Contractor financing seen attractive for marginal fields projects

At the recently concluded marginal fields investment match making workshop organised by Meiracopp Nigeria Limited and Businessday West Africa Energy, investors harped on the need to ramp up contractor financing as its holds the key to unlocking financing for marginal fields if Nigeria holds its much anticipated licensing rounds.

Contractor financing, a short-term loan used to finance projects is gaining currency as capital from financial institutions plummets.

In contractor financing agreements in the oil and gas sector, a field contractor pre-finances field development and operations and for his services, he receives payment from crude sales. The contracts are written in such a way as it factors in contractor’s cost of financing, projects, research and development, etc.

However the challenge for most of this financing arrangement is that some beneficiaries are sometimes unfaithful to the terms when the field achieves first oil. This is why financial advisors advocate for an accounts administration structure to be set up to ensure timely payment to the contractor.

Bank Anthony Okoroafor, president of PETAN in his presentation at the conference urged prospective bidders for the marginal fields bid round who need financing to explore contractor financing.

Local content in Nigeria’s oil exploration sector is growing in leaps and bounds with many of the large scale fabrication projects usually undertaken outside the country being executed in country. The Agbami development testifies to the accuracy of the assertion.

Nigerian professionals have acquired expertise in virtually every sector of the upstream oil and gas sector exploration includes subsea and seismic operations. There are now oil servicing companies who can carry out complex operations, though some still employ foreign expertise in some operations.

Having acquired experience through lessons learnt, many are now open to contractor financing. Areas of collaboration include training, HSE, Manpower development, waste management, automation, engineering design and planning.

There are examples of successes of contractor financing initiated in Nigeria. In November last year, Shell Companies in Nigeria, supported by the Nigerian National Petroleum Corporation (NNPC) signed a Memoranda of Understanding (MoUs) with eight Nigerian banks under the refreshed Shell Contractors’ Support Fund, to improve access to finance for Nigerian vendors and suppliers in the oil and gas industry.

Under the MoUs signed in Lagos, Access Bank, Skye Bank, Zenith Bank, Stanbic IBTC Bank, First Bank, Standard Chartered Bank, First City Monument Bank and Guaranty Trust Bank have set aside $2.2billion for contract execution by Nigerian firms.

The scheme provides support for contractors to enable them finance projects executed for Shell Companies in Nigeria in line with the aspirations of the Nigerian Content Act.

To access these funds, the contractors must have a valid purchase order and meet the banks’ risk assessment criteria. This refreshed version is in response to market realities and will offer loans faster and at cheaper rates.

This is just an initiative of a multinational oil company employing contractor financing to support execution of projects by local oil firms. Experts say more of this kinds of schemes are now required to ramp up funding for local projects.

Nigeria’s energy sector is already responsible for almost 40 percent of all non-performing loans in the banking sector. Therefore, there is a very low appetite for lending to the oil and gas sector.

This makes contractor financing very attractive to unlock funding for new projects and even complete ongoing projects. To succeed, operators could benefit from views of financial advisors who can assist in structuring the finance to ensure both parties are not short-changed.

Generally, for marginal field projects to succeed, the project sponsor must be willing to have equity financing and partner with the right technical partner. There is also need to conduct effective due diligence on partners and back agreements with iron-clad contracts.

ISAAC ANYAOGU