AHAM NZENWATA
ABSTRACT
This seminar paper
investigated the challenges and strategies adopted by oil and gas companies in
financing their activities in Nigeria. The paper had the objective of
identifying the financing strategies employed by oil and companies, the
challenges they face in the process and the measure they use to overcome such
challenge. In order to achieve the objectives of the study, data was collected
from a cross-section of respondents from staff of four (4) oil and gas
companies and data collected was analyzed using simple percentages.Findings
indicate that oil and gas companies in Nigeria use a combination of Equity
Financing, Bank Loans, Project Financing and Bond Issuance to finance their
projects. However, depending on the nature of the project vis-à-vis project
size, duration, inherent risk etc., a strategy of combining more than one
funding source is usually implemented. The findings also show that size of
project, estimated duration and risk inherent in the project(s) are the most
important factors that determine their choice of funding strategy. The
respondents identified the challenges of financing projects faced by the oil
and gas companies to include: Price Fluctuations, Project Duration, Government
Regulations, Access to and Cost of Funds and Security Challenges in operating
environment. Access to funds is the over-riding challenge. Finally, problems
associated with financing oil and gas projects are solved through the
combination of several financing strategies to make-up for shortfalls in
funding. Respondents also note that in some cases, the way out is to bring in
experts consultants who can reassess the viability of project to ascertain if
it will be profitable or not or abandoning the project until
1. Introduction – Overview of
the Oil and Gas Industry
Nigeria, with a population of over 160 million people,
is the largest oil producer in Africa and the sixth largest producer in OPEC
with an average of 2.2 million barrels per day (bpd) by 2014 estimates.
Nigeria's economy is heavily dependent on the oil and gas sector, which account
for about 75% of government revenues and over 90% of total foreign exchange
earnings. Estimates of the total crude oil reserves vary, but are generally
accepted to be about 36 billion barrels, although new offshore discoveries are
likely to push this figure to about 40 billion barrels (Abushaiba &
Eldanfour 2014).
Most of Nigeria’s oil
production, comprising 10 major crude streams (including condensate), is light
sweet crude with a low sulphur content. Nigeria's marker crudes on the
International oil market are Bonny Light and Forcados. All of the crude oil in
Nigeria comes from numerous, small, producing fields, located in the swamps of
the Niger Delta, and product is exported through 7terminals, and a number of
floating production vessels (Abushaiba & Eldanfour 2014).
The Oil and gas Industry
remains the backbone and driver of development across other sectors of the
economy, especially infrastructure in other regions of the country apart from
the Niger Delta. In realizing the increasing capacity of the sector, the sector
has witnessed a number of government initiated reforms including the
privatization and unbundling of the Nigeria National Petroleum Corporation into
several companies.
According to (Waqas 2015)
the industry is dominated by 6 major joint venture operations managed by a
number of well known multinationals, Shell, Mobil, Chevron, Agip, Elf, and
Texaco. The production concessions are managed through joint venture companies,
in which the Nigerian Government, through the Nigerian National Petroleum
Company (NNPC), holds about 60% shareholding. The foreign joint venture
partners manage the operations, under a joint equity financing structure
regulated by a Joint Operating Agreement Waqas( 2015).
All operating costs are
financed jointly, by a system of monthly cash-calls. Apart from the major joint
venture operations, a number of private Nigerian firms have been awarded
concessions, and most have been involved in the exploration of their blocks over
the past 6 years. The government plans to press ahead with more local investment
in the oil sector, and have issued directives guiding the development of
‘marginal fields’ comprising small, abandoned fields, which have remained
undeveloped by their joint venture partners (PWC 2008).
Offshore companies have
been invited to participate in the development of these fields. The last few
years have been a difficult period for Nigerian Upstream oil sector-community
restiveness throughout the Niger Delta, increasing violent kidnap of oil workers,
massive squalor and environmental degradation with monumental impact on the
livelihood of the population. Despite all of these, given the important role that
this sector plays in the economy of Nigeria, the business of oil continues (PWC
2008).
