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Dr. B.O. OramahDr. B.O. Oramah
Critical Issues in Financing Indigenous Oil Critical Issues in Financing Indigenous Oil
Field Services Providers in AfricaField Services Providers in Africa
Director (Planning & Development Department)Director (Planning & Development Department)
African Export-Import Bank (Afreximbank)African Export-Import Bank (Afreximbank)
Cairo, EgyptCairo, Egypt
Director (Planning & Development Department)Director (Planning & Development Department)
African Export-Import Bank (Afreximbank)African Export-Import Bank (Afreximbank)
Cairo, EgyptCairo, Egypt
ByBy
Paper Presented at the 8Paper Presented at the 8thth African Oil Trade Conference African Oil Trade ConferenceMarrakech, MoroccoMarrakech, Morocco
April 26 – May 1, 2004April 26 – May 1, 2004
NOT AN OFFICIAL UNCTAD RECORDNOT AN OFFICIAL UNCTAD RECORD
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 2
INTRODUCTIONINTRODUCTION
• Afreximbank (Afreximbank (www.www.afreximbankafreximbank.com.com) has come a long way in bringing ) has come a long way in bringing
Structured Finance to Oil Field Services Financing in Africa. From 1998 Structured Finance to Oil Field Services Financing in Africa. From 1998
to 2003, total approvals to the Sector amounted to USD 385 million.to 2003, total approvals to the Sector amounted to USD 385 million.
• Prior to Afreximbank’s Structured Oil Field Services Financing Prior to Afreximbank’s Structured Oil Field Services Financing
Approach, Corporate Finance was the Instrument of Choice in Financing Approach, Corporate Finance was the Instrument of Choice in Financing
Operators in the Sector.Operators in the Sector.
• The consequence was that Oil Field Services remained under the control The consequence was that Oil Field Services remained under the control
of Large Multinationals.of Large Multinationals.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 3
• The Sector remained an enclave with limited The Sector remained an enclave with limited
linkages to the rest of the domestic economies of linkages to the rest of the domestic economies of
African Oil Producers.African Oil Producers.
• In this Paper, I will share some of Afreximbank’s In this Paper, I will share some of Afreximbank’s
experience in facilitating indigenous participation in experience in facilitating indigenous participation in
the African Oil Sector through financiing indigenous the African Oil Sector through financiing indigenous
Oil Field Services Providers.Oil Field Services Providers.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 4
2. 2. ACTIVITIES IN THE OIL SECTOR CAN BE BROADLY ACTIVITIES IN THE OIL SECTOR CAN BE BROADLY
CATEGORIZED INTO:CATEGORIZED INTO:
Upstream ActivitiesUpstream Activities
– ExplorationExploration
– Drilling and production of crudeDrilling and production of crude
Oil Field Services support the above activitiesOil Field Services support the above activities
Downstream ActivitiesDownstream Activities
– RefiningRefining
– Distribution and Sales Distribution and Sales
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 5
2.1 2.1 THE UPSTREAM SECTORTHE UPSTREAM SECTOR
2.1.12.1.1 Africa's StrengthsAfrica's Strengths
•• Africa is well endowed with oil and gas resources, accounting for about Africa is well endowed with oil and gas resources, accounting for about
10% of global oil production and 6.4% of reserves10% of global oil production and 6.4% of reserves
•• Africa also accounts for about 7% of global gas reservesAfrica also accounts for about 7% of global gas reserves
•• Increasingly higher quantities of oil and gas reserves are being found in Increasingly higher quantities of oil and gas reserves are being found in
Africa's deep and ultra deep offshore areas, especially in west Africa.Africa's deep and ultra deep offshore areas, especially in west Africa.
