By Michael Chibuzo
I have gone through the post made by the former Vice President of Nigeria, Alhaji Atiku Abubakar questioning the integrity of a loan prepayment deal secured by the Nigerian National Petroleum Company Limited (NNPCL) in collaboration with the Afrexim Bank and I feel a bit concerned at the inaccuracies and deliberate ignorance on display therein.
As a former Vice President with a number of personal aides paid for by the government, Atiku Abubakar should have asked one of his aides to bring him up to date with the latest information/facts on the $3.3 billion NNPC pre-payment loan.
It is puzzling for the former Vice President to say that the Federal government has kept mum about the deal. It is on record that on 30th December, 2023, the Minister of Finance, Wale Edun confirmed on Arise TV that Nigeria had received the first tranche of the facility which was $2.25 billion with the remaining $1.05 billion due to be credited to Nigeria in January. If the Minister of Finance and Coordinating Minister of the Economy is not federal government enough, I wonder who else is?
Apart from the confirmation by the Finance Minister, the Office of Digital Communications and Engagement in the Presidency few days ago in collaboration with the Chief Corporate Communications Officer of NNPC Ltd, Olufemi Soneye published a comprehensive release about the NNPC’s Project Gazelle where they detailed everything there is to know about the deal and provided answers to many frequently asked questions.
Also, it is uncharitable for Mr. Atiku to claim that the only information available to the public on the mega deal is coming only through unofficial sources from the NNPCL. One may begin to wonder if the Chief Corporate Communications Officer of NNPC Ltd is an UNOFFICIAL SOURCE?
The Group CEO of NNPCL, Mele Kyari has equally spoken about this dynamic financing option and had actually revealed that the proceeds of the facility have been made available to Nigeria.
Now let’s get to the deal proper…
The concerns by Atiku Abubakar about the incorporation of the Special Purpose Vehicle called Project Gazelle Funding Limited in the Bahamas and his innuendo that it is shady simply because of the Paradise Papers leak that involved Bahamas is misplaced and pedestrian. Probably, following Atiku’s personal experience with incorporating SPVs (both local and international) for corruption purposes as captured in previously leaked tape, it is not surprising that the first thing that came to his mind when he saw SPV and Bahamas was corruption.
It is necessary to point out that Bahamas is a popular destination for incorporating SPVs used in international financial transactions because of its tax neutral environment and strong regulatory environment which gives confidence to businesses and investors while also allowing them to maximise returns.
It is therefore easier to get financing when the potential lenders are confident and trust the jurisdiction. This is what has happened in this case. Funding was mobilised rather quickly due to the structure of the entire deal which guarantees repayment.
Crucially, Atiku’s little mathematics about the supply of 164.25 million barrels of crude oil to repay the loan and his multiplication using current price of $77.96 per barrel to arrive at a $12 billion figure shows that he simply did not go through the structure of the deal which has been in the public domain since last year and which was equally explained in FAQ graphics by the presidency few days ago.
It’s obvious that the former Vice President did a straightforward multiplication of the 90,000 barrels per day earmarked to repay the loan for the entire five years. His wrong calculation is shown below:
90,000 barrels x 365 days = 32,850,000 barrels per year
For 5 years, it becomes:
32,850,000 barrels x 5 = 164,250,000 barrels.
164.25 million barrels x $77.96 = $12.8 billion
This was how Atiku came to the conclusion that the Federal government will be repaying a loan of $3 billion with $12.8 billion in five years. Meanwhile it was clearly stated in the deal that the interest on the loan is 12% (i.e. both principal and interest totals around $3.696 billion). If we are to go by Atiku’s calculation, it means the interest alone is 300% of the principal sum. This is definitely impossible.
FACTS ABOUT PROJECT GAZELLE
The deal has an embedded price balance mechanism where 90 per cent of all excess cash from the sale of the committed barrels (after debt service) will be released to the borrower, while the balance of 10 per cent will be used to repay the facility, effectively shortening the final maturity of the facility and freeing cash flow from future pledged cargoes for use by Nigeria.
Let me break this down in the language that many, including Atiku Abubakar would understand:
90,000 barrels is the committed amount of crude oil per day that should go into the repayment of the loan.
In the deal, the benchmark price of crude oil is around $65, which means the daily repayment figure is 90,000 x $65 = $5.85 million.
If today is the first day of repayment and 90,000 barrels of crude oil as agreed is given to the SPV to sell towards debt service, it would be sold at today’s price of $76.43. This will fetch 90,000 x $76.43 = $6,878,700.
Out of this $6.879 million, the lender will get its due $5.85 million leaving an EXCESS earning of $1,028,700.
According to the deal, 90% of this EXCESS earning from the sale of the daily 90,000 barrels will go back to the borrower (i.e. NNPCL and by extension Nigeria). That amounts to $925,830. The other 10%, which amounts to $102,870 will then be used to further repay the $3.3 billion loan and the $396 million interest. Therefore for today $5,952,870 would have been used to repay part of the loan instead of the normal $5.85 million.
What this means is that the repayment duration will be shortened. If crude oil price remains static at $76.43 per barrel, it means that in 620 days (or less than 21 months) the entire loan plus interest of $3.696 billion would have been repaid. Nigeria within this 620 days would have equally received $574,826,542 as 90% of the daily excess earnings.
It is instructive to note that in this type of cash for crude credit facility, lenders typically prefer lower crude oil benchmark figures to guard against default in repayment when prices fluctuate sharply towards the negative territory while borrowers prefer higher benchmark figures to reduce the amount of committed barrels of crude oil as well as the repayment duration.
The other part of the entire deal that people are not discussing and which the former Vice President is not interested in is the reasons for such a financing package. The immediate reason for the Project Gazelle may appear to be the need to be inject much needed foreign exchange liquidity into Nigeria as the CBN battles to stabilize the Naira. However, beyond the need to stabilize the Nigerian currency, NNPCL as a commercial entity needs this financing to expand its operations.
Nigeria has around 40 billion barrels of proven crude oil reserves and we are currently producing crude oil at levels below 1.5 million bpd. What this means is that we are producing enough to finance our growth. This is partly because of lack of needed funding/investments by the NNPCL and its joint venture partners to embark on crude oil exploitation projects that will increase Nigeria’s crude oil production capacity.
This Project Gazelle is therefore very important for the NNPCL to expand by investing in many new projects that will increase Nigeria’s crude oil production. The end product will be an increased inflow of petrodollars into the Nigerian economy, which will further stabilize our currency and drive growth. It is therefore a very ingenious way by the NNPCL and the federal government to kill two birds with one financing stone
Alhaji Atiku Abubakar may need to take out time to carefully go through the details of this Project Gazelle before commenting to avoid making statements from a position of ignorance.