NNPCL AND OPERATION GAZELLE

 Etim O. Udom  writes it is NNPCL’s imaginative solution for internal operations and the Nigerian economy

When in mid-August 2023, news broke that Nigeria’s national oil company, the Nigeria National Petroleum Company Limited (NNPCL) had signed an agreement to the tune of $3 billion in what was termed Emergency Crude Repayment Loan with African Export-Import Bank (Afreximbank), under the aegis of its ‘Operation Gazelle’, many people wondered what exactly could be the rationale behind such a move. To them, there was very little wisdom in a farmer pledging his harvest to a merchant and getting immediate cash to run his family and attend to sundry pressing socio-economic demands. They argued that it would have been better, as it were, to ensure that the harvest was done, completed and thereafter engage in a direct sale in the form of ‘cash and carry’ than seek a quick fix solution. But they forgot that the NNPCL is, in a manner of speaking, the major artery that keeps the Nigeria nation going by virtue of its strategic economic operations.

In the first place, it is trite to say the NNPCL requires funds to run its own operations. Second, because the Nigeria economy is heavily dependent on oil and gas, it is the inherent duty of the national oil company to ensure that there is enough cash in the system at all times, preserve the Naira, stabilise the forex system and additionally help to create opportunities in the economy in more ways than one.

It is in the light of the foregoing, and of course other compelling needs, that one must see the NNPCL’s Operation Gazelle or the Gazelle Policy as others like to call it, as a well thought-out imaginative solution that Nigeria needs at the present moment. A deft move that speaks to ‘thinking outside the box’ in finding a solution to pressing problems.

As we all know, a Gazelle is a nimble, agile and strong animal known for its sprinting ability. The symbolism of the policy here is very apt as it depicts all the aesthetics of speed, strength and a determination to succeed.

For the benefit of those who are yet to grasp exactly what the NNPCL has done on behalf of the Federal Government of Nigeria, here is a breakdown of the seemingly inscrutable policy.

Simply put, the Gazelle Policy is a loan structure which enables the NNPC Limited to access cash via a sponsored SPV called Project Gazelle Funding Limited by the NNPCL. The NNPCL makes a promise to repay Afreximbank with crude oil that will be equivalent to the borrowed principal at an interest of 11.85% Annual Percentage Yield (APY).

NNPCL then backs the loan with a collateral of future sales of crude oil. Here, Nigeria is obligated to deliver to Afreximbank 90,000 barrels of crude a day from 2024 until 2029, making a total of 164.25 million barrels valued at about $12.8b for a period of five year.
It must, however, be noted that of the proceeds of the 90,000 barrels to be delivered by NNPCL forward sales, up to 90% of excess cash, otherwise called ‘Price Balance’ will be released back to NNPC Limited via the Central Bank of Nigeria while 10% will go towards the repayment of the facility.

What the NNPCL has done is essentially a domiciliation of sales proceeds. This allows you to borrow from a bank by promising to lodge or deposit all your sales with the bank. That then forms the collateral because the bank has your sales, by agreement, coming directly from your customers in its vaults.

With the arrangement, in a week, the NNPCL will be able to access an initial $2.2b loan disbursement but would have only deposited just 450,000 barrels with an estimated value of $36m on the premise of $80 per barrel. What this means is that Afreximbank is only getting an equivalent value of sales collateral of $36m for releasing $2.2b

Don’t forget that $12.8b is the total transaction, which is what NNPCL is paying back on the $3.3b borrowed capital plus 11.85% APY excluding fees. Remember also that, the sales will be domiciled with Afreximbank, who will then take their 10% to settle their obligations and release 90% to NNPC/CBN. It is this domiciliation that is the essential ingredient in collateral because that is what the syndicate financers required for the total package.

The question then arises: what is the risk inherent in this transaction to Nigeria? There can only be risk if Nigeria fails to deliver these barrels of oil as agreed. It will then incur a penalty of two percent per annum.

It is worth stating that as Nigeria is today, if the truth must be told, it badly needs those funds to steady the economy. With a $2.2 billion to be released immediately, there is no gainsaying the fact that it will boost the value of the Naira.  It will also impact positively on the forex regime.

The only drawback that is visible to all and sundry, perhaps, is the rate and tenure of 11.85% and 5 years respectively. And the plausible explanation for this, according to an industry source, is that it is a reflection of the risk factor involved. The source averred Nigeria parades an increased risk factor rating, particularly the risk of oil cargo delivery.

Beyond that, there’s hardly anything else to worry about in the Project Gazelle. It must be emphasised for the sake of clarity, that the transaction is essentially a crude repayment loan and not a crude swap or crude for refined products deal but an upfront cash loan against proceeds from a limited amount of future crude oil production.

All things considered, there is no inherent major risk in it for both the NNPCL and for the Nigerian Treasury as the exposure for NNPCL is very limited, covering just a fraction of their entitlements. Importantly, there are no sovereign guarantees tied to this loan, so no cause whatsoever for alarm.
Project Gazelle, as mentioned above, will assist NNPCL in funding its operations in that it will be able to easily settle taxes and royalties in advance. What’s more, it will also enable it to equip the federal government with the necessary dollar liquidity to stabilize the Naira.

Another important point to note is the fact that the funds would be released in tranches based on the specific needs and requirements of the federal government. Overall, the loan is a strategic move that ensures a balance between the country’s current economic needs and future production capabilities of crude by the NNPCL.
Udom writes from Lagos