•• Africa produces high quality crude at competitive costsAfrica produces high quality crude at competitive costs
•• The physical production environment remains easier than in most other The physical production environment remains easier than in most other
major producing areasmajor producing areas
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 6
2.1.22.1.2 WeaknessesWeaknesses
•• Volatile oil pricesVolatile oil prices
•• Wars/ community disturbancesWars/ community disturbances
•• Environmental problemsEnvironmental problems
•• In many countries, unclear rules and regulations regarding award of In many countries, unclear rules and regulations regarding award of
ConcessionsConcessions
•• Over dependence on foreign technology and skillsOver dependence on foreign technology and skills
•• Political instabilityPolitical instability
•• Economic instabilityEconomic instability
•• Lack of FinanceLack of Finance
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 7
2.1.3 Prognosis2.1.3 Prognosis
• Despite the weaknesses, activity will continue to grow driven by:Despite the weaknesses, activity will continue to grow driven by:
– New technologies that have facilitated deep offshore activitiesNew technologies that have facilitated deep offshore activities
– Events in the Middle East that have accelerated geographic Events in the Middle East that have accelerated geographic
diversificationdiversification
– Strong Oil pricesStrong Oil prices
– Prolific nature of most basinsProlific nature of most basins
– Some policy support, e.g. Oil free zones in Nigeria and AngolaSome policy support, e.g. Oil free zones in Nigeria and Angola
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 8
•• Most activity in the near term, especially in West Africa, Most activity in the near term, especially in West Africa,
will be off - shore to avoid community problems and civil will be off - shore to avoid community problems and civil
strifes and due to huge discoveries already madestrifes and due to huge discoveries already made
•• Given higher cost of off - shore activity, financing Given higher cost of off - shore activity, financing
requirements will increaserequirements will increase
•• Movement to off - shore will require more logistics Movement to off - shore will require more logistics
support increasing the importance of oil field services.support increasing the importance of oil field services.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 9
2.1.4 Major Oil Producers in Africa2.1.4 Major Oil Producers in Africa
Country
Actuala) Near Term Forecastb)
Proven Reserves (billion barrels)
Production (bpd)
Proven Reserves (billion
barrels)
Production (bpd)
1. Nigeria 31.5
1,800,170 342,350,00
0
2. Libya 36.0 1,200,300 n/a n/a
3. Angola 5.4 894,200 22.81,220,00
0
4. Algeria 11.3 735,100 n/a 1,500,00
0
5. Egypt 3.7 628,100 n/a n/a
6. Gabon 2.5 295,200 1.934 249,000
7. Congo Brazzaville 1.5 255,200 n/a n/a
8. Equatorial Guinea 1.1 231,000 n/a n/a
9. Others 3.1 651,250 n/a n/a
Total Africa 96.16,690,52
0
a) refers to 2002b) refers to EIU 2005 forecastn/a not availableSources: i) OPEC Annual Statistical Bulletin 2002 ii) EIU Country Profiles 2004
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 10
3.3. WHAT ARE OIL FIELD SERVICES?WHAT ARE OIL FIELD SERVICES?
3.1 3.1 Restrictively seen as Logistic Services - Marine Services, Provision of Restrictively seen as Logistic Services - Marine Services, Provision of
Facilities, Maintenance ServicesFacilities, Maintenance Services
3.23.2 Definition expanded (as Oil Industry evolved) to include Engineering, Definition expanded (as Oil Industry evolved) to include Engineering,
Drilling, Work - Over and other activities.Drilling, Work - Over and other activities.
Oil Services Market has enlarged as a result of:Oil Services Market has enlarged as a result of: Out-sourcing of most activities by ProducersOut-sourcing of most activities by Producers
Increasing importance of off - Shore ActivitiesIncreasing importance of off - Shore Activities
3.33.3 Accordingly Typical Project is executed with variety of contracts involving Accordingly Typical Project is executed with variety of contracts involving
Services (See Fig. 1)Services (See Fig. 1)
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 11
FIGURE 1FIGURE 1
OIL FIELD DEVELOPMENT PROJECT SHOWING TYPICAL OIL FIELD DEVELOPMENT PROJECT SHOWING TYPICAL
SERVICE CONTRACTS INVOLVEDSERVICE CONTRACTS INVOLVED
CONSTRUCTIONCONSTRUCTIONCONTRACTCONTRACT
PROJECTPROJECT
SPARES ANDSPARES ANDMATERIALSMATERIALSCONTRACTCONTRACT
O&MO&MCONTRACTCONTRACT
ServicesOwnership interestService Contracts awarded through JV Operator
PROJECT PROJECT OWNERS OWNERS
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 12
3.33.3 Typical Contracts are:Typical Contracts are:
• Those signed between Oil Producers (Oil Majors / Minors) and Those signed between Oil Producers (Oil Majors / Minors) and
Major oil field services companies, for example;Major oil field services companies, for example;
SchlumbergerSchlumberger
HalliburtonHalliburton
Baker Hughes, etceteraBaker Hughes, etcetera
• Contracts between Oil Producers and Minor Oil Service CompaniesContracts between Oil Producers and Minor Oil Service Companies
• Sub contracts between major service providers and minor Oil Sub contracts between major service providers and minor Oil
Service Providers.Service Providers.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 13
3.43.4 Indigenization of Oil Field Services Business is Indigenization of Oil Field Services Business is
becoming a priority in some African Countries, such becoming a priority in some African Countries, such
as:as:• Nigeria where target is 30% indigenous participation. A Cabbotage Nigeria where target is 30% indigenous participation. A Cabbotage
Law (with Cabbotage Fund) has been enacted to ensure, among Law (with Cabbotage Fund) has been enacted to ensure, among
others, more indigenous participation in Marine Services.others, more indigenous participation in Marine Services.
