William Brees and Thomas Bethel, Herbert Smith Freehills (https://bit.ly/3SGS7yg)
At first glance, upstream finance in Africa is expected to be in good shape. Gas is the essential transition fuel. Domestic demand for hydrocarbons continues to grow. Government support for upstream development continues. Sector earnings are strong. However, when it comes to access to capital, especially debt financing, the situation is rather complicated.
In late 2021 and early 2022, a number of commercial banks have finalized and are now publishing their net zero goals and strategies in relation to their commitments to join the Net Zero Banking Alliance. It focuses on the impact on the oil and gas lending business. This has resulted in very limited new funding activity over a period of 6 to 12 months, with many banks appearing to be concentrating solely on existing funding. A limited number of commercial banks have exited upstream entirely in some markets, but things have calmed down in the last 12 months or so and many banks are more selective than they used to be, but still We provide financing to the upstream sector. The clarity that the market is still open to business and the exposure of major global supply and pricing issues has increased the willingness to proceed with the deal. We have been working on several upstream financings in recent months, with lenders providing new funding to the sector, including new borrower names and new developments. This is a welcome change compared to market conditions a year ago.
Environmental, social and governance requirements, or “ESG” in thousands of newspaper articles and academic papers, are now ubiquitous in banking markets. While some seek to adopt ESG (especially decarbonisation) as a very blunt tool as a reason not to lend to certain sectors or projects, most lenders are taking a more cautious approach. Given the large (albeit potentially dwindling) need for oil and gas production over the decades (and even the most aggressive energy transition projections , indicating a very important supply requirement), then ESG-focused financing can be a powerful tool to support and drive upstream progress and improvement.
Another challenge to upstream funding is the approach of some politicians and NGOs. Some people argue that no further upstream development should be done. Leaving aside the economic and moral contradictions of this position (why are countries denied the right to exploit natural resources for their own people and use oil royalties to build hospitals and schools? should it be?), the negative publicity that upstream generally attracts has the effect of discouraging banks from lending. All market participants advocate responsible, best-in-class development, with financing terms that help operators and investors manage their assets in the most efficient and prudent way possible. I have an obligation.
But there are other sources of funding, and the liquidity shortages due to bank appetites are less dramatic than they would otherwise be. Traders continue to be active in commodities, whether they are houses or the trading arm of the IOC, providing funding (often on competitive terms) to secure deals. Some development banks continue to lend, recognizing the employment and economic benefits of upstream development and operations. A growing number of private credit investors, both specialty and general, are providing debt to upstream African companies. This is often drawn to attractive returns from lower positions in the capital structure. And until relatively recently, the trend began to avoid loans and instead look to the debt capital market.
In our view, the banking market should not be dismissed lightly. We have a wealth of institutional and personal knowledge to help you solve the complexities of fundraising. When market conditions are difficult, the value of being able to have smart conversations with lenders and take a mutually productive approach to temporary difficulties should not be underestimated. A fixed income investor does not have the ability to be flexible or react to market conditions, and his private credit always keeps in mind the longevity of the fund and his IRR, and is a temporary cash You may not even be in a position to accept a lack of flow. Conversations about waivers and restructuring are very difficult to convene and move forward. Although it may not appear so from the borrower’s perspective, bank debt is more consistently available (without a blanket period during which the market is said to be “closed”) and most They are priced much more competitively than bonds and private credit.
It is inspiring to witness the energy and enthusiasm brought by a new generation of owners – independents, often indigenous peoples – acquiring properties sold by the IOC. Develop Africa’s endowed natural resources, aim to be best in class from an ESG perspective, and drive continuous improvement through ambitious but achievable targets.
More than ever, African oil and gas is an overwhelming mix of challenges, changes, complexities and opportunities. But I am confident that this sector and the innovative spirit that manages, develops and finances it will pave the way for the benefit of the continent and its people while doing the least harm to the planet. We look forward to discussing these and other topics with all delegates at Africa Oil He Week.
Distributed by APO Group on behalf of Africa Oil Week.
About Africa Oil Week:
Africa Oil Week (https://Africa-OilWeek.com) is the meeting place for the continent’s upstream oil and gas sector. Now in his 28th year, the event brings together governments, national and international oil companies, independent companies, investors, the G&G community and service providers. Africa Oil Week will take place from 3-7 October 2022 at the Cape Town International Convention Center 2 (CTICC2) in the heart of Cape Town.
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