transaction structuring... Lender’s Engineer

Advise on special engineering requirements Assess and advise on the capability of the OSC to execute the

contract

Oil majors No direct agreement with them, besides the Assignment

Agreement, but can be disqualified in the event of failing to respect the contracts with OSCs; cross default; etc

If disqualified then OSCs contracted to them will not access finance, hence pressure on the oil major

Loan Monitoring Agent Calag Capital & Consulting Limited

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The outcome... Facility

Amount: Revolving US$75 million Purpose:

The purchase of products and services required by OSCs to perform contracts

Pre-finance receivables due to OSCs from Oil Majors

Effective final maturity: 4 years

Repayment from assignment of proceeds from Oil Majors

Competitively priced

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The outcome... WAY FORWARD AFTER DRAW DOWN

To increase the facility amount once international lenders are comfortable with doing business with OSCs in Nigeria (target for next facility – US$200m)

To reduce credit enhancement layers, thereby reducing the financing costs

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Conclusion..

As Mozambique or other countries in Africa pursue on oil and gas projects, is the financial sector prepared enough to play role in promoting “local content”?

There is need to come up with financing structures to support participation of local companies in the oil & gas sector.

Oil and gas sector finance is vital, hence the need for all financial players to collaborate in providing innovative financial solutions, for example our structure included over 10 financial institutions (Africa and Europe), playing different roles.

SO LET US, AS PROFESSIONALS IN CAPITAL MARKETS, COLLABORATE IN CAPACITY BUILDING

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In line with our quest to be THE point of reference in the oil sector in Nigeria ……………..

MARGINAL FIELD FINANCING WORKSHOP: Workshop In Partnership With UNCTAD And NNPC set for

Abuja, Nigeria (indicative dates: end of June/early July 2005) NIGERIA OIL SERVICE SURVEY:

Survey Completed (publication forthcoming) In collaboration with UNCTAD And NNPC International Conference Based On Survey set for 4th Quarter

2005 US$70 million line of credit to finance independent marketers in

the down-stream sector

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UPCOMING ….