• Angola where goal appears to be 10%Angola where goal appears to be 10%
• Egypt where Egyptian Drilling Company (JV between EGPC and Egypt where Egyptian Drilling Company (JV between EGPC and
Maersk) does most drilling workMaersk) does most drilling work
3.53.5 Goal is to capture huge amounts of money paid Goal is to capture huge amounts of money paid
to Service Providers and integrate the Oil Sector to Service Providers and integrate the Oil Sector
with the Overall Economywith the Overall Economy
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 14
4.4. OIL FIELD SERVICESOIL FIELD SERVICES
4.1 4.1 The Oil Field Services market is therefore segmented into three categoriesThe Oil Field Services market is therefore segmented into three categories
i.i. Major playersMajor players
ii.ii. Minor playersMinor players
iii.iii. Indigenous contractorsIndigenous contractors
• Entities in category (i) do not have major financing problems since they can raise Entities in category (i) do not have major financing problems since they can raise
money in their name (Corporate Finance)money in their name (Corporate Finance)
• Category (ii) entities are to some extent adequately covered financiallyCategory (ii) entities are to some extent adequately covered financially
• Financing is principally a major problem of category (iii) companies (Indigenous Financing is principally a major problem of category (iii) companies (Indigenous
Contractors).Contractors).
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 15
4.2 4.2 Xteristics of Indigenous Oil Services CompaniesXteristics of Indigenous Oil Services Companies• small size of capital (USD 1 million or less), except a few in Nigeria small size of capital (USD 1 million or less), except a few in Nigeria
that have grown significantly in size, e.g. the Adamac Groupthat have grown significantly in size, e.g. the Adamac Group
• firms with limited experience in oil field servicesfirms with limited experience in oil field services
• have no or limited borrowing track recordhave no or limited borrowing track record
• corporate structure sometimes confusingcorporate structure sometimes confusing
• small players with annual revenues of less than USD 5 millionsmall players with annual revenues of less than USD 5 million
• usually require financing far in excess of equity capitalusually require financing far in excess of equity capital
• loan required usually of medium term nature as main use of loan is to loan required usually of medium term nature as main use of loan is to
acquire equipment for contract executionacquire equipment for contract execution
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 16
4.3 4.3 The Critical Issues in Financing Indigenous Companies Therefore The Critical Issues in Financing Indigenous Companies Therefore
Revolve Around How To Deal With:Revolve Around How To Deal With:
a)a) Their Low capitalizationTheir Low capitalization
b)b) Limited experienceLimited experience
c)c) No borrowing track record and therefore no credible banking No borrowing track record and therefore no credible banking
relationshipsrelationships
d)d) Their Highly specialized assets with limited secondary market.Their Highly specialized assets with limited secondary market.
