Financing Downstream Oil and Gas Operations: The Experienc

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Financing Downstream Oil and Gas Operations The
Experience of Afreximbank
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• TABLE OF CONTENTS
• Introduction
• Africas Oil Gas Sector
• Afreximbanks Programmes Directed at Financing
  Downstream Operations in Africa
• Conclusions/Recommendations

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• INTRODUCTION
• 1.1 Preamble
• Afreximbank is pleased to be invited to
  participate in this Conference and to share with
  delegates its experiences in the financing and
  promotion of Downstream operations in Africas
  Oil and Gas Sector.
• The Sector accounts for over a third of the total
  merchandise export revenues of the Continent and
  a lions share of GDP and fiscal revenues in oil
  producing African countries (See Table 2.2).

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• Against this background, African Export-Import
  Bank (the Bank or Afreximbank) considers it
  as a Strategic Sector worthy of its supports.
• This Paper provides an overview of the African
  Oil Gas Sector followed by a discussion of
  Afreximbanks experience in financing downstream
  operations in Africas Oil and Gas Sector and
  conclude.

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• 1.2 AFREXIMBANK
• Established in 1993 as a
• multilateral financial institution.
• Shareholders include African governments, African
  private investors and non-African investors.
• Authorized capital US750 million.
• Mandated to finance intra- and extra-African
  trade.
• Headquartered in Egypt with Branch offices in
  Abuja, Harare and Tunis.
• Cumulative credit approvals since 1994/95
  amounted to 2004USD8 billion.
• Return on Equity in excess of 10 in 2006.

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• 2. Africas Oil Gas Sector
• 2.1 Activities in the Oil Gas Sector
• Activities in the oil gas sector can be
  broadly categorized into
• a) Upstream Activities
• Exploration and
• Production of crude.
• Oil Field Services support the above activities
• b) Downstream Activities
• Refining and
• Distribution and Sales.

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2.2 Economic Importance of the Sector in
Africa Table 2.1 Major Upstream Oil Producers in
Africa
n/a not available Sources i) OPEC Annual
Statistical Bulletin 2006 ii) EIU
Country Profiles 2007 iii) Energy
Information Administration (EIA) (Sudan) Country
Analysis Brief, April 2007.
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Table 2.2 Economic Importance of the Oil and Gas
Sector to Selected Oil Producing African
Economies, 2005/6
Share of GDP Share of Fiscal Revenues Share of Merchandise Export Revenues
1. Algeria 32.5 49.03 68.2
2. Angolaa 53.6 n/a 87.1
3. Cameroon 6.3 23.04 39.8
4. Gabon 41.9 54.29 80.5
5. Libya 32.6 85.6 95
6. Nigeria 46.9 90.7 96
Memorandum Item Share of Oil and Gas in total African Exports Memorandum Item Share of Oil and Gas in total African Exports Memorandum Item Share of Oil and Gas in total African Exports 33b
Note a data relate to 2001 b this figure tends to exceed 33 in times of good market conditions for Oil and Gas products n/a not available Source 1. EIU, Country Reports, various issues 2. EIU, Country Risk Services, Main Report, various issues 3. World Bank, Global Development Indicators, 2004 4. World Bank, African Development Indicators, 2004 Note a data relate to 2001 b this figure tends to exceed 33 in times of good market conditions for Oil and Gas products n/a not available Source 1. EIU, Country Reports, various issues 2. EIU, Country Risk Services, Main Report, various issues 3. World Bank, Global Development Indicators, 2004 4. World Bank, African Development Indicators, 2004 Note a data relate to 2001 b this figure tends to exceed 33 in times of good market conditions for Oil and Gas products n/a not available Source 1. EIU, Country Reports, various issues 2. EIU, Country Risk Services, Main Report, various issues 3. World Bank, Global Development Indicators, 2004 4. World Bank, African Development Indicators, 2004 Note a data relate to 2001 b this figure tends to exceed 33 in times of good market conditions for Oil and Gas products n/a not available Source 1. EIU, Country Reports, various issues 2. EIU, Country Risk Services, Main Report, various issues 3. World Bank, Global Development Indicators, 2004 4. World Bank, African Development Indicators, 2004




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• 2.3 Strengths and Weaknesses of Africas Oil and
  Gas Sector
• 2.3.1 Strengths
• Africa is well endowed with oil and gas
  resources, and accounted for about 12.5 of
  global oil production and 9.84 of proven global
  oil reserves in 2006.
• Africa also accounted for about 7.83 of proven
  global gas reserves in 2006.
• Increasingly higher quantities of oil and gas
  reserves are being found in Africa's deep and
  ultra deep offshore areas, especially in west
  Africa.

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• Africa produces high quality crude oil and gas at
  competitive costs.
• Activity in the Downstream Segment is dominated
  by Multinationals. This is due to the fact that
  less than 20 of 53 African countries have
  Refineries.
• Distribution of refined petroleum products is
  also controlled by multinationals.

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• 2.3.2 Weaknesses of the Downstream Segment
• Unrealistic official prices for refined petroleum
  products
• Environmental problems
• Economic instability and over-regulation of
  prices and activity in the downstream
• Huge capital requirement for entry into
  downstream operations and
• Lack of project financing.

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• 2.4 Activity in the Downstream Segment
• 2.4.1 Major Downstream Projects
• Major projects in the Downstream are
• Oil Refinery Projects
• Petrochemical Industries / Projects
• Liquefied Natural Gas Projects and
• Oil and Gas Distribution Infrastructure Projects
  such as Storage Facilities, pipelines, etc.

