NNPCL: Why We Intervened in Nigeria’s FX Crisis with $3.3bn Crude Repayment Loan from Afrexim-bank

Peter Uzoho

The Nigerian National Petroleum Company Limited (NNPCL) has justified its involvement in the controversial $3.3 billion crude oil pre-payment loan it signed with the African Export-Import Bank (Afrexim-bank) last year.
In an interview with journalists, the Chief Corporate Communications Officer (CCCO) of NNPCL, Mr. Femi Soneye, explained that the deal christened ‘Project Gazelle’ – the forward sale of oil, which is the first of its kind to be facilitated by any government institution in Nigeria, was to ultimately provide dollar financing to the federal government.

Earlier in August, NNPCL had announced that it secured a $3 billion emergency loan from Afrexim-bank to stabilise the country’s volatile foreign exchange market.
The deal came over a year after the national oil company had similarly secured a $5 billion corporate finance commitment from the same Afreximbank to fund major investments in Nigeria’s upstream sector.

In late December last year, the federal government had announced receipt of $2.25 billion out of the $3.3 billion facility from the multilateral financial institution.
Afreximbank is the lead arranger of the loan, while some other sub-lenders included VITOL; Guvnor, one of the world’s largest energy trading houses by turnover; Sahara Energy Group; Oando and the United Bank for Africa (UBA), which chipped in $100 million.  
However, while the loan attracted mixed reactions from Nigerians, especially over concerns about the implication of the facility for Nigeria’s oil production, the NNPCL Spokesman argued that the loan was needed as a short to mid-term solution to the foreign exchange shortage challenge currently being faced by the country.

Soneye added that Nigeria needed to urgently improve its foreign exchange position, pointing out that as of June 2023, the Central Bank of Nigeria (CBN) had over $6 billion of unmet obligations – forward contracts with third-party institutions that were past their expiry dates.
He explained, “NNPC Ltd entered into this arrangement to ultimately provide dollar financing to the federal government. It is a short to mid-term solution to the foreign exchange shortage challenge currently being faced by the country.  

“Nigeria needs to urgently improve its foreign exchange position. As of June 2023, the Central Bank had over S$6 billion of unmet obligations – forward contracts with third-party institutions that were past their expiry dates.

“These unmet obligations have pressured the nation’s external reserves and resulted in a significant devaluation of the naira. The pre-financing arrangement allows the federal government to receive foreign exchange, in advance, to enable it to resolve its unmet FX obligations. These inflows of foreign exchange will ensure exchange rate stability and is an immediate quick-win available to the country.”
He further explained that forward sale contracts help resource-producing companies such as the NNPCL to deliver significant upfront funding for new projects before eventual production and export.

The NNPCL spokesman maintained that the funding available is used as investments in existing and prospective resources, adding that this could result in more oil and gas production in the country as new projects come onstream, and higher oil and gas exports, bringing in more dollars and foreign currencies.
He further argued that international banks have a track record of providing forward-sale financings, which brings new Foreign (FDIs) into the country.
With Nigeria having over 35 billion barrels of proven reserves that need to be exploited and produced, Soneye said a fraction of these prospective reserves could be used to raise the required funding.

With a forward sale financing, he noted that the country could securitise these proven oil reserves today, saying this improves foreign currency inflows immediately rather than having to wait for years.
“Also, by supporting more exports and bringing in overseas financing, forward-sale financing can significantly boost the availability of foreign currency for an oil/gas-dependent country. This improves the country’s ability to pay for imports and manage its overall economy.  
“When exports finally start, the forward-sale investments are repaid using the money earned from those same exports. This improves the country’s balance of payments.

“The financing gives the government more stable and predictable oil earnings. This helps in planning budgets and managing foreign exchange reserves,” he noted.
On repayment of the Project Gazelle, he said up to 90,000 barrels had been earmarked for the purpose.

According to him, “the quantity of crude earmarked is sized to ensure that there is sufficient cash available for the repayment of the facility as and when due and ensure that the Borrower can also meet the other cashflow obligations, taking into consideration the expected future price of crude oil globally.”