The above factors mean that pure corporate Finance will be difficultThe above factors mean that pure corporate Finance will be difficult
Resort to local bank financing is constrained by lack of medium term Resort to local bank financing is constrained by lack of medium term
funding in many marketsfunding in many markets
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 17
4.4 4.4 Structured Financing by international banks is difficult also due to:Structured Financing by international banks is difficult also due to:
a)a) Small size of deals (usually USD5 - 10 million) and therefore returns do not Small size of deals (usually USD5 - 10 million) and therefore returns do not
justify the trouble.justify the trouble.
b)b) Small size of company puts company at a disadvantage when negotiating Small size of company puts company at a disadvantage when negotiating
contract with majors. Thus, contracts may carry onerous clauses.contract with majors. Thus, contracts may carry onerous clauses.
c)c) Required funding of medium term nature meaning that international Required funding of medium term nature meaning that international
banks may provision for exposure.banks may provision for exposure.
d)d) Companies unfamiliar with international financing making structuring Companies unfamiliar with international financing making structuring
work difficult.work difficult.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 18
e)e) Contract counterparties usually reluctant to assist in putting Contract counterparties usually reluctant to assist in putting
structure in place; for example, Many may refuse to structure in place; for example, Many may refuse to
acknowledge assignments of contract or simple letters of acknowledge assignments of contract or simple letters of
instruction.instruction.
f)f) Operations usually not well diversified to enable banks to Operations usually not well diversified to enable banks to
diversify their risk.diversify their risk.
g)g) Due to their small size some are not able to buy adequate Due to their small size some are not able to buy adequate
insurance to cover the risks in the business or to structure insurance to cover the risks in the business or to structure
their operation to mitigate such risks; for example, certain their operation to mitigate such risks; for example, certain
vessels may incur liabilities that can bankrupt the firm.vessels may incur liabilities that can bankrupt the firm.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 19
5.5. In Realization Of The Problems These Companies Face, In Realization Of The Problems These Companies Face,
Afreximbank Designed Special Means Of Supporting Them Afreximbank Designed Special Means Of Supporting Them
Hinged on a “TOTAL APPROACH”.Hinged on a “TOTAL APPROACH”.
To Deal With the Challenges Identified, Instruments used include:To Deal With the Challenges Identified, Instruments used include:
Advisory services aimed at corporate reorganization and Advisory services aimed at corporate reorganization and
preparing borrowers to enter loans market preparing borrowers to enter loans market
Structured Finance to mitigate Corporate Finance Risks.Structured Finance to mitigate Corporate Finance Risks.
Risk bearing support.Risk bearing support.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 20
The Bank’s Experience Has Been That:The Bank’s Experience Has Been That:
a)a) THE UNDERLYING BUSINESS IS BANKABLE IF FINANCING IS THE UNDERLYING BUSINESS IS BANKABLE IF FINANCING IS
WELL DESIGNEDWELL DESIGNED
b)b) SUPPORTING THE COMPANIES HELPS IN CREATING SUPPORTING THE COMPANIES HELPS IN CREATING
INDIGENOUS CAPACITY IN THE OIL INDUSTRY AND HELPS INDIGENOUS CAPACITY IN THE OIL INDUSTRY AND HELPS
PROMOTE THE GOALS OF GOVERNMENTS OF AFRICAN OIL PROMOTE THE GOALS OF GOVERNMENTS OF AFRICAN OIL
PRODUCING COUNTRIES.PRODUCING COUNTRIES.
c)c) THE BANK'S INTERVENTION USUALLY HELPS IN BETTER THE BANK'S INTERVENTION USUALLY HELPS IN BETTER
CONTRACT THERMS NEGOTIATED WITH PRODUCERS.CONTRACT THERMS NEGOTIATED WITH PRODUCERS.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 21
d)d) THE TRANSACTIONS MOST TIMES GENERATE SPIN-THE TRANSACTIONS MOST TIMES GENERATE SPIN-
OFF BUSINESS FROM OIL MAJORS.OFF BUSINESS FROM OIL MAJORS.
e)e) THE BANK’S TENACIOUS SUPPORT HAS HELPED TO THE BANK’S TENACIOUS SUPPORT HAS HELPED TO
ATTRACT OTHER INTERNATIONAL BANKS TO ATTRACT OTHER INTERNATIONAL BANKS TO
FINANCING SUCH ACTIVITIES. ACCORDINGLY, THE FINANCING SUCH ACTIVITIES. ACCORDINGLY, THE
BANK HAS BEGUN A MAJOR ACTIVITY OF BANK HAS BEGUN A MAJOR ACTIVITY OF
SYNDICATING SUCH DEALS.SYNDICATING SUCH DEALS.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 22
FIGURE 2FIGURE 2
SECURED DIRECT LENDINGSECURED DIRECT LENDING
LendingLendingBankBank
3.