The refining,
petrochemical, and transportation sectors of the oil industry in Nigeria are
controlled by government and indigenous operators and are an area in which government
has made considerable investment over the years. The downstream sector is beset
by a non-commercial pricing environment and lack of resources to maintain and
manage the infrastructure properly (Abushaiba & Eldanfour 2014).
Estimates of Nigeria’s
proven natural gas reserves are approximately 185 trillion cubic feet. Nigeria
has the tenth largest reserves in the world, approximately 30% of African gas
reserves. Much of this is associated gas, as many Nigerian oil fields are
saturated, and have primary gas caps. There is presently no dedicated
exploration for gas. About 75% of the associated gas is currently flared off,
as nodomestic gas infrastructure or market exists, while fiscal terms remain
unattractive.
Stakeholders in oil and
gas industry have over the years expressed worries that the rising operational
costs in the industry, among other challenges, have been limiting the
industry’s growth. They note that the sector is also affected by inadequate
finance, poor policy implementation, professional knowledge gaps and low
capacity building. At the recent National Oil and Gas Conference and Exhibition
in Abuja, the Minister of Petroleum Resources, Diezani Alison-Madueke, called
on all stakeholders in the oil and gas sector to tackle the challenges facing
the sector. She stressed the need for stakeholders to find workable solutions
to the funding challenges facing the industry. According to her, future growth
in the industry may be stunted as a result of lack of funding.
Considering the above,
this seminar paper is aimed at investigating the problems of financing facing
the Nigeria oil and gas industry with a view to proffering strategies that can
be employed to overcome these challenges (Waqas 2015).
2 Financing Strategies
In order to understand the dynamics of the oil and gas
industry, we must first take a look at the companies operating within the
industry. Companies operating in the industry are heterogeneous, ranging from
large integrated companies such as Exxon-Mobil and Shell (SPDC) and Total, to
small exploration and production companies like Oando Energy and Eterna. Each
company faces some financial considerations that are the same throughout the
industry, and some that are specific to the area of the industry in which it
operates.
For example Shell and
Exxon-Mobil has to deal with international finance on a daily basis with
operations across the globe. Oando Energy on the other hand also has to deal
with international finance, but on a different scale as its operations are
focused in specific geographic areas and parts of the supply chain. Another
company that operates within the industry but has a different focus is Nigeria Liquefied
Natural Gas (NLNG). NLNG is a large integrated company, but produces and sells
only gas. This creates a different set of decisions facing the company, yet it
operates in the same industry as Exxon, Shell and Oando (Waqas 2015).
Each company within the
oil and gas industry including the National oil and gas companies rely on a
number of methods to finance their activities. These include: Equity Finance,
Bank loans, Project finance and issuance of Bonds.
Equity Finance
Equity issuance is often the first or
only option for pure-play exploration companies, which lack tangible assets but
offer material upside in the event of exploration success. These companies
generally have low debt capacity due to a lack of proved reserves and cash
flow. Investors took flight from perceived riskier stocks in the aftermath of
the financial crisis and confidence, in exploration companies in particular,
has yet to fully return. As one indicator of this, the 2013 total funds raised
from new and further issues by oil and gas companies listed on London’s Alternative
Investment Market was the lowest amount for 10 years (Brown, Moles, Vagneur,
& Robinson 2011).
Companies experiencing
capital constraints are forced to be more innovative as they assess all the
funding options available to them. In addition to conventional finance,
companies are engaging in higher volumes of farm-out transactions, mergers and
loan arrangements with service providers. The ability of the smaller explorers
is important to the industry as they are often the source of innovation which
is then picked up by their larger peers (Brown, et al 2011).
