EXPLAINER: Inside NNPC’s crude-backed loans

In pursuit of capital to finance its operations, the Nigerian National Petroleum Company (NNPC) Limited offered a substantial volume of the nation’s crude oil to creditors to secure about $6 billion in loans within three years.

The NNPC is also currently shopping for another $2 billion loan that will see the company hand over more barrels to deep-pocket investors.

The crude-backed loans, drawn from four different deals, were obtained between 2020 and 2023 — a period Nigeria’s crude oil production fell from 1.49 million barrels per day (bpd) to 1.31 million bpd.

TheCable presents details of the deals.

PROJECT GAZELLE

In August 2023, the NNPC secured a $3 billion oil-backed loan from the African Export-Import Bank (Afreximbank) to support the naira and stabilise the foreign exchange (FX) market.

In the deal, the oil company pledged a total of 164.25 million barrels of crude.

At 90,000 barrels per day, starting from 2024, NNPC is expected to repay the loan through Project Gazelle Funding Ltd, a special purpose vehicle (SPV) incorporated in the Bahamas.

Commenting on the transaction in its 2023 audited financial statements, the NNPC said the funding was utilised to finance an “advance payment of future taxes and royalty obligation due to the federation on production sharing contracts (PSC) assets managed by the company on behalf of the federation”.

According to the NNPC, the interest rate for the facility is 11.8 percent while the margin and liquidity premium are 6 percent and 0.5 percent respectively.

In January, Afreximbank announced the first disbursement of $2.25 billion under the crude oil prepayment facility.

The lender also paid out an additional $925 million in June — bringing the total disbursement to $3.175 billion.

PROJECT BISON

In September 2021, the NNPC proposed to acquire a 20 percent interest in the Dangote Petroleum Refinery for $2.76 billion.

According to the national oil company, the deal was financed by a forward sale agreement of $1.036 billion from Lekki Refinery Funding Limited — of which $1 billion was paid to Dangote refinery.

The oil firm said it signed the forward sale agreement with the Lekki refinery to supply 35,000 barrels of crude per day (bpd) for the settlement of the $1.036 billion (N426.2 billion) funding.

The interest rate for the facility, according to the NNPC, is 11 percent.

NNPC said it paid $625 million principal, while $424 million (N324 billion) is still outstanding, as of December 31, 2023.

The national oil company added that the investment was initially held by the NNPC Greenfield Limited, its wholly-owned special-purpose vehicle (SPV).

PROJECT EAGLE

In 2020, the NNPC signed a $1.5 billion prepayment deal with Eagle Export Financing Limited.

Under the terms of the agreement, the NNPC commenced reimbursement of the facility on August 28, 2020, with 1.8 million barrels of crude oil every delivery period.

The forward sale agreement (FSA) was meant to provide capital for investment in NNPC’s production capacity, which is of strategic importance to the Nigerian economy and the country’s leading source of FX earnings.

“The production under the FSA will support debt of up to N627.8 billion (US $1.5 billion), which has been structured as a crude oil prepayment facility over two tranches,” NNPC said.

United Bank for Africa (UBA), Standard Chartered Bank, Afreximbank, Union Bank, as well as Vitol and Matrix — two oil trading companies — participated in funding Project Eagle.

As of December 31, 2023, the NNPC said its subsidiary, NNPC Exploration and Production Limited (NEPL), had capital commitments of $352.88 million (N158.3 billion) relating to the forward sale agreement with Eagle Export Financing for the delivery of crude oil.

“Under the contract, Eagle Export Funding Limited will make an upfront payment to NEPL for crude in a forward sale agreement (FSA),” the firm said.

“The payment received is required to be settled with delivery of crude oil volumes i.e. NEPL sells crude to Eagle Export Funding Limited based on a delivery schedule.

“Based on the agreement, at least 1,800,000 barrels of crude oil must be nominated and scheduled by NEPL and delivered at the relevant delivery terminal to Eagle Export Limited in every delivery period which commenced on August 28, 2020.”

