Many economies on the African continent are undergoing a transformative expansion. Recent discoveries, along with improvements

in transparency and governance, have prompted the opening of new markets to foreign investment in all segments of the oil and gas value chain. International investors are also proving increasingly willing to take on emerging market risks as they seek to employ capital in a depressed global market. These trends have resulted in the highest levels of African investment since the 2008 global financial crisis. Although infrastructure requirements remain high, existing gaps in financing are increasingly being filled through a balanced approach that combines support from development agencies and export credit agencies, private equity investment, intra-continental investment, and the use of asset-backed debt facilities such as sharia-compliant sukuk and reserve-based loans.

Africa is already a proven oil and gas giant, accounting for 16% of total global production in 2012.1 The top four African producers – Nigeria, Algeria, Angola, and Libya – are all OPEC members with established oil industries. Yet most of the continent remains unexplored. A recent flood of notable discoveries in non-OPEC Africa indicates great potential for the approximately 45% of identified exploration blocks that remain open, and for the future of the African continent as a global oil and gas heavyweight for decades to come (figure 1).

Historically, it was easy-to-export oil that motivated the bulk of foreign investment in Africa’s hydrocarbons sector. But with rapidly increasing domestic demand for energy, many African countries can also support the monetisation of natural gas developments. Evidence for this is clear: the past five years have brought an increase in midstream and downstream oil and gas infrastructure projects that is expected to continue in the years to come. This is creating pronounced change in opportunities for the production of infrastructure-intensive natural gas. Previously unvalued and newly discovered gas deposits on both the eastern and western African coasts are gearing up for production, positioning Africa to greatly expand its already significant role in the globalising gas trade.

More than 15 years ago, South African industrial conglomerate Sasol invested in the Mozambican Pande and Temane gas fields with the intention of supplying Sasol’s local fuel retailers in Maputo. Now, the offshore gas discoveries in Mozambique exceed 65Tcf, in a massive resource that will support not only domestic economic development, but also large LNG projects to supply global demand. Natural gas reserves and downstream infrastructure are also developing apace in other countries, including East African hot spots Tanzania and Kenya. And in Mauritania, the Banda offshore gas field is being

Drillers&Dealers December201362

Terry Newendorp and Shannon Thomas – Taylor-DeJonghEXPERT’S INSIGHT

Mobilising finance for energy development in Africa

figure 1: reCent oil anD gas DisCoveries (Q1 2012 – Q3 2013)

Source: company press releases and reports

1 EIA. Oil and natural gas in sub-Saharan Africa. Presentation, 1 August 2013.

OML141

NIGERIA

Port Harcourt

AbaImo R

iver

River Orashi

Nig

er

HAUTE MER A

HAUTE MER B

CONGO(Brazzaville)

ANGOLA(Cabinda)

DEMOCRATIC REPUBLIC

GABON

Pointe Noire

Atlantic Ocean

Lelali R

iver

Niari River

Nya

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Luala River

Lali B

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r

Kwilu River

Nya

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Niari River

Oil discoveries Gas discoveries

developed as part of an integrated plan that will provide the first electricity to residents in more than 60 towns in the Senegal River Basin.

Still, there is much progress to be made. Based on moderate projected growth in domestic and global demand, the African continent will require $1.6 trillion in cumulative investment in oil infrastructure and $721bn in gas infrastructure over the next 22 years,2 and average required total upstream spend is estimated at $92bn a year. This amount could be even greater as a result of the complex technical requirements of many planned offshore and LNG developments. Fortunately, maturing economies and novel risk mitigation strategies are creating new avenues for meeting the financing gap.

In recent years, debt financing in Africa has largely been government sponsored. The World Bank estimates that 70% of current external lending to Africa originates from foreign governments, and of the remaining 30%, around half the loans were based on sovereign guarantees. A significant source of debt has been development finance institutions (DFIs) such as the World Bank, and export credit agencies (ECAs), which have recognised in today’s illiquid markets an opportunity to advance their own organisational goals – economic development and export promotion, respectively – by offering debt facilities and credit enhancements (figure 2). Poor or no sovereign credit ratings limit many African governments’ access to international debt markets, on top of which many countries face restrictions on non-concessional

debt and sovereign guarantees imposed by the IMF and World Bank.3 As both a direct and indirect result of these restrictions, in the past three years oil and gas firms used their own cashflows as the largest funding source for new business in Africa. Nevertheless, the availability of both debt and equity financing has steadily increased.4

Growing investor confidence is driving growth in equity investment with the help of alternative financing sources and risk mitigation measures, bringing benefits for Africans and international investors alike. A survey conducted by PWC showed that in the past three years, private and public equity were the fastest growing funding sources for oil and gas companies’ African operations, but still account for only 28% of total oil and gas financing. Also notable is the emergence of private equity funds as investors in energy and infrastructure developments. As of early 2013, Taylor-DeJongh identified 57 private equity funds that operate exclusively in Africa, and leading companies such as the Carlyle Group, Och-Ziff Capital Management, and Blackstone have started funds that specialise exclusively in African infrastructure. Growth in first-time funds and private investment companies that focus on specific regions within Africa is especially pronounced. Upstream oil and gas projects offer private investors value growth in the form of reserve increases, making them an attractive alternative to the more competitive buyout market. Energy demand from expanding local markets also helps to balance risk.