Bank Loans
In the past, bank loans formed the
bulk of financing for oil and gas companies. Consisting of short-term,
medium-term and long-term facilities, banks facilitated investment in the sector
through loan syndication for large facilities. The last few years was broadly
characterized by a scarcity of public equity financing, combined with corporate
credit conditions that were initially tight but are now accommodative. Banks
were forced to introduce tighter lending controls in response to new
legislation. In many jurisdictions, the process of rebuilding their balance
sheets is largely complete (Watts & Zimmerman, 1990; Williams 1982).
However, caution around
risk management and the pressure to deliver an appropriate return has led banks
to tighten lending standards, particularly for small to-medium-sized borrowers.
In response, companies have started to access alternative sources of finance,
such as the bond market, project finance, private equity and export credit
agencies. There is now both more competition for funding and also a wider range
of debt and equity providers serving the market (Watts & Zimmerman, 1990;
Williams 1982).
Project Finance
Compared with other infrastructure
intensive sectors, such as power and utilities, project finance has been less
widely used by the oil and gas industry. This is because the industry is
inherently long term in nature which can be a challenge when trying to arrange
project financing on acceptable terms. Future revenue streams are typically
less stable and predictable in oil and gas projects than in other large-scale
infrastructure projects, which may have regulated or inflation linked returns
and are not directly exposed to commodity price risk.
The logistics,
infrastructure and social issues caused by the increased size of projects have
made achieving time, cost and quality targets more challenging than ever. The
industry’s relatively poor recent track record of completing projects on-time
and on-budget will test banking sector appetite for lending to the oil and gas
sector. The pool of providers also diminishes as the length and size of the
funding requirement increases. Project financing has typically been more
prevalent in the downstream sector than in the more capital intensive and
riskier upstream segment (Waqas 2015).
As mentioned earlier, the
challenges in the use of this method include: poor recent track record of
completing projects on-time and on budget, Unstable and unpredictable revenue
streams and the very long-term nature of projects in the industry. These
challenges notwithstanding, finance and investment companies are devising
sophisticated methods to overcome the challenges (Misund, Osmundsen, &
Sikveland 2014).
Bond Issuance
Bond markets are increasingly being accessed to
finance new development opportunities within the oil and gas sector. Recent
years have seen some of the highest new issuance volumes in the public bond
market as corporates seek to lock in low benchmark rates. Bonds provide capital
with fewer continuing obligations than bank loans. Most bonds are issued in the
public bond market and this will continue to be the case, although the private
placement market also provides an important liquidity source. Companies are
increasingly using private transactions to place subordinated notes with select
investors. The attraction of private placement is around flexibility on
maturity and greater certainty around execution (Cormier & Magnan 2002;
Cooper, Flory & Grossman 1979).
3 Methodology
This seminar paper adopted the survey
research method to gather and analyze data and information for the purpose of
the study. Data was collected through the issue of questionnaires to twenty two
(22) accounting/ finance staff of four (4) Oil and Gas companies in Rivers
State. The companies sampled are SPDC, Mobil, Oando, and Total. The responses
to the questionnaire items were a analyzed
using simple percentages in order to draw inferences.
4 Research Findings
Fig 1 Distribution of Respondents By Organization
Figure show that staffs of Oando PLC were in the
majority of the respondents making up 41% (9 respondents). Mobil Nigeria
comprised 27% (6 respondents), Total PLC 18% (4 respondents) while SPDC made up
14% (3 respondents) of the respondents.
Questionnaire item number one sought
to find out the financing option used by oil and gas producing companies in
Nigeria. All 22 respondents (100%) were of the opinion that their companies use
all the available options to finance projects. The chosen options are Equity
Finance, Bank Loans, Project Finance and Bond Issuance.
