Trends in project finance

Nigeria

Helen Brume, group head for oil and gas at Union Bank of Nigeria, talks to The Energy Year about the ups and downs the country’s financial sector continues to face and the extent to which oil and gas projects are becoming more bankable. Union Bank is an indigenous provider of commercial financial services.

What approach have the Central Bank of Nigeria (CBN) and local banks taken to the pandemic?
CBN has done a commendable job in trying to stabilise the economy, which was harshly hit by Covid-19 and the drop of oil prices, especially since oil is Nigeria’s primary source of revenue. They introduced some swift and early intervention funds to protect the financial sector in the early part of 2020. They also allowed banks to restructure some of the loans without fear of taking any significant provisions on oil and gas-related exposures, and pushed forward obligations for at least one year. In regards to intervention funds, banks reduced the interest rate from 9% to 5% and granted an additional moratorium especially for SMEs.
Overall, the banks are still very healthy and stable. Comparing Union Bank to other banks, we were more prepared to reinvent ourselves when the pandemic hit. We were one of the first to activate remote banking – in March 2020 – and have been able to operate seamlessly with remote banking by making sure all our digital banking channels are up and running. Overall, growth earnings improved and our nonperforming loan ratio is still good.

What ups and downs is the country’s financial sector still facing?
In meeting foreign exchange needs, given that Nigeria is very import dependent, there is still a lot of work to be done. There is no way the foreign reserves of the country can meet the demands of the importers. There’s always going to be a need to strike a balance with how much of the foreign reserves you use to meet import needs, and CBN has done a good job prioritising the sectors that really add to the country’s GDP.
Nigeria posted a modest growth for Q4 2020, which exceeded all the predictions of the World Bank and the IMF. It is yet to be seen how the economic situation will develop given the level of insecurity in the country and the rising inflation, which now stands at 16%. Moderating inflation is needed but the light at the end of the tunnel is seen with the recovery of the price of oil. This means that we can begin to build our foreign reserves back up.
CBN is actively working towards reducing the backlog of import-driven FX requirements. With respect to exchange rate, on the one hand you have the parallel market that is just short of NGN 500 to a dollar and on the other the CBN’s official rate of NGN 410. We expect some kind of convergence of the two rates by the end of the year as we cannot continue to operate in an economy where there is such a disparity. The whole economy is very import dependent, hence the continuous demand for foreign exchange, so if you had multiple exchange rates, it would be difficult to attract the capital you need.

To what extent are oil and gas projects becoming more bankable?
Many more deals should close this year compared to last year. Several oil producing companies are revisiting capital expenditures which had been shelved in 2020 due to the collapse in oil prices. From a lending perspective, a key consideration for us as a bank is your ability to hedge your production. When oil prices are at USD 30, it’s almost impossible to put a hedge in. With the price of oil above USD 60, people are now trying to meet some of the conditions precedent to earlier approved loans and revalidate some of the approvals. So, you will see more lending support for the oil and gas sector moving forwards.
An important example is seen with the marginal fields, as we sense a growing appetite for those deals. The trick about the marginal field deals is that the last marginal round was done in 2004, so there is limited local banking experience as the heads of oil and energy in most banks may not have been in the industry during the last marginal field round so there aren’t many lessons learned to be shared.
At the same time, the stakes are much higher because there is a lot more money needed to revamp some of these assets. Some of the fields have been shut in for 20 or 30 years. This means that there’s a lot more due diligence needed but we should see some appetite for those deals happening this year. From our perspective, lending for marginal field developments will need to be structured purely as a corporate finance deal as banks are unlikely to take the risk of production.

What strategy does Union Bank have when it comes to the oil and gas industry?
Even if the IOCs continue to divest, they aren’t going anywhere. They will still be active in the sector. We have worked with Chevron for 40 years, and that is still our most important banking relationship.
But while IOCs will continue to dominate, we cannot deny the importance of indigenous players. We’ve supported several indigenous players in the last five or six years and our aim is to continue that trend. In 2014, we supported the acquisition of one of the Shell divestments, in which almost USD 1 billion was raised. We put in USD 25 million. We also supported the NLNG Train 7 transactions and the NNPC Project Eagle transaction, where we chipped in with USD 15 million.
In this sense, our strategy has not changed: we will play a role where there are opportunities. We keep our eyes open to any opportunity in the upstream, midstream and downstream. Regarding the downstream, the progress of the Dangote Refinery has added to the trend of there being many more indigenous refineries with very good banking proposals. This could be revolutionary if done correctly. As a country, we’ve recognised the need to develop our own local refineries and product, as we cannot continue to use our foreign exchange to import finished petroleum products.

To what extent are you involved in the NLNG Train 7 financing?
We are one of the co-lenders for Train 7, which applied a multi-tranche financing scheme. We are one of nine banks involved. This deal is very unusual as it has different categories of financial institutions involved. We are very confident in the previous successes of NLNG so even though it is foreign currency denominated, they got a lot of support from the Nigerian financial sector. These are the types of transactions any bank wants to have on its books.

What gas-based projects have you recently been involved in?
The gas sector has a lot of potential and we are now seeing that turned into reality. There is a USD 350-million gas processing deal that closed in February 2021. More than USD 300 million was raised and we were one of the leading arrangers. This transaction involves ANOH Gas Processing Company, a joint venture between Seplat Energy and the Nigerian Gas Company, investing in a gas processing plant with a capacity of 300 mcf [8.5 mcm] per day. This facility will be a crucial pillar of gas-to-power initiatives in Nigeria, boosting the domestic supply of power.
This project has strong sponsors, good offtakers, a reliable evacuation network and strong equity support. Those were the key selling points for that deal. Value-wise, we put USD 20 million into that deal. That’s a starting point because gas is clearly the future. We have done a couple of indigenous gas deals and the idea is to do more this year. We look forward to structuring more deals of this nature.

How are you changing your image as a traditional bank to that of a modern bank?
We’ve invested heavily in technology, as evidenced in our digital channels for our customers and in the way in which we work. Perceptions of us being a traditional bank are still there but as we continue to differentiate ourselves digitally and attract more young banking customers that will change. We are becoming more digitally minded and digitally centred. We continue to design products to suit the country’s demographics (largely young and digitally savvy).
To this end, Union Bank has opened the first smart branch and the first drive-through ATM in the country. We are doing things differently and we need to spread the word. Every employee is an ambassador letting the public know we have changed and that they need to come and experience that.

What opportunities do you see in energy for Union Bank moving forward?
The energy space is diverse. We have some limited appetite for the power sector, and were very supportive of the privatisation process, while a lot of banks are still struggling with the suboptimal performance of the loans. Banks may have a bit more appetite for captive power as it is an area where there is less government intervention as it works on a willing buyer-willing seller basis. We are interested in those kinds of opportunities. There are a couple we are looking at now, and that includes renewable energy – captive and off-grid power projects.
We have a broad approach to the oil and gas sector, having an appetite for the upstream, downstream, midstream and of course natural gas. In particular, our appetite for gas transactions is more on the development and processing side. The government is also trying to raise awareness around cooking gas. We are still watching that.

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