EXPERT’S INSIGHT

Terry Newendorp and Shannon Thomas – Taylor-DeJongh

Drillers&Dealers December201363

>

2 In 2011 $. IEA. World Energy Outlook 2012

3 African Development Bank. “Amendments to the Bank Group Policy on Non-Concessional Debt Accumulation” May 2011

4 PWC. “From Promise to Performance: Africa oil & gas review.” June 2013

Multilateral lending

32%

Bilateral lending (includes direct loans from ECAs)

22%Commercial loans – publicly guaranteed

15%

Commercial loans – other

14%

Public bonds

12%

Private bonds

5%Private credits covered by ECA guarantees

1%figure 2: sourCes of afriCan Debt in 2011

Source: World Bank internatinal debt statistcs

African banks are an additional emerging resource. South African banks such as Standard Bank and Nedbank have established themselves as lenders for energy infrastructure throughout the continent. The Nigerian banking sector is also especially active in home-country oil and gas sector lending. This trend is extending to other countries, often with the support of credit enhancements from DFIs and other external agencies. Across all sectors, the largest markets for local currency loan syndications are in Kenya, Zambia, Nigeria, Ghana, Angola, and South Africa. Loan tenors in sub-Saharan Africa have extended to as long as eight years, with hope that continued macroeconomic stability and regulation might support longer terms in the future. In the meantime, engaging local investors puts available capital to work, hedges currency risk, and has the potential to reinforce regulatory advances, helping to ensure long term reliable and stable returns.

The availability of resources as collateral is particularly advantageous because it allows companies to raise debt secured by claims on future production. Since 2007, banks have issued nearly $17.7bn in reserve-based loans (RBLs) in Africa.5 RBLs base credit on the net present value of projected cashflows from resource sales.6 Banks have varying approaches to reserve- based lending, but the existence of fields in production or under development is necessary. The credit facility is reevaluated regularly, allowing credit growth if production or reserves increase. In the past two years, more than $5bn in RBLs have been issued based on assets in Ghana, Nigeria, Equatorial Guinea, and Egypt.7

Growing competition for RBLs has also helped to hasten the expansion of sukuk, an Islamic asset-backed debt instrument. Like conventional bonds, sukuk provides a fixed amount of income to the borrower for a predetermined tenor. Like RBLs, they are backed by physical collateral and associated cashflows. In lieu of

interest, the lender is entitled to a portion of the income or dividends generated by the backing asset in exchange for taking partial ownership responsibility – similar to a moderated equity risk. The global market for sukuk has grown more than 28% annually for the past five years, for a total market that exceeded $130bn in 2012 and is expected to surpass $600bn by 2015. While Egypt has been the target of most African sukuk to date, issuances have also taken place in the Gambia, Senegal, and Sudan. Plans for sovereign sukuk are also being developed in Nigeria, Mauritania, Morocco, and South Africa.

With each large project that successfully uses tailored financing solutions to accommodate a unique risk profile and expand local economic activity, more opportunities are likely to emerge for international and African investors. The risks of doing business in frontier markets are real, but institutional and infrastructure growth promise to reward those who are willing to find constructive mitigation and risk-sharing structures. The mutual benefits to private and public stakeholders, both local and international, should encourage even more investment and help bring Africa into a new era of economic development, as global investors follow the lead of the capital providers to Africa’s oil and gas sector.

Terry Newendorp is chairman and CEO and Shannon Thomas is an analyst at Taylor-DeJongh

Drillers&Dealers December201364

Terry Newendorp and Shannon Thomas – Taylor-DeJonghEXPERT’S INSIGHT

With each large project that successfully uses tailored financing solutions, more opportunities are likely to emerge for international and African investors

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5 ProjectWare, September 2013

6 PFI. “RBL – Your flexible friend” Feb 9, 2011.

7 Taylor-DeJongh research from ProjectWare, Infrastructure Journal, and Project Finance International

Africa accounts for 16% of total global oil and gas production, yet most of the continent remains unexplored

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