With a GDP in 2020 of just over US$450bn, Nigeria is by some stretch the largest economy in Africa (with Egypt in second place with a GBP of just over US$360bn). It is one of the world’s larger oil producing countries, with daily production of over two million bbl at the beginning of January 2020 (which then dropped to around 1.4 million bbl by the end of the year due to COVID-19 knock-on effects, at which level it remained steady throughout 2021) and it has been an OPEC member since 1971.

Nigeria’s economy is heavily oil-dependent, with some statistics putting it as making up more than two thirds of the government’s income, which is attributable to the petroleum tax regime and the activities of the Nigerian National Petroleum Corporation (“NNPC”). The main laws governing oil and gas have not been fully updated since the 1960s and attempts at large-scale reform have been made over at least two decades but the contentious nature of changes (especially as to taxes and revenue-sharing) have thwarted these attempts.

Ratification of the Petroleum Industry Bill

However, this has all now changed. On 16 August 2021 President Muhammadu Buhari signed into law the Petroleum Industry Bill – now the “Petroleum Industry Act” (“PIA”), which had been approved by both chambers of Nigeria’s parliament on 1 July 2021, putting an end to years of back-and-forth debates about the future of Nigeria’s oil and gas industry. The latest push for reform has been said to have been catalysed by Nigeria exiting its deepest recession in four decades as COVID-19 restrictions were eased, together with strong impetus from oil majors in the country, urging that the delay to reform was in turn delaying further investment at a time where investment in oil and gas must compete alongside renewable resources as a part of the energy transition.

The reform addresses a wide range of matters, including:

  1. the sharing of wealth for communities in areas where petroleum is produced, and also those parts of Nigeria where there is exploration but no production yet, as yet (mostly in the northern and central regions of the country);

  2. amended royalties and fiscal terms for oil and gas production (including a reversal on laws passed in 2019 to increase the state’s take of oil revenue); and

  3. the transfer of NNPC’s assets and liabilities to a limited liability corporation which is to be called Nigerian National Petroleum Company Limited (“NNPC Limited”), pursuant to Article 53 of the PIA.

The PIA seeks to ensure increased transparency and accountability in the sector by strengthening the governing institutions and attracting international investment through changes to the governance, administrative, regulatory and fiscal framework of the industry. The aim is to address immediate revenue demands with the desire to lock in long-term investment in the industry. The reforms to NNPC may have a considerable impact upon the way in which oil and gas projects are funded in Nigeria and could open up the pool of investors.

World bank funding restrictions

Aside from the industry-standard co-venturing approach, Nigeria also receives investment into its oil and gas industry in the form of loans. One of the key issues for this form of investment centres around the fact that Nigeria has a debt to the World Bank (since 2017, the World Bank has made loans to Nigeria approaching USD 10 billion). When providing loans, the World Bank does not seek security from its government-borrowers but protects its position indirectly through the use of a negative pledge clause (see Clause 6.02 of the World Bank’s “General Conditions for IBRD Financing: Investment Project Financing” by way of example). The provision usually turns on two defined terms in particular:

  1. “Lien” – “includes mortgages, pledges, charges, privileges and priorities of any kind”; and

  2. “public assets” – “assets of the Member Country, of any of its political or administrative subdivisions and of any entity owned or controlled by, or operating for the account or benefit of, the Member Country or any such subdivision…”.

The provision seeks to prevent foreign investors from receiving security from the government-borrower in priority to the World Bank, by providing that any “Lien” over public assets in respect of a loan “which will or might result in a priority for the benefit of [such creditor] in the allocation, realization or distribution of foreign exchange” shall equally and rateably secure amounts payable by the member state to the World Bank.

On the basis of these provisions, and from the practice in Nigeria, the above restriction would, at present, apply to loans to NNPC. The negative pledge effectively prevents “standard” project development financing by oil and gas investors as it inhibits the ability to take a “typical” level of security, which would typically rank in priority to other creditors. The breadth of the pledge (and the severity of consequences for its breach) is sometimes seen as being counter-productive as it has the effect of preventing long-term investment for growth. The government of Nigeria and NNPC have not been able to grant security to lenders unless such security also secures the loans from the World Bank. This is even the case where the purpose of the loan is to develop a project, and to generate petroleum revenues, which, but for the loan, would not have existed.

The effect of the negative pledge in Nigeria has traditionally obliged lenders to structure their financing arrangements in such a way so as to accommodate the negative pledge. One such method is to use a forward sales arrangement, whereby each USD financed by the foreign investor is made to a (non-state owned) SPV. The SPV purchases oil from NNPC (in its capacity as an owner of the relevant assets). The SPV then sells that oil to NNPC-approved off-takers and the cash from such sales is used (amongst things) to reimburse the investor.

Future investment opportunities

The PIA clearly aims to set a new course for NNPC’s future. Article 53(7) PIA states that “NNPC Limited and any of its subsidiaries shall conduct their affairs on a commercial basis in a profitable and efficient manner without recourse to government funds and their memorandum and articles of association shall state these restrictions.” The Nigerian government’s intention is that, by ensuring that NNPC Limited conducts its affairs to the maximum extent according to the standards expected from privately owned commercial entities, this will attract new investors and open new potential channels of raising financing.

Although NNPC Limited will still be government-owned (and therefore subject to the World Bank’s negative pledge restrictions), and although Government shares are not transferable (by way of sale, assignment, mortgage or pledge) unless approved by the Government, assets will now be ringfenced in a new commercial vehicle, as opposed to a government body, which may be more palatable for foreign investors looking to contract with a commercial counterparty. Lenders may be willing to lend directly to NNPC Limited, with their debt secured with lower-ranking security against the shares in this new entity, potentially in exchange for a higher rate of interest for repayment. In addition, the Nigerian government will have multiple options at its disposal for monetising NNPC Limited, including accessing the international debt and equity capital markets and partial sell-downs of NNPC Limited’s shares. These latter options would invariably pique the interest of sovereign wealth funds and private equity houses that have been traditional investors in oil and gas and who may leap at the chance of owning a stake in Nigeria’s NOC.

Another concern of international investors will be the enforceability of the agreements against their counterparties, as well as any security that is granted. Again, these two concerns may be easier to address when dealing with this commercial vehicle, primarily through the introduction of sovereign immunity waivers into the contractual framework, as well as opening up the possibility of international arbitration as a method for resolving any disputes (Nigeria is signatory to both the New York Convention and ICSID).

The commercial rationale behind these new changes are numerous – Nigeria has not been immune to the damaging effect that rollercoaster oil prices have had on the economies of many oil-dependent countries and its oft-stated ambitions to diversify its economy away from oil will take time and a lot of investment before any efforts bear fruit. In the short to medium-term it will need to pull out all of the stops to continue encouraging investment into its oil and gas industry, which will allow the country to start building towards future long-term sustainability.

A shorter form of this article was previously shared on Energy Voice at https://www.energyvoice.com/opinion/377457/nigeria-pia-financing-options