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• 2.4.2 Major Operators in the Downstream Sector
• Operators could be grouped under three main
  headings
• Major Players Refining and distributing
  processed oil and gas products
• Minor Players National Refiners/ Distributors of
  oil and gas products
• Local Entrepreneurs Acting as Distribution
  Agents or suppliers of services to (i) and (ii)
  above.
• Category (i) comprises of multinational companies
  like Shell, Exxon Mobil, BP Amoco, etc.
• Overall, activity in this Sector is dominated by
  Multinationals.

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3. Afreximbank Programmes Directed at Financing
Downstream Operations 3.1 Rationale for
Afreximbanks Intervention in

• The Banks intervention derives from
• the economic importance of the Sector (e.g. GDP,
  fiscal export revenues) to African Oil Producing
  economies, and
• need to improve the participation of new
  (African) entrants into the Sector.

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• 3.2 Instruments used in the Banks intervention
  in the Sector include
• Advisory services aimed at corporate
  reorganization and preparing borrowers to enter
  loans market
• Structured Finance to mitigate Corporate Finance
  Risks and
• Risk bearing support.

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3.3 Beneficiaries

• Beneficiaries of the Banks financing programme
  include
• African Oil ( Gas) Refineries
• African Oil and Gas Distribution Companies
• African firms providing engineering and transport
  services etc. to major upstream and downstream
  Oil and Gas companies and
• Traders (exporters / importers) of refined Oil
  and Gas products in Africa.

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Figure 1Secured Direct Lending
3.4 Financing Structures In Support of Oil and
Gas Refineries
Lending Bank
ESCROW Account (with offshore bank)
6. Repayment of principal and interest
5. Payment of Proceeds of Export / Sale Contract
3. Disbursement
2. Assignment of Contract Proceeds
1. Export/ Sale Contract
Buyer (Retailers/Distributors Of refined Oil
Gas products)
Producer e.g. SMB (Côte dIvoire), TOR
(Ghana), SAR (Senegal) Public/Private Refineries
4. Delivery of Oil/ Gas
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Figure 2Secured Direct Lending
Financing Structures In Support of Downstream
Services a)
Lending Bank
ESCROW Account (with offshore bank)
6. Repayment of principal and interest
5. Payment of Proceeds of Service Contract
3. Disbursement
2. Assignment of Contract Proceeds
Oil Refiner/ Distribution Company
Oil/Gas Service Provider
1. Service Contract
4. Delivery of Service
a) Include construction and maintenance of
infrastructure for storage and distribution of
processed oil and gas products, as well as
haulage and pipeline construction and maintenance
services
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• Key features
• Bank assumes performance risk of the refinery (or
  Oil and Gas Service Company) and payment risk of
  buyer (or beneficiary of the service).
• Transaction hinged on demonstrated track record
  of company or a technical partnership arrangement
  with a reputable oil refiner / service company.

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• Export or construction and OM, and
  transportation service contracts, among others,
  being binding and enforceable.
• Duly Executed Oil Export or Service Contract.
• Assignment of Proceeds of Oil Export or Service
  Contract to Lender(s).
• In many instances, the bank further supports the
  facility using local bank guarantees (see Figure
  3).

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Figure 3Lending With Payment Guarantee
Lending Bank
2. Guarantee (which may or may not be
collateralized) a)
Guarantor b) (Local bank)
7. Repayment of principal and interest
ESCROW Account (with offshore bank)
3. Assignment of Proceeds of Export/ Service
Contract
4. Disbursement
6. Payment of Proceeds of Export / Service
Contract
1. Export/Service Contract
Producer
Buyer
5. Performance of Contract (Delivery of Oil / Gas
or Service)

1. Securities taken include depositing of short-term
   treasury bills, partial cash collateral etc.
2. Guarantee may be per aval.

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• 3.5 The Banks Major Downstream Operational
  Interventions include
• i) Financing major refineries in the continent
  such as SAR (Senegal), NNPC (Nigeria), TOR
  (Ghana), SIR and SMB (Côte dIvoire), SONARA
  (Cameroon), among others.

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ii) Financing major indigenous Oil and Gas
Services Companies providing haulage and other
services, such as Construction and maintenance of
infrastructure needed for storage and
distribution of refined petroleum and gas
products in many Afreximbank shareholder
countries.
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1. Activities of major traders of Refined Oil and
   Gas Products in Africa, for example, Vittol,
   Trafigura, and Africa Petroleum (AP), among
   others, have also benefited from the Banks Oil
   Sector Financing Programme.
2. During 1998-2006, the Banks credit approvals in
   favour of the Sector exceeded USD3 billion.

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• CONCLUSIONS/RECOMMENDATIONS
• African/Indian companies operating in the Oil and
  Gas Sector deserve financial support because of
• (i) the enormous contribution of the Sector to
  GDP, fiscal export revenues in oil producing
  African countries and
• (ii) the prominence of Oil and Gas as a source of
  energy for all forms of economic activity in
  Africa and India.

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• Indigenous African operators in the oil Gas
  sector could address their capital and technology
  needs by entering into partnership with their
  Indian counterparts.

• Afreximbank is prepared to support African and
  Indian companies with viable business in the
  downstream segment of Africas Oil and Gas Sector.

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• THANK YOU FOR LISTENING