Dis
bu
rsem
en
t3.
Dis
bu
rsem
en
t 5. Repayment of principal and
5. Repayment of principal and
interest
interest
1. Service Contract1. Service Contract
4. Performance of Contract4. Performance of ContractContractorContractor ProducerProducer
2.
Assig
nm
en
t of
2.
Assig
nm
en
t of
Con
tract
Pro
ceed
sC
on
tract
Pro
ceed
s
6. 6. FINANCING STRUCTURES IN SUPPORT OF THE SECTORFINANCING STRUCTURES IN SUPPORT OF THE SECTOR
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 23
Key Features:Key Features: BANK ASSUMES PERFORMANCE RISK OF COMPANY AND PAYMENT BANK ASSUMES PERFORMANCE RISK OF COMPANY AND PAYMENT
RISK OF PRODUCERRISK OF PRODUCER
TRANSACTION HINGED ON DEMONSTRATED TRACK RECORD OF TRANSACTION HINGED ON DEMONSTRATED TRACK RECORD OF
COMPANY OR A TECHNICAL PARTNERSHIPARRANGEMENT WITH A COMPANY OR A TECHNICAL PARTNERSHIPARRANGEMENT WITH A
REPUTABLE CONTRACTORREPUTABLE CONTRACTOR
CONTRACT BEING BINDING, LONG ENOUGH AND ENFORCEABLECONTRACT BEING BINDING, LONG ENOUGH AND ENFORCEABLE
CLEAR INVOICING MECHANISMSCLEAR INVOICING MECHANISMS
IN MANY INSTANCES, THE BANK FURTHER SUPPORTS THE FACILITY IN MANY INSTANCES, THE BANK FURTHER SUPPORTS THE FACILITY
USING LOCAL BANK GUARANTEES (SEE FIGURE 3)USING LOCAL BANK GUARANTEES (SEE FIGURE 3)
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 24
FIGURE 3FIGURE 3
LENDING WITH PAYMENT GUARANTEELENDING WITH PAYMENT GUARANTEE
LendingLendingBankBank
GuarantorGuarantor b)b)
(Local bank)(Local bank)
4.
Dis
bu
rsem
en
t4.
Dis
bu
rsem
en
t2. Guarantee (which may or 2. Guarantee (which may or may not be collateralized)may not be collateralized) a)a)
a) Securities taken include depositing of short-term treasury bills, partial cash collateral etc.
b) Guarantee may be per aval.
a) Securities taken include depositing of short-term treasury bills, partial cash collateral etc.
b) Guarantee may be per aval.
6. Repayment of principal and
6. Repayment of principal and
interest
interest
1. Service Contract1. Service Contract
5. Performance of Contract5. Performance of ContractContractorContractor ProducerProducer
3.
Assig
nm
en
t of
3.
Assig
nm
en
t of
Con
tract
Pro
ceed
sC
on
tract
Pro
ceed
s
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 25
FIGURE 4FIGURE 4MITIGATING PERFORMANCE RISK:MITIGATING PERFORMANCE RISK:
OIL SERVICE INVOICE DISCOUNTINGOIL SERVICE INVOICE DISCOUNTING
Afreximbank Oil Service Invoice Discounting ProcessAfreximbank Oil Service Invoice Discounting Process
Oil ServiceOil ServiceCompanyCompany
Oil MajorOil Major(Service user)(Service user)
6.
Pu
rch
ase o
f6.
Pu
rch
ase o
fIn
voic
eIn
voic
e(p
rep
aym
en
t)(p
rep
aym
en
t)
1. Service Contract1. Service Contract
• This Assists Contractors In Bridging Liquidity GapsThis Assists Contractors In Bridging Liquidity Gaps• This Assists Contractors In Bridging Liquidity GapsThis Assists Contractors In Bridging Liquidity Gaps
6. Purchase of Invoice (prepayment)6. Purchase of Invoice (prepayment)
2. Approval2. Approval
Local BankLocal Bank(Guarantor)(Guarantor)
AfreximbankAfreximbank
2.
Ap
pro
val
2.
Ap
pro
val
3. Performs Contract and Invoices3. Performs Contract and Invoices
4. Accepts Invoice (Confirmation of Receipt of 4. Accepts Invoice (Confirmation of Receipt of Service) and acknowledges Sale of invoice to Service) and acknowledges Sale of invoice to
Afreximbank (“Documents”)Afreximbank (“Documents”)
5.
