By Jeph Ajobaju, Chief Copy Editor
Nigeria has signed a $1.5 billion oil prepayment deal with Standard Chartered and oil traders Vitol Group and Matrix Energy to raise revenue and stem the impact of sales slump caused by coronavirus.
Project Eagle, which the package is called, was signed by the Nigerian National Petroleum Corporation (NNPC). It is also backed by African Export Import Bank (Afrexim) and United Bank for Africa (UBA).
It is the first such agreement since the outbreak of coronavirus, which crashed oil prices in April and triggered lockdowns that wiped out about one-third of global oil demand, Reuters reports.
Vitol and Matrix will each get 15,000 barrels per day (bpd) of crude as repayment over five years, starting in August.
Nigeria’s crude production is nearly 2 million bpd, minus a recent quota cut agreed by members of the Organisation of Oil Exporting Countries (OPEC).
ThisDay adds that the prepayment deal may weaken longer-term revenues since Nigeria will offer its oil at a reduced price and will miss out on any price increases.
But the deal provides Nigeria with upfront cash and guarantees revenue as it expands its budget.
It also assures traders a source of supply at a discount for an extended period of time that they can use for resale in the global market.
Prepayment deals usually allow traders to establish long-term relationships with producers.
When oil producers are cash-strapped, prepayment deals are not uncommon, with banks and bond markets remaining the top source of financing for the oil and gas sector.
Secure form of lending
Prepayments with traders are widely used in commodity finance as banks consider them to be one of the more secure forms of lending in countries viewed as risky.
For trading firms such as Vitol, these loans are ideal for securing long-term supplies and boosting razor-thin margins.
In 2013, Russia’s Rosneft signed a $10 billion deal with Vitol and Glencore and made a similar agreement with Trafigura around the same time.
Venezuela, Ecuador, Colombia, Libya, and Algeria have also utilised similar pre-payment structures.
Traders who strike prepayment deals with countries like Nigeria hope to enjoy a close relationship with a major oil exporter, giving them access to time-sensitive data that boost market intelligence and information flow.
NNPC has been trying to raise cash through prepayments with traders for years. However, its opaque finances and costly fuel subsidies have made it tough for it to secure private financing on attractive terms.
Nigeria announced the end of subsidies earlier this year.
NNPC will use a large portion of the money to pay taxes owed by its subsidiary NPDC, sources told Reuters.
The remainder will fund operational expenses and capital expenditure. One of the sources said money from the prepayment could fund an upgrade of the Port Harcourt refinery.
NNPC Group Managing Director, Mele Kyari, had disclosed in a recent interview that the corporation was trying to secure funding for the Port Harcourt refinery that has been idle for years.
Kyari said the NNPC was pursuing “a different model” for the refineries, including the type used by the Nigeria LNG Limited (NLNG), that will make them operate more efficiently.