Table 1: Please Circle the financing
strategy employed by your
|
S/N
|
Responses
|
Frequency
|
Percentage
|
|
1
|
Equity Finance
|
22
|
100
|
|
2
|
Bank Loans
|
22
|
100
|
|
3
|
Project Finance
|
22
|
100
|
|
4
|
Bond Issuance
|
22
|
100
|
Source: Research
Instrument Analysis (2016)
In questionnaire item 2, all respondents (100%) agree
that the company uses a combination of financing methods with bank loans and
project financing methods being the two most combined strategies (68%). A
combination of bank loans and bonds issuance comes next on the preferred
financing combination strategy. Our respondents also note that in some cases,
more than strategies may be combined to finance a single oil and gas project.
On the question as to what determines the strategy or
combination of strategies employed to finance any given oil and gas project,
our respondents are of the opinion that: size of project, estimated duration
and risk inherent in the project(s) are the most important factors that
determine their choice of strategy.
However, they also indicate that the size of the project is the number
one consideration in choosing a financing strategy.
Table 2: What determines the strategy or combination strategies employed
on any given project? Please note answer in order of importance with 1 as most
important
|
S/N
|
Responses
|
Frequency
|
Percentage
|
|
1
|
Size of project
|
22
|
100
|
|
2
|
Estimated duration
|
20
|
91
|
|
3
|
Risk inherent in the
project
|
18
|
82
|
Source: Research Instrument Analysis (2016)
All respondents sampled agree that they face some
challenges in raising the necessary funds for their operations to include the
following: Price Fluctuations, Project Duration, Government Regulations, Access
to and Cost of Funds and Security Challenges in operating environment. They however state that access to fund is the
most critical challenge they face in financing oil and gas projects followed by
fluctuation of the products in the international market while government
regulations is the least important factor in this category.
Table 3: Do you face any challenges
in the choice of financing strategy?
|
S/N
|
Responses
|
Frequency
|
Percentage
|
|
1
|
Yes
|
22
|
100
|
|
2
|
No
|
0
|
0
|
|
3
|
Total
|
22
|
100
|
Source: Research Instrument Analysis (2016)
Finally, the respondents identified
that some of the measures taken by the oil and gas companies to overcome the
financing challenges of the companies to include: Abandon project, choosing a
combination of financing strategies and Involving other experts consultants and
financiers.
Table 4: How
do you overcome the financing challenges?
|
S/N
|
Responses
|
Frequency
|
Percentage
|
|
1
|
Abandon project
|
16
|
73
|
|
2
|
Choosing a combination of
financing strategies
|
22
|
100
|
|
3
|
Involving other experts
consultants and financiers
|
20
|
91
|
Source: Research Instrument Analysis (2016)
6 Discussion of Findings
and Conclusions
This paper investigated the challenges
and strategies adopted by oil and gas companies in financing their activities
in Nigeria. Below we discuss the findings made in the course of the research:
· The findings show that oil and gas
companies in Nigeria use a combination of Equity Financing, Bank Loans, Project
Financing and Bond Issuance to finance their projects. However, depending on
the nature of the project vis-à-vis project size, duration, inherent risk etc.,
a strategy of combining more than one funding source is usually implemented.
For example, initial investments are normally made through the issue of equity
while subsequent operations will likely be financed through bank loans and use
of the project finance options. The use of corporate bonds (debentures) to
finance oil and gas operations is also an option used mostly for projects of
long-term outlooks.
· The findings also show that size of
project, estimated duration and risk inherent in the project(s) are the most
important factors that determine their choice of funding strategy. In this regard, the size of the project is
the most important consideration for the choice of financing strategy that will
be deployed for the project. Hence were the project is large scale, the
companies will likely use a combination of bank loans and debentures. While for
short-term projects, the companies will favour the use project finance and
short-term bank loan facilities. Risky
projects will attract the use of equity financing and debentures. For one,
equity financing as a source for this nature of projects minimizes the risk of
bankruptcy as equity is not repayable while debenture are not only long-term in
nature but can also be converted to equity if need be thus reducing the risk of
the firm finding itself in a financial crisis.