Docu
men
ts5.
Docu
men
ts
5. Documents5. Documents
7.
Paym
en
t7.
Paym
en
t
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 26
7.7. DEALING WITH CERTAIN RISKS/ PROBLEMSDEALING WITH CERTAIN RISKS/ PROBLEMS
7.17.1 Performance RiskPerformance Risk
MitigantMitigant
Use local bank with experience in oil services financing to assess and mitigate Use local bank with experience in oil services financing to assess and mitigate
riskrisk
Producers do a thorough assessment of capability of Contractors so check Producers do a thorough assessment of capability of Contractors so check
with themwith them
Focus on those companies with good technical partnersFocus on those companies with good technical partners
Afreximbank has gained good experience in proper analysis of such risksAfreximbank has gained good experience in proper analysis of such risks
Restrict lending to invoice discountingRestrict lending to invoice discounting
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 27
7.27.2 Community Disturbances / Civil StrifeCommunity Disturbances / Civil Strife
MitigantMitigant In Angola and Nigeria where these used to be rife, things are subsidingIn Angola and Nigeria where these used to be rife, things are subsiding
In some service contracts, this risk is retained by the Producers.In some service contracts, this risk is retained by the Producers.
7.37.3 Premature Contract Termination Not Caused By Contractor Non-Premature Contract Termination Not Caused By Contractor Non-
PerformancePerformance
MitigantMitigant In many Service Contracts In many Service Contracts “Early Termination Clauses”“Early Termination Clauses” ensure that the Producers retain ensure that the Producers retain
the risk.the risk.
Take insurance.Take insurance.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 28
7.47.4 Difficulty In Obtaining Acknowledgement of Contract Assignments by ProducersDifficulty In Obtaining Acknowledgement of Contract Assignments by Producers
MitigantMitigant Not a generalized problem. However, Direct approach to Producer helps.Not a generalized problem. However, Direct approach to Producer helps.
7.57.5 High Documentary TaxesHigh Documentary Taxes
MitigantMitigant In many of the countries, Afreximbank’s tax/ duty exempt status is being honoured so it makes In many of the countries, Afreximbank’s tax/ duty exempt status is being honoured so it makes
sense to partner with Afreximbank.sense to partner with Afreximbank.
7.67.6 Country RiskCountry Risk
MitigantMitigant Use Afreximbank’s Country Risk Guarantee Facility.Use Afreximbank’s Country Risk Guarantee Facility. Use other PRI Providers.Use other PRI Providers.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 29
8.8. ISSUES TO NOTE AS YOU STRUCTURE YOUR DEALISSUES TO NOTE AS YOU STRUCTURE YOUR DEAL
Many Service Contracts are not assignable – Proceeds of the Contracts areMany Service Contracts are not assignable – Proceeds of the Contracts are
Understand Nature of Contract, i.e.:Understand Nature of Contract, i.e.: Its termIts term
Termination clausesTermination clauses
What is considered a satisfactorily completed serviceWhat is considered a satisfactorily completed service
How payments will be made:How payments will be made:
• Day-rate (minimum and escalation)Day-rate (minimum and escalation)
• Milestones (what are they and are any third party actions required before milestone completion is Milestones (what are they and are any third party actions required before milestone completion is
confirmed?)confirmed?)
• Community disturbance clausesCommunity disturbance clauses
• Force Majeure clauses, etc.Force Majeure clauses, etc.
