Understanding ‘Project Gazelle: $3.3 bn crude loan from AFREXIM is short/mid-term solution to FX shortage

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Understanding ‘Project Gazelle: $3.3 bn crude loan from AFREXIM is short/mid-term solution to FX shortage Nigerian National Petroleum Company Limited (NNPCL) Chief Corporate Communication Officer, Femi Soneye, in this interview, speaks to the issues around the $3.3 billion crude oil pre-payment loan from the African Export-Import (AFREXIM) Bank which the NNPCL helped Nigeria to secure in late 2023 and its benefit to the nation. While many have applauded the move by NNPCL, critics have queried the implication of the loan for Nigeria’s oil production. The scheme, christened ‘Project Gazelle’, is the first of its kind to be facilitated by any government institution in Nigeria. Excerpts of interview:

The Project Gazelle has thrown up a lot of issues particularly because of its unique nature, which involves forward sale of oil. Perhaps this is where we should begin. What is crude oil backed forward-sale financing agreement, how does it work?

A forward sale financing is an agreement between the owner of a product and a potential off-taker (buyer) that allows the off-taker to pre-pay, that is, pay ahead, for the future product of the seller. Under the arrangement, the seller agrees to sell its product to a Special Purpose Vehicle (SPV) in the future in exchange for immediate funding. This done, the SPV then goes to a bank or financial institution and obtains financing based on the agreed forward sale value of the product. This financing is often collateralized by the future product itself. The advantage to the seller is that it is able to use the proceeds from the forward sale to finance its operations ranging from operational expenses to production costs, and investments in new projects.

Okay. This seems clear enough but a key sticky issue is repayment…

I was coming to that. It’s a simple and straightforward matter. The SPV is able to use the proceeds of the sale of the product(s) to meet its financing obligations whilst flowing back to the original seller any upsides from the final sales.

I am sure Nigerians now have a clearer understanding of the dynamics of forward sale-financing. Let’s get down to basics. What is Project Gazelle all about; what are the details of the deal with AFREXIM?

Project Gazelle is the code name given to the structured crude oil backed forward-sale finance facility sponsored by Nigerian National Petroleum Corporation Limited (NNPC Ltd), which is the seller. By this arrangement, NNPC Ltd has dedicated a specific number of barrels of crude oil to a Special Purpose Vehicle (SPV) which has, in turn, approached international financial institutions to provide the funding required to pay for the forward-sale. The proceeds of the forward-sale are thus made available to NNPC Ltd for its use.

Why is NNPCL involved in this arrangement? What is the compelling need for it to get involved in this kind of deal?

NNPC Ltd entered into this arrangement to ultimately provide dollar financing to the Federal Government. It is a short to mid-term solution to the foreign exchange shortage challenge currently being faced by the country. Nigeria needs to urgently improve its foreign exchange position. As of June 2023, the Central Bank had over US$6 billion of unmet obligations – forward contracts with third party institutions which were past their expiry dates. These unmet obligations have pressured the nation’s external reserves and resulted in a significant devaluation of the Naira. The pre-financing arrangement allows the Federal Government to receive foreign exchange, in advance, to enable it resolve its unmet FX obligations. These inflows of foreign exchange will ensure exchange rate stability and is an immediate quick-win available to the country.

Can this type of financing really help improve flow of foreign exchange into a country?

Forward sale contracts help resource producing companies such as the NNPC Ltd to deliver significant upfront funding for new projects prior to eventual production and export. Usually, the funding available is used as investments in existing and prospective resources. This could result in more oil and gas production in the country as new projects come on stream, and higher oil and gas exports, bringing in more dollars and foreign currencies. International Banks have a track record for providing forward-sale financings. This basically brings new Foreign Direct Investments (FDIs) into the country. With Nigeria having over 35billion barrels of proven reserves that need to be exploited and produced, a fraction of these prospective reserves can be used to raise the required funding. With a forward sale financing, the country can securitize these proven oil reserves today. This improves foreign currency inflows immediately rather than having to wait for years. Also, by supporting more exports and bringing in overseas financing, forward-sale financing can significantly boost the availability of foreign currency for an oil/gas dependent country. This improves the country’s ability to pay for imports and manage its overall economy. When exports finally start, the forward-sale investments are repaid using the money earned from those same exports. This improves the country’s balance of payments. The financing gives the government more stable and predictable oil earnings. This helps in planning budgets and managing foreign exchange reserves.

But there are other ways of obtaining foreign currency…

Yes. Nigeria can obtain foreign currency by increasing its oil production which will lead to a growth in crude exports. Unfortunately, a ramp-up in production will not occur in the short term due to the current lack of foreign direct investments into the oil and gas sector. Fortunately, as I said earlier, Nigeria is blessed with over 35 billion barrels in oil reserves and is at liberty to sell some of these reserves on a forward basis, wherein it sells only a small portion of its oil for cash forwards. Nigeria is able to source foreign exchange from other sources including Eurobonds and Debt Issuances. These sources are, however, currently constrained given the increased borrowing of recent years as a result of the poor fiscal state of the economy.


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