The slump in the oil and gas prices impacted the financial sector, and has led to a decrease in the available liquidity for energy projects. Thabo S. Thobejane, Senior Associate of Oil & Gas Finance in Corporate and Investment Banking for Nedbank CIB, talks about the current state of oil and gas financing, the role of private equity and the involvement of indigenous banks in financing.
How has the availability of liquidity for the oil and gas sector been impacted by the low oil price environment and the volatility of the prices?
Liquidity was very low in 2015/2016 as a result of the slump in price and the increase in price volatility. In the past three months, however, some stability has returned since OPEC agreed to cut production in Q4-2016, and we have seen a slight improvement in liquidity as a result. OPEC’s production cuts will result in a better oil price going forward, after the average price of $40-$45 per barrel experienced in 2015/2016.
Private equity involvement is also playing an important role in the recent improvement in liquidity for companies, such as with Kosmos and another Africa-focused exploration and production company, New Age. New Age recently turned to the private equity market for funding while Kosmos, on the other hand, has always been supported by that market.
In summary, there is not going to be much of a buffer between price deck and spot going forward, but liquidity is slowly starting to return.
How can companies and governments coordinate to make the most of what funding is available?
What is key is that governments put in place a reliable, long-term legal framework, which provides a foundation for investors and ensures the laws governing the country are consistent. For example, the mega LNG projects in Mozambique are governed by special laws; for these mega projects to go ahead, they need a reliable and long-term legal framework.
In addition, if one looks at Nigeria, a number of IOCs are coming up with creative funding solutions to assist government in meeting its cash-call obligations on specific projects.
What role do you see indigenous banks playing in the oil and gas sector and the funding of multi-billion dollar deals, such as the LNG projects in Mozambique and Tanzania, in the near-future?
In addition to having their ear to the ground, indigenous banks have local knowledge in terms of relevant stakeholders, rules and regulations.
Mega projects tend to be dollar-funded; and indigenous banks that can raise dollars cheaply have the opportunity to play a role. However, the reality is that raising dollars can be challenging for these banks. If one wants to see indigenous banks in mega upstream projects, one needs to propose transactions that are structured with two-currency tranches, one local and the other in dollars.
Indigenous banks tend to be more involved in the downstream sector, which tends to be funded in local currency.
The message is that mega upstream projects tend to be dollar-denominated, and most local banks struggle to raise dollars cheaply. In Nigeria, for example, funding tranches are created specifically for local banks to participate in, and the balance is then funded by international banks and/or project sponsors.