• What insurance obligations are to be borne by ContractorWhat insurance obligations are to be borne by Contractor
• Environmental issuesEnvironmental issues
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 30
Producers can delay payment so build knowledge of Producers can delay payment so build knowledge of
historical delays in arriving at tenorhistorical delays in arriving at tenor
Agree with Contractor on Issuing Invoices promptly. For Agree with Contractor on Issuing Invoices promptly. For
some Producers, Invoice tracking can be done on-line by some Producers, Invoice tracking can be done on-line by
subscription.subscription.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 31
8.8. Bringing Other International Banks In Support of the Sector – Bringing Other International Banks In Support of the Sector –
Afreximbank’s RoleAfreximbank’s Role
8.18.1 Dealing with Country RiskDealing with Country Risk
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 32
Figure 5Figure 5 AFREXIMBANK COUNTRY RISK GUARANTEE FACILITY - FLOW OF AFREXIMBANK COUNTRY RISK GUARANTEE FACILITY - FLOW OF
TRANSACTIONSTRANSACTIONS
Exposure ExtinguishedExposure Extinguished
AFREXIMBANK interventionAFREXIMBANK interventionas risk mitigantas risk mitigant
Cause of Non‑reimbursement is Cause of Non‑reimbursement is determined and risk is shareddetermined and risk is shared
Afreximbank is dischargedAfreximbank is dischargedLenders pursue security from BorrowerLenders pursue security from Borrower
AFREXIMBANK reimburses covered portion to LenderAFREXIMBANK reimburses covered portion to Lender and pursues and pursues reimbursement with country concerned inreimbursement with country concerned in accordance with Bank accordance with Bank
Membership AgreementMembership Agreement
On recovery of repayment, Lending bank is On recovery of repayment, Lending bank is reimbursed the uncovered balance, less reasonable reimbursed the uncovered balance, less reasonable costs incurred by Afreximbank in pursuing recoverycosts incurred by Afreximbank in pursuing recovery
Risk Period for lending bankRisk Period for lending bank
NoNo
YesYes
NoNo
YesYes
At maturity, International bank isAt maturity, International bank isreimbursed by obligorreimbursed by obligor
At maturity, International bankAt maturity, International bankis reimbursed by obligor ?is reimbursed by obligor ?
Non‑reimbursement caused by commercial risk (credit,Non‑reimbursement caused by commercial risk (credit, documentary/administration risks and fraud) events, force documentary/administration risks and fraud) events, force
majeure and/or certain country risk eventsmajeure and/or certain country risk eventsYesYes
Afreximbank is dischargedAfreximbank is dischargedLenders pursue security from BorrowerLenders pursue security from Borrower
Afreximbank providesAfreximbank providescover against certain country riskcover against certain country risk
eventsevents
International bank assumes paymentInternational bank assumes payment risk of risk of an African entity (through L/Can African entity (through L/C issuance/ issuance/ confirmation or other formsconfirmation or other forms of financingof financing
YesYes
YesYes
NoNoNon‑reimbursement caused by certain country risk events (exchange. Non‑reimbursement caused by certain country risk events (exchange.
control regulations, moratorium on debt payment, change in law or control regulations, moratorium on debt payment, change in law or policy affecting the timing, currency or manner of debt paymentpolicy affecting the timing, currency or manner of debt payment
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 33
8.28.2 Dealing with Lack of Experience and Local KnowledgeDealing with Lack of Experience and Local Knowledge
Afreximbank has begun to leverage its proven track record and knowledge of the Sector and Markets to arrange syndicated deals in support of the Sector,Afreximbank has begun to leverage its proven track record and knowledge of the Sector and Markets to arrange syndicated deals in support of the Sector,
• Syndicated Deals Concluded = USD 180 millionSyndicated Deals Concluded = USD 180 million
• Syndicated Deals in Pipeline = USD 80 millionSyndicated Deals in Pipeline = USD 80 million
8.38.3 Extending the Frontier with its Innovative GASON Debuting in Nigeria (Figure 6)Extending the Frontier with its Innovative GASON Debuting in Nigeria (Figure 6)
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 34
Credit Enhancement*Credit Enhancement*(Lloyds / AfricaRe (Lloyds / AfricaRe
AFREXIM)AFREXIM)
FIGURE 6FIGURE 6 GUARANTEED AFREXIMBANK-BACKED SECURITIZED OIL SERVICE NOTES GUARANTEED AFREXIMBANK-BACKED SECURITIZED OIL SERVICE NOTES
(GASON)(GASON)
LENDERS (INTERNATIONAL BANKS)LENDERS (INTERNATIONAL BANKS)
OIL SERVICE COs.OIL SERVICE COs.
