Nigeria is the largest economy in Africa and one of the most popular sub-Saharan states to have received foreign investment from European, US and Chinese investors over recent years. It is one of the world’s larger oil producing countries, with daily production of nearly two million barrels, more than twice that of the UK. It has been a member of the Organisation of Petroleum Exporting Countries (OPEC) since 1971.
Nigeria’s economy is heavily oil-dependent, with some statistics putting it as high as two thirds of the government’s income, generated by the petroleum tax regime and the activities of the Nigerian National Petroleum Corporation (NNPC).
The current practice for the award of concession rights is for oil and gas companies to enter into an auction for a production-sharing contract (PSC) with NNPC. NNPC has a number of joint ventures involving foreign investors, including Shell, Chevron, Total, Exxon and Eni.
Aside from the industry-standard co-venturing approach, Nigeria also receives investment in the form of loans. One of the key issues for this form of investment centres on the fact that Nigeria had a debt to the World Bank of around $8.5 billion as of summer 2018.
When providing loans, the World Bank does not seek security from governments who borrow from it but protects its position indirectly through the use of a negative pledge clause (Clause 6.02 of the World Bank’s “General Conditions”). The provision turns on two defined terms in particular:
l Lien – mortgages, pledges, charges, privileges and priorities of any kind;
l 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 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 a creditor in the allocation, realisation or distribution of foreign exchange” shall equally and rateably secure amounts payable by the member state to the bank.
It is clear on this language, and from the practice in Nigeria, that the above restriction would apply to loans to NNPC to help it finance new oil and gas developments.
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.
The breadth of the pledge and the severity of consequences for its breach are sometimes seen as being counter-productive, as they have the effect of preventing long-term investment for growth.
The government of Nigeria and NNPC are not 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.
However, there are ways in which lenders can structure their financing arrangements to accommodate the negative pledge.
One such method is to use a forward sales arrangement, whereby the loan made by the foreign investor is made to a (non-state owned) special purpose vehicle (SPV). The SPV agrees to use the
investment to purchase oil from NNPC under a long term sales agreement. The SPV then sells that oil to NNPC-approved off-takers and the cash from such sales is used to reimburse the investor.
The investment landscape is a dynamic one. A general election is due to take place on February 16, 2019 to elect the President and the National Assembly.
A leading opposition candidate to replace the incumbent President, Atiku Abubakar of the Peoples’ Democratic Party, is widely reported to be planning to break up and privatise NNPC and to re-negotiate production-sharing contracts with multinational oil companies.
If Mr Abubakar is elected and is successful, privatisation would likely see the World Bank negative pledge become less of a concern for players in the industry and thereby open the door for more “conventional” forms of project development finance, although on what terms we will have to wait and see.
Penelope Warne is senior partner at CMS