PROJECT EAGLE SUBSEQUENT

In another deal, the national oil company obtained pre-export finance (PXF) loans, named PXF1 and PXF2, for the settlement of its debts to some import vendors of petroleum products.

According to NNPC, the NEPL had capital commitments of $159 million (N60.3 billion) regarding the deal, as of December 2020.

However, NNPC said there are no capital commitments regarding the pre-export financing as of December 31, 2023.

“As at 31 December 2023, there are no capital commitments regarding pre-export financing as outstanding PXF 2 liability balance was refinanced through a forward sale of crude valued at $694m (N278 billion) to Eagle Export Limited tagged “Project Eagle Subsequent” on 15 March 2021,” the company said.

PROPOSED $2 BILLION LOAN BY NNPC

On July 9, Mele Kyari, group chief executive officer (GCEO) of the NNPC, said the company is in talks with lenders for a new $2 billion oil-backed loan to finance the NNPC’s operations and allow investment in its business.

Kyari said the company was seeking a loan against 30,000 bpd to 35,000 bpd of crude production.

He said the cash raised would be used for all NNPC’s business activities, including supporting production growth.

“We have no problem covering our gasoline payments. This is just money for normal business and not a desperate act,” Kyari said.

“It will be a syndication with critical but regular partners who have been in business with our company to forward the cash.”

In August, TheCable reported that top NNPC officials were in Europe to source the loans and were targeting Standard Chartered Bank in the United Kingdom.

If the deal is successful, it will increase the volume of crude oil pledged to NNPC’s lenders.

IMPACT OF NNPC’S CRUDE-BACKED LOANS

The NNPC said crude-backed loans are important for several reasons including accessing FX, financing its business activities, supporting production growth, and buying stakes.

However, stakeholders have raised concerns about the deals, stressing the negative impacts of such transactions.

According to oil experts, the forward sale arrangements have immense impacts on the country’s oil output, petrol availability, and external reserves.

Speaking to TheCable, Jide Pratt, an oil and gas expert, said the arrangements would negatively impact export volumes and domestic supply when crude oil production drops, as NNPC is compelled to set aside some barrels for the creditors.

“So if we have 1.34 million bpd production and 60 percent of that is for NNPC, if the company takes crude-backed loans, it reduces federation revenue,” he said.

“The impact also flows from under production as this means the company struggles to meet domestic crude supply obligation (DCSO) as we see with refineries not getting enough local crude feed.”

On August 11, the management of AIPCC Energy Limited, operators of the Edo Refinery and Petrochemicals Company Limited (ERPCL), said NNPC has failed to supply crude oil to the refiner despite having several meetings, correspondences, and communications with the national oil company over the past three years.

Speaking further, Pratt said the country’s revenue would decline over low oil production or the barrels offered in exchange for loans, preventing the government from increasing FX in the excess crude account.

“As such, with less volume produced or more pledged to forward sales combined with dropping crude prices, the government is unable to increase FX in the excess crude account,” he said.

“In all of this, NNPC shouldn’t have the free reign on crude-backed loans in a proper organisation with corporate governance structures.”

Also, Oyeyemi Oke, managing partner at AO2LAW, a law firm, said Nigeria uses potential revenues, which it is supposed to get in future, for the deal.

“We have collected it, or it will be part of the amount that will be used to repay the loan. Does that mean that, essentially, our revenues have gone down? Not necessarily,” he said.

“But what it means is that we don’t have flexibility to sell crude oil to other persons. What it means is that perhaps the financers under the forward sales arrangement have already locked in the crude to be supplied at a particular price, which gives little flexibility. What it means is that we may not be able to take advantage of the increase in crude oil price.”

Oyeyemi said part of the amount which should be in the foreign reserves — as a result of crude oil sale — is used to service loans obtained from the arrangement.

“But this is not unusual. The question is: what is the interest on loan to be repaid? I don’t think it’s unusual whereby we’re using part of our revenues to service debt, just like any commercial venture,” he said.

“If NNPC did not borrow the loans, Nigeria may have more money in its reserves, but since we are using loans, part of the monies which should be in our reserves will be used for settling the debts.”