Investing in the energy sector requires money owing to infrastructures that must be put in place in order to attain aspirations and set objectives. For a financial institution to support an energy business, many factors are considered while the would-be investor must strive to accomplish requirements of its financial partner to be in business.

Recently, at the Energy Sustainability Conference organized by the Energy Institute, financial experts explained that supporting the energy sector entails realization of certain criteria due to huge amount involved which is usually in foreign currency since the sector is globally driven. For example, the oil industry is dollar denominated and transaction is also done using the dollar. If a business is yet to find its feet and struggling to survive, it will be difficult to fund.

A financial energy expert and former Head of Energy, FBN Quest, Rolake Akinkugbe-Filani, said her commercial bank was helping companies raise equity capital in the energy space across the value chain. She is in advisory board of appeal fund focusing on the energy space across Africa and passionately assisting companies overcome hurdles they face on funding and building capacity.

Akinkugbe-Filani raised a lot of issues on financing the upstream. Exploration is capital intensive with long gestation time from acquisition to first oil. “No bank will want to tie its money down for the next ten years which typically is what it takes to bring asset to production. Exploration risk is a big problem that the oil industry confronts.”

The Nigerian environment is not an enabling one because there are bottlenecks that tend to increase transaction cost which is not an excuse to the banks coupled with volatile oil prices which is out of the reach of operators’ control. It is not easy to work against prices. Hostile host community might sabotage operator’s effort which can disrupt cash flow. “If cash flow is disrupted, how can you tell banks that you are going to make the payment.” Operators try to drive down cost and maximise profit.

She asked, the access to market and where does the company heads to? Why is the business so important? Is there going to be market for these goods and services? There must be answers to these questions before embarking or financing any project.

In terms of innovative structure, the partnership structure of accessing value is important especially consortium of companies and how partnership can be enhanced.

On energy sector investment, Mariah Lucciano-Gabriel, Head, Commercial and Business Development, Asharami Energy, upstream arm of Sahara Group noