Banks Err on the Side of Caution
President and Chairman of the Board of Directors of the African Export-Import Bank (Afreximbank) Dr. Benedict Okey Oramah talks about the future of finance for oil and gas projects, especially in a low oil price environment.
What do you see as the future of finance for oil and gas projects in the near-term, especially in light of the low oil and gas prices?
The financing for the oil and gas sector is dependent on the oil and gas price, and so it is no wonder that financing went down with the oil prices. But, even though the available liquidity is down, you also are not going to see the same demand you’ve seen before. For example, we saw investments in oil and gas in Africa decline by 60 percent to 73 billion on the heels of 2015. So the demand is lower.
On the supply side, the oil markets have experienced a shock and it has created a supply deficit for the financial flows. Many banks are restricting their oil and gas lending, because during the price surges, banks had become laxer. Many were no longer hedging the oil price, and banks were offering more favorable terms. They were really not doing what they needed to do, and that meant they have suffered during the oil price crash.
Now, they will be more restricted in lending to the oil and gas sector. On the supply side, you will certainly see less availability.
Next year, if the oil price stablizes to around $50-60 per barrel, I think that will be a fair enough price for many of the credible producers to continue investments and then I think the financing will return, though in a limited way. I think banks will be more cautious.
How have you seen the role of export-import banks in Africa’s oil and gas sector evolve in the last few years, and what role do you expect it to play in the future?
EXIM banks have been very supportive of the sector, especially in terms of making sure we saw an expansion of production in new geographies. But, just like what is happening to commercial lenders, EXIM banks are also experiencing some shocks to the system. I expect they will not expand their activity in the oil and gas sectors as impressively as we have seen in the past.
EXIM banks also played a critical role in the last few years in supporting oil service companies, such as in buying new vessels, etc. I think we are going to continue to be active there, but we need more comfort and will probably require the guarantee of banks like ours to participate in some of those projects. Banks are seeking more creditor support before they back a project — they want more guarantees to de-risk the project, whereas before they would back a project directly.
I do not see a rapid ramp-up of activity.
What steps can indigenous banks increase their involvement to the oil and gas industry?
African banks are already active in the oil and gas sector in many regions, such as in Nigeria and Egypt. However, in Nigeria there are challenges for the same reasons I’ve already mentioned — many indigenous banks became over-exposed to the oil and gas sector when the prices were high, and are now having to restructure their oil and gas. Their portfolios have too many high-risk deals, and as they restructure their debt, I don’t see these banks becoming more active in the sector in the coming years. They have issues to deal with now — capital issues, debt restructuring issues — that they are contending with. Until they do that, I would not expect much direct participation.
Having said that, I think many banks cannot ignore oil and gas. In a country like Nigeria, for example, oil and gas is a huge source of revenue. But the banks will transition from funding the upstream to the midstream for example, or oilfield services. They will go back to short-term loans. I do not expect increased activity in the upstream or offshore sectors.