· Finally, the respondents identified
the challenges of financing projects faced by the oil and gas companies to
include: Price Fluctuations, Project Duration, Government Regulations, Access
to and Cost of Funds and Security Challenges in operating environment. Access to funds is the over-riding challenge.
However, it is intertwined with the other factors mentioned. For example, with
crude oil prices at all time low in the international market, investors and
other funds providers are somewhat careful in providing or guaranteeing the
provision of funds. Further, longer term projects are currently viewed as being
too risky considering the new realities (low prices alternative, cleaner energy
sources, new government regulations and agitations for cleaner environments an
cost savings for energy). Finally,
insecurity in the oil and producing areas are also sources of concern for investors
and other funds providers.
Considering the challenges faced by
oil and gas companies in financing the projects, the following where proffered
as solutions and strategies that can be employed to solve the problems.
· In many cases, the problems associated
with financing oil and gas projects are solved through the combination of
several financing strategies to make-up for shortfalls in funding. for example,
where the there is a high risk of striking a dry hole or activities in hostile
hampering operations, funds providers may not want to get too financially
exposed in such an environment. In this case having more than one financing
source acts as some sort guarantee that ‘we are not in it alone’ for other
investors to come in. same can be said for reduced prediction of reduced
earnings as a result of price fluctuations. In this case, using a combination
of debt and equity will likely reduce exposure to liquidity crisis in the
future.
· Some of our respondents also note
that in some cases, the way out is to bring in experts consultants who can
reassess the viability of project to ascertain if it will be profitable or not.
These consultants also act as advisors to funds providers who rely on their
assessment to provide funds for new project.
· Finally, where no workable
alternative is found, the solution may lie in abandoning the project until such
a time that the firm can receive the necessary financial backing to carry on
the project. In this case, the project will likely not be abandoned per se but
put on hold until such a time that financial challenges are sorted out.
References
Abushaiba I. A, Eldanfour I. (2014).
Argument of accounting for oil and gas upstream activities. Int'l Journal of
Humanities and Management Science, 2014; 2(3):120-123.
Brown, K.; Moles, P.; Vagneur,
K. & Robinson, C (2011) Finance for
the Oil and Gas Industry, Edinburgh Business School, Heriot-Watt University,
FO-A1-engb 1/2011 (1046)
Cormier, D & Magnan, M. (2002).
Performance reporting by oil and gas firms: contractual and value implications,
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Cooper, K., Flory, S. M. &
Grossman, S. D. (1979) New Ballgame for Oil and Gas Accounting. The CPA
Journal, Vol. 49(1) pp. 11-17
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Financial Reporting Practices in the Oil and Gas Sector, Int'l Journal of
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Reporting Standards
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QUESTIONNAIRE
1) Please Circle the financing
strategy employed by your
a) Equity Finance company
b) Bank Loans
c) Project Finance
d) Bond Issuance
2) If
your firm uses more than one method, please indicate the preference level with
1 as most preferred and so on
a) Equity Finance company
b) Bank Loans
c) Project Finance
d) Bond Issuance
3) Do you employ more than one
strategy in a single project?
a) Yes
b) No
4) What determines the strategy or
combination strategies employed on any given project? Please note answer in
order of importance with 1 as most important
a) Size of project
b) Estimated duration
c) Risk inherent in the project
5) Do you face any challenges in the
choice of financing strategy?
a) Yes
b) No
6) Please indicate the most
important/critical challenges you face in the in your financing strategies
a) Business Risk (Risk of striking a dry-hole)
b) Price Fluctuations
c) Project Duration
d) Government Regulations
e) Access to and Cost of Funds
f) Security Challenges in oprating
environment
7) How do you overcome the financing challenges?
a) Abandon project
b) Choosing a combination of financing
strategies
c) Involving other experts consultants
and financiers
For comments, observation or other feedback or if you need
assistance with your research projects/papers, you can contact the author via
E-mail: researchmidas@gmail.com or call/Whatsapp (+234)0803-544-6622
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