Calag Capital and Consulting Limited

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3c
NOT AN OFFICIAL UNCTAD RECORD

• Calag Capital and Consulting Limited
• FINANCING OIL SERVICE SECTOR COMPANIES A CASE
  STUDY FOR NIGERIA
• XAVIER ABEL EDZIWA
• Chief Operating Officer

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Introduction.
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• CALAG CAPITAL AND CONSULTING LIMITED (3C) IS
  INCORPORATED IN NIGERIA AS A FINANCIAL ADVISORY
  SERVICES FIRM. IT IS AN ASSOCIATE COMPANY OF
  PIVOT CAPITAL PARTNERS (PROPRIETARY ) LTD, A
  SOUTH AFRICAN REGISTERED FINANCIAL ADVISORY
  SERVICES COMPANY
• 3CS CLIENTS ARE DRAWN FROM THE HOSPITALITY,
  OIL AND GAS, FINANCIAL SERVICES, MANUFACTURING,
  AGRICULTURE, AVIATION AND REAL ESTATE SECTORS OF
  THE NIGERIAN ECONOMY.

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Oil service sector financing
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• BACKGROUND (to put the topic in context)
• Nigeria is one of the world's leading oil
  exporters and the largest producer in Africa
• Its oil reserves constitute 2.5 of total
  world reserves
• Favorable geology and high quality crude
  make Nigeria a country of continued interest for
  investment
• The oil and gas industry remains the
  country's principal source of revenue and foreign
  exchange, and as such, it is vital to Nigeria's
  economic development
• Petroleum export contributes over 90 of
  the country's foreign exchange earnings and over
  75 of government revenue

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Up Stream Oil Sector
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• The bulk of Nigeria's oil and gas is produced by
  multinational companies operating under joint
  venture arrangements with the Nigerian National
  Petroleum Corporation
• The companies with the largest participation in
  joint ventures are the Royal Dutch/Shell group
  (Shell), Exxon Mobil, Chevron Texaco, Agip, and
  Total
• Government is encouraging greater indigenous
  participation through local content policy
• Indigenous Producers
• Local Nigerian's participation in the country's
  upstream oil sector is just 14
• Experts believe that Nigerian companies have
  difficulties meeting high costs of entry because
  of the technical and financial requirements of
  that sector

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Up Stream Oil Sector
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• Main operators are the international Oil Majors
• Oil Majors out-source
• Engineering
• Work-over
• Drilling
• Laying of pipes
• Marine services
• Maintenance
• Procurement
• Supplies
• etc
• /- 80 of cost of producing a barrel of crude
  oil is in terms of oil services
• Hence the need to support the oil service
  companies

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Down Stream Oil Sector
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• The downstream sector includes the refining and
  sale of gasoline, kerosene, and other petroleum
  products
• Major marketers currently control about 65 of
  the fuels business
• The major marketers include foreign oil companies
  as well as Nigerian companies
• The independent marketers are mainly Nigerian
  companies
• Currently CALAG is structuring a US70 million
  line of credit for a leading bank to finance
  Independent Marketers

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Local Companies Funding Constraints
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• Indigenous companies have unfortunately, for
  several reasons, not been able to take full
  advantage of the vibrant industry
• Experts believe that Nigerian companies have
  difficulties meeting high costs of entry because
  of the technical and financial requirements of
  that sector
• It is worth noting that the Nigerian community is
  now aware and very sensitive to the need for a
  participatory role in the industry
• Huge volumes of financing required can not be
  supported due to lack of market depth and
  inability to provide medium to long term
  financing
• Bank debt funding is typically small, high
  interest bearing and mismatched tenors

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Financing Structure for upstream OSCs
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• mitigate risks to financiers of the perceived
  risky OSCs
• appropriately priced funding
• appropriately tenured funding
• Transaction financing NOT balance sheet financing
• Structure to recognise the quality of the
  underlying contracts

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Transaction structuring...
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• OSCs
• Pre-qualified by
• arrangers,
• International lenders
• local bank guarantors
• Key to prequalification is track record and
  quality of contracts with oil majors current
  contracts and likelihood of future contracts
• Not balance sheet financing, which is the reason
  why most OSCs struggle to get financing, because
  financiers apply inappropriate OSCs financing
  structures emphasis is on contracts, hence it is
  like financing Oil Majors themselves
• Risks managed
• Default assignment of contracts
• Performance pre-qualification ensures credible
  OSCs access the facility

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Transaction structuring...
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• Local bank guarantors
• Pre-qualified and limits set based on capacity of
  each
• Guarantee obligations on pro-rata
• This also address local bank risk as may be
  feared by international financiers, as risk is
  pro-rata
• Loan monitoring to safe guard own guarantee
  exposure

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Transaction structuring...
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• Credit enhancing international institutions
• Guaranteeing lenders on non-performance by local
  banks
• First loss guarantor For example guaranteed the
  first 30m
• Second loss guarantor For example guaranteed the
  next 35m
• International lenders overall exposure not
  covered by loss guarantors is 10m (but then this
  is covered by assignment of contracts, hence in
  reality almost zero exposure to local vagaries)
• Structured risk management to be reflected in
  pricing and other terms of the facility

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Transaction structuring...
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• Lenders Engineer
• Advise on special engineering requirements
• Assess and advise on the capability of the OSC
  to execute the contract
• Oil majors
• No direct agreement with them, besides the
  Assignment Agreement, but can be disqualified in
  the event of failing to respect the contracts
  with OSCs cross default etc
• If disqualified then OSCs contracted to them will
  not access finance, hence pressure on the oil
  major
• Loan Monitoring Agent
• Calag Capital Consulting Limited

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The outcome...
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• Facility
• Amount Revolving US75 million
• Purpose
• The purchase of products and services required by
  OSCs to perform contracts
• Pre-finance receivables due to OSCs from Oil
  Majors
• Effective final maturity 4 years
• Repayment from assignment of proceeds from Oil
  Majors
• Competitively priced

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The outcome...
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• WAY FORWARD AFTER DRAW DOWN
• To increase the facility amount once
  international lenders are comfortable with doing
  business with OSCs in Nigeria (target for next
  facility US200m)
• To reduce credit enhancement layers, thereby
  reducing the financing costs

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Conclusion..
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• As Mozambique or other countries in Africa pursue
  on oil and gas projects, is the financial sector
  prepared enough to play role in promoting local
  content?
• There is need to come up with financing
  structures to support participation of local
  companies in the oil gas sector.
• Oil and gas sector finance is vital, hence the
  need for all financial players to collaborate in
  providing innovative financial solutions, for
  example our structure included over 10 financial
  institutions (Africa and Europe), playing
  different roles.
• SO LET US, AS PROFESSIONALS IN CAPITAL MARKETS,
  COLLABORATE IN CAPACITY BUILDING

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UPCOMING .
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• In line with our quest to be THE point of
  reference in the oil sector in Nigeria ..
• MARGINAL FIELD FINANCING WORKSHOP
• Workshop In Partnership With UNCTAD And NNPC set
  for Abuja, Nigeria (indicative dates end of
  June/early July 2005)
• NIGERIA OIL SERVICE SURVEY
• Survey Completed (publication forthcoming)
• In collaboration with UNCTAD And NNPC
• International Conference Based On Survey set for
  4th Quarter 2005
• US70 million line of credit to finance
  independent marketers in the down-stream sector