OIL MAJORSOIL MAJORS(SUBSIDIARIES)(SUBSIDIARIES)
ESCROW A/CESCROW A/C
1.C
ontr
act
1.C
ontr
act
AFREXIMBANKAFREXIMBANKLender of RecordLender of Record
QUALIFIED LOCAL BANKSQUALIFIED LOCAL BANKS(BORROWERS)(BORROWERS)
2. Secu
rity /
2. Secu
rity /
Assignmen
t
Assignmen
t
2. Acknowledgement2. Acknowledgement
Rec
ours
eR
ecou
rse
Gu
aran
tee
Gu
aran
tee
(Per
Ava
l)(P
er A
val)
2. R
isk
2.
Ris
k
Par
tici
pat
ion
P
arti
cip
atio
n
Agr
eem
ent
Agr
eem
ent
2. L.O.C**2. L.O.C**
3. F
un
din
g3.
Fu
nd
ing
On
-Len
din
gO
n-L
end
ing
4. Oil F
ield
4. Oil F
ield
Services
Services
5. C.W.D***5. C.W.D***
6.
6.
Rep
aym
ent
Rep
aym
ent
* May include Country Risk and Performance Risk * May include Country Risk and Performance Risk GuaranteesGuarantees
** Letter of Comfort** Letter of Comfort*** Certificate of Work Done or Accepted Invoices*** Certificate of Work Done or Accepted Invoices
* May include Country Risk and Performance Risk * May include Country Risk and Performance Risk GuaranteesGuarantees
** Letter of Comfort** Letter of Comfort*** Certificate of Work Done or Accepted Invoices*** Certificate of Work Done or Accepted Invoices
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 35
Key Advantages of Deal In Figure 6Key Advantages of Deal In Figure 6
Lenders benefit from Afreximbank’s preferred Lenders benefit from Afreximbank’s preferred
Creditor Status.Creditor Status.
Lenders benefit from knowledge of domestic Lenders benefit from knowledge of domestic
originator banks.originator banks.
Lenders benefit from a second way out comprising of Lenders benefit from a second way out comprising of
a diversified pool of local banks with strong oil service a diversified pool of local banks with strong oil service
financing capabilities.financing capabilities.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 36
Local banks are able to increase oil service lending by Local banks are able to increase oil service lending by
freeing their capital.freeing their capital.
Contractors benefit from cheaper and matching Contractors benefit from cheaper and matching
currency funding.currency funding.
Country benefits from greater indigenous Country benefits from greater indigenous
participation in the sector by operators and local participation in the sector by operators and local
banks.banks.
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 37
9.9. ABOUT AFREXIMBANKABOUT AFREXIMBANK Established in 1993 as a Established in 1993 as a
multilateral financial institutionmultilateral financial institution
Shareholders include African Shareholders include African
governments, African private governments, African private
investors and non African investors and non African
investors.investors.
Authorized capital = US$750 Authorized capital = US$750
millionmillion
Mandated to finance intra and Mandated to finance intra and
extra-African tradeextra-African trade
Headquartered in EgyptHeadquartered in Egypt
Branch offices in Abuja, Tunis Branch offices in Abuja, Tunis
and Harareand Harare
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 38
OPERATES FOLLOWING PROGRAMMES:OPERATES FOLLOWING PROGRAMMES:1.1. LINE OF CREDIT;LINE OF CREDIT;
2.2. DIRECT FINANCING;DIRECT FINANCING;
3.3. SYNDICATIONS;SYNDICATIONS;
4.4. PROJECT RELATED FINANCING;PROJECT RELATED FINANCING;
5.5. EXPORT DEVELOPMENT FINANCE PROGRAMMEEXPORT DEVELOPMENT FINANCE PROGRAMME
6.6. INVESTMENT BANKING; ANDINVESTMENT BANKING; AND
7.7. SPECIAL RISK PROGRAMMES, INCLUDING SPECIAL RISK PROGRAMMES, INCLUDING
COUNTRY RISK GUARANTEE FACILITYCOUNTRY RISK GUARANTEE FACILITY
8.8. ALSO OFFERS FORFAITING FACILITYALSO OFFERS FORFAITING FACILITY
CUMULATIVE APPROVALS SINCE 1994 TO DECEMBER 2003 = CUMULATIVE APPROVALS SINCE 1994 TO DECEMBER 2003 =
US$6.68 BILLIONUS$6.68 BILLION
Dr. B.O. Oramah – Critical Issues in Financing Indigenous Oil Field Services Providers in Africa - 39
10.10.CONCLUSIONSCONCLUSIONS