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When lenders are broke

How N5 trillion loans to energy sector got banks into trouble

 

The banks’ loans to Nigeria’s energy sector is going bad, putting recovery move by the lenders in jeopardy and the country’s economy in more trouble, reports Adeola Yusuf

 

The banking sector, it was, that first gave signs that Nigeria’s economy is in trouble; the Bankers’ Committee saw the problem coming, but all it did could not help the lenders to save jobs of over 400 members of staff in their services in Nigeria.

Despite assurances it gave to the Central bank of Nigeria (CBN) at its meeting in October to shelve plans of mass retrenchment in the banking industry, the committee of banks could not help but sack hundreds of workers.

Director, Banking Supervision of CBN, Mrs. Tokunbo Martins, went back to Abuja from Lagos, venue of the meeting with Bankers’ Committee with erroneous belief that the problems caused majorly by over N5 trillion loans sunk into the energy, would not degenerate.

“One of the things we discussed was about the impending retrenchment in the banking industry. So, we understand that many bank workers are expressing fears about possible retrenchment in the industry, she said.

“We discussed and the banks are now committed to not retrenching their staff, going forward. So, whatever rumours are flying around that mass retrenchment is happening or not happening, that is not true,” she added.

Force majeure

Dampened by unfruitful loan recovery plans, banks and other lenders in Nigeria declared force majeure on financing of oil projects in the country as oil price rout hits harder on financial institutions, worsening their cash crunch.

The banks are also putting a proposal to the Federal Government for bailout as loans granted to energy firms, which hit N5 trillion in 2013, are stuck. Vice president at First City Monument Bank Plc, Mrs. Ronke Jibodu, who revealed this at the monthly technical meeting of the Nigerian Association of Petroleum Explorationists (NAPE) in Lagos, declared that the banks could no longer participate in crude equity investment.

Stating that projects financed by banks in Nigeria are recording a shortfall of $10 on every single barrel produced, Jibodu maintained that the crude price had fallen below the $45 per barrel projection by most of the lenders. “What we set as worse target for oil (projection) is $45, but today, it’s $35 per barrel.

This is a big challenge for the banking industry,” she said. This has led to a major issue facing banks. For instance, she said the bank had $1.2 billion refund this year. “And how the money could be refunded by oil firms that are also facing big task to survive the low price is a big issue,” she declared.

“The financial institutions are being faced with ‘if what do we do scenario?’ The unstable, uncertainty in the oil sector. “What I told my colleague is that maybe we could get bailout fund. We need to fund new projects without being saddled.

We still have a need of $20 to $30 million for new project financing,” she stressed. According to the FCMB vice president, the “biggest issue we have today is the fall in oil price. However, the oil sector still remains a sector where banks still want to play.”

Voice of debtors

A former Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Chambers Oyibo, who is now the Chief Executive Officer of Prime Energy Resources Limited, confirmed that the current realities in Nigeria had impacted both big and marginal field operators.

Maintaining that many companies may not see the next recovery, Oyibo said that his company, like many marginal field operators, was impacted while many others could not meet their costs. His view was corroborated by energy expert, Abiodun Adesanya, in a paper delivered recently, entitled: “Current realities in the upstream sector of the Nigerian oil and gas industry.”

Adesanya said that non-performing loans in the industry were ubiquitous. “About $5 billion loans granted to energy firms might be impaired due to the current realities, which have also led to a 53 per cent drop in NNPC cash calls payment to JV operations between 2005 and 2015,” he said.

Adesanya, the Chief Executive Officer of Degeconek, added: “The low price has also led to a 62 per cent drop in JV production that is masked by PSC production. “It plays a part in decline of crude oil production from 2.3 million barrels per day to 2.1 million barrels per day over the same period,” he said.

Troubled recovery

Long before banks commenced recovery processes for their N5 trillion credit facilities in the energy sector, signs of recession had begun to manifest on the over $4 billion marginal fields’ operations in Nigeria. The books of many local oil operators were turning red, making many to be on the cliff of bankruptcy.

While 17 out of the 24 marginal fields issued to 31 firms during the 2003 bid round could not produce, New Telegraph gathered that the financial books of some of the seven operating marginal fields are in red due to oil price rout and the renewed militancy in the Niger Delta. The militancy alone crashed production at the onshore and shallow water acreages, where the indigenous firms operate.

Pressure on lenders

Banks and other lenders have, however, exchanged correspondence with the operators, expressing fear that over $130 million loans ploughed into the marginal field operations between 2007 and 2011 may go bad. “It is not enough to stop the flow of new investment in the section, what happens to the investment already made is major cause for concern as we speak.

It will interest you to know that between 2007 and 2011 alone three banks in Nigeria invested $130 million in the marginal fields,” a manager at oil and gas investment section of one of the new generation banks told this newspaper. Everyone, banks and other lenders who have invested in this industry, he said, is already fretting over the books of most of these indigenous producers that are turning red.

The banker said: “Skye Bank has funded a number of marginal field projects such as the Platform Petroleum’s Gas Processing Plant and WalterSmith’s Production Boost Project. Recently, Skye Bank approved a loan facility of $18 million for Pillar Oil, to enable the company drill a well at an interest rate of 17per cent per annum.

