Calag Capital and Consulting Limited FINANCING OIL SERVICE SECTOR COMPANIES: A CASE STUDY FOR NIGERIA XAVIER ABEL EDZIWA Chief Operating Officer 3c NOT AN OFFICIAL UNCTAD RECORD

Introduction…. CALAG CAPITAL AND CONSULTING LIMITED (3C) IS INCORPORATED IN NIGERIA AS A FINANCIAL ADVISORY SERVICES FIRM. IT IS AN ASSOCIATE COMPANY OF PIVOT CAPITAL PARTNERS (PROPRIETARY ) LTD, A SOUTH AFRICAN REGISTERED FINANCIAL ADVISORY SERVICES COMPANY 3C’S CLIENTS ARE DRAWN FROM THE HOSPITALITY, OIL AND GAS, FINANCIAL SERVICES, MANUFACTURING, AGRICULTURE, AVIATION AND REAL ESTATE SECTORS OF THE NIGERIAN ECONOMY. 3c

BACKGROUND (to put the topic in context) Nigeria is one of the world's leading oil exporters and the largest producer in Africa  Its oil reserves constitute 2.5% of total world reserves  Favorable geology and high quality crude make Nigeria a country of continued interest for investment  The oil and gas industry remains the country's principal source of revenue and foreign exchange, and as such, it is vital to Nigeria's economic development  Petroleum export contributes over 90% of the country's foreign exchange earnings and over 75% of government revenue 3c Oil service sector financing

Up Stream Oil Sector  The bulk of Nigeria's oil and gas is produced by multinational companies operating under joint venture arrangements with the Nigerian National Petroleum Corporation  The companies with the largest participation in joint ventures are the Royal Dutch/Shell group (Shell), Exxon Mobil, Chevron Texaco, Agip, and Total  Government is encouraging greater indigenous participation through local content policy Indigenous Producers  Local Nigerian's participation in the country's upstream oil sector is just 14%  Experts believe that Nigerian companies have difficulties meeting high costs of entry because of the technical and financial requirements of that sector 3c

Up Stream Oil Sector  Main operators are the international Oil Majors  Oil Majors out-source:  Engineering  Work-over  Drilling  Laying of pipes  Marine services  Maintenance  Procurement  Supplies  etc  +/- 80% of cost of producing a barrel of crude oil is in terms of oil services  Hence the need to support the oil service companies 3c

Down Stream Oil Sector  The downstream sector includes the refining and sale of gasoline, kerosene, and other petroleum products  Major marketers currently control about 65% of the fuels business  The major marketers include foreign oil companies as well as Nigerian companies  The independent marketers are mainly Nigerian companies  Currently CALAG is structuring a US$70 million line of credit for a leading bank to finance Independent Marketers 3c

Local Companies Funding Constraints  Indigenous companies have unfortunately, for several reasons, not been able to take full advantage of the vibrant industry  Experts believe that Nigerian companies have difficulties meeting high costs of entry because of the technical and financial requirements of that sector  It is worth noting that the Nigerian community is now aware and very sensitive to the need for a participatory role in the industry  Huge volumes of financing required can not be supported due to lack of market depth and inability to provide medium to long term financing  Bank debt funding is typically small, high interest bearing and mismatched tenors 3c

Financing Structure for upstream OSCs  mitigate risks to financiers of the perceived risky OSCs  appropriately priced funding  appropriately tenured funding  Transaction financing NOT balance sheet financing  Structure to recognise the quality of the underlying contracts 3c

Transaction structuring...  OSCs  Pre-qualified by:  arrangers,  International lenders  local bank guarantors  Key to prequalification is track record and quality of contracts with oil majors; current contracts and likelihood of future contracts  Not balance sheet financing, which is the reason why most OSCs struggle to get financing, because financiers apply inappropriate OSCs financing structures; emphasis is on contracts, hence it is like financing Oil Majors themselves  Risks managed:  Default:assignment of contracts  Performance: pre-qualification ensures credible OSCs access the facility 3c

Transaction structuring...  Local bank guarantors  Pre-qualified and limits set based on capacity of each  Guarantee obligations on pro-rata  This also address local bank risk as may be feared by international financiers, as risk is pro-rata  Loan monitoring to safe guard own guarantee exposure 3c

Transaction structuring...  Credit enhancing international institutions Guaranteeing lenders on non-performance by local banks  First loss guarantor: For example guaranteed the first $30m  Second loss guarantor: For example guaranteed the next $35m International lenders’ overall exposure not covered by loss guarantors is $10m (but then this is covered by assignment of contracts, hence in reality almost zero exposure to local vagaries) Structured risk management to be reflected in pricing and other terms of the facility 3c

Transaction structuring...  Lender’s Engineer Advise on special engineering requirements Assess and advise on the capability of the OSC to execute the contract  Oil majors No direct agreement with them, besides the Assignment Agreement, but can be disqualified in the event of failing to respect the contracts with OSCs; cross default; etc If disqualified then OSCs contracted to them will not access finance, hence pressure on the oil major  Loan Monitoring Agent Calag Capital & Consulting Limited 3c

The outcome...  Facility Amount:Revolving US$75 million Purpose:  The purchase of products and services required by OSCs to perform contracts  Pre-finance receivables due to OSCs from Oil Majors Effective final maturity:4 years Repayment from assignment of proceeds from Oil Majors Competitively priced 3c

The outcome...  WAY FORWARD AFTER DRAW DOWN To increase the facility amount once international lenders are comfortable with doing business with OSCs in Nigeria (target for next facility – US$200m) To reduce credit enhancement layers, thereby reducing the financing costs 3c

Conclusion..  As Mozambique or other countries in Africa pursue on oil and gas projects, is the financial sector prepared enough to play role in promoting “local content”?  There is need to come up with financing structures to support participation of local companies in the oil & gas sector.  Oil and gas sector finance is vital, hence the need for all financial players to collaborate in providing innovative financial solutions, for example our structure included over 10 financial institutions (Africa and Europe), playing different roles.  SO LET US, AS PROFESSIONALS IN CAPITAL MARKETS, COLLABORATE IN CAPACITY BUILDING 3c

In line with our quest to be THE point of reference in the oil sector in Nigeria ……………..  MARGINAL FIELD FINANCING WORKSHOP:  Workshop In Partnership With UNCTAD And NNPC set for Abuja, Nigeria (indicative dates: end of June/early July 2005)  NIGERIA OIL SERVICE SURVEY:  Survey Completed (publication forthcoming)  In collaboration with UNCTAD And NNPC  International Conference Based On Survey set for 4 th Quarter 2005  US$70 million line of credit to finance independent marketers in the down-stream sector 3c UPCOMING ….