“The former Intercontinental Bank approved $6 million for Niger Delta Petroleum for the ‘work-over’ of Ogbelle 1, at an interest rate of 18 per cent per annum, a project that led to their crucial first oil. “Brittania- U received its initial funding of $23 million from Union Bank in 2007 for its project on the Ajapa field.

“By the time Brittania-U reached first oil, this loan had increased to $50 million. Brittania- U also re-ceived an additional $30 million loan facility from Union Bank, which the company used to buy-out its ‘troublesome’ foreign technical partners.”

Production heading southwards

Currently, Brittania-U is producing about 2,300 barrels per day (bpd). However, focusing on the fortunes of the firm might give the erroneous impression that the local banks were in a lending frenzy to marginal field operators.

The fact is that of the six companies producing from marginal fields as at 2011, only Brittania-U commenced operations with a bank loan.” Platform Petroleum, the first to reach production, was able to do so with funds provided by its partners (New Cross), a cash-loaded Nigerian company.

Pillar Oil struggled for cash and was forced to rally funds through shareholder’s contributions, in order to commence production without a bank loan. Pillar drilled a new well, funded by Skye Bank, to enable the company increase production. Walter- Smith Oil Ltd could not raise funds from a bank until it had established production.

Energia Oil Ltd funded its field development with cash flow from its shareholders. Even with this funding, total output contributed to the production by the marginal operators has crashed below three per cent and this had raised a major concern for the lenders.

Producer’s voice

Reacting to this issue, Managing Director, Seplat, Mr. Austin Avuru, said: “The journey that the industry had started a few years ago, unfortunately, today is being interrupted by forces that you and I have looked at how we can combat them.”

The crisis in the Niger Delta, Avuru said, has taken “a new turn that must worry all of us because when we don’t produce, our companies are destroyed, jobs are destroyed, and the economy is destroyed.

“This whole transformation that I described is interrupted rudely. Unfortunately, I do not know if there is any real solution in the horizon,” Avuru said at the just concluded Nigeria Annual International Conference and Exhibition (NAICE) organised by Society of Petroleum Engineers (SPE) in Lagos.

Investments in power

The power Investors sourced over $10 billion from banks and other lenders for the purchase of 10 Power Plants and the distribution firms during the last privatisation. Despite the longterm period of recovery for these funds, the lenders now expect faster yields from these investments.

While over $5 billion loan facilities were secured for unbundled Power Holding Company (PHCN), the lenders also offered $5.8 billion for the purchase of gencos including Alaoji, Calabar, Omotosho, Olorunsogo, Omoku, Ogorode, Geregu, Gbarain, Benin and Egbema. After the financial bid opening held in Abuja, two companies that bid above the reserved price were accepted for nine out of the 10 generation companies.

Three companies bid for Benin Genco, three companies for Calabar, three others for Egbema, six for Gbarian, five for Geregu, four for Ogorode, four for Olorunsogo, three for Omoku, and nine for Omotosho Genco.

Nine of the power plants had two investing companies that bid above the Privatisation Committee reserved price. It was only Alaoji that had only one bidder, while AITEO consortium bid $902 million. The company’s first bidding for Alaoji Power Plant was $680 million, which was not up to the reserved price and it was asked to go and raise its bidding price.

Recovery frenzy

in downstream Banks and other lenders have also begun a recovery programme to recoup loans and debts from the downstream sector of the oil industry, a move that has set jitters down the spines of marketers and importers of premium motor spirit (PMS) otherwise known as petrol. While the debts differ from bank to bank and from one marketing company to another, a banker told this newspaper that the cumulative loan and debts for recovery are over N350 billion.

The major marketers and depot owners also gave the hint that the banks are on their tail for loans and accumulated debts from subsidy. Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Thomas Olawore, who declared this on the sideline of a conference in Lagos, disclosed that part of the debts they owe banks are still with government in form of foreign exchange differential and taxes on subsidy debts of 2014 and 2015.

Tough one

The on-going sack at the banks is also contrary to the agreement, which the lenders signed with the Association of Senior Staff of Banks, Insurance and Financial Institutions (ASSBIFI) and the National Union of Banks, Insurance and Financial Institutions Employees (NUBIFIE), a few months ago.

The agreement, which was signed in the wake of the mass sack in the industry in the first quarter of the year that saw over 6,000 bank workers losing their jobs, reportedly had the banks agreeing to suspend further layoffs. In fact, the mass layoffs earlier in the year had also triggered an intervention by the Minister of Labour and Employment, Dr. Chris Ngige, who directed that despite the economic downturn, banks, other financial institutions and multinationals, must keep existing jobs and desist from sacking their workers.

Attempts by this newspaper to seek reaction of NUBIFIE President, Mr. Danjuma Musa were not successful. However, when contacted, ASSBIFI President, Mr. Sunday Salako, said he was not aware that any bank that signed the agreement with the unions not to lay off workers was flouting it.

He said: “I’m just hearing it from you that banks are still sacking. I don’t think any bank that is doing this signed the agreement with us. Any bank that signed the agreement and is sacking workers is inviting our wrath.” He emphasised that that the Minister of Labour’s directive to the banks to suspend staff retrenchment was still in force and that any bank that flouts it was doing so at its own risk.

Last line

Although the Federal Government is faced with financial challenges, it should come to the aid of investors whose major source of investment is from banks and other lenders. The operators too should consider mergers with one another. This will make them to come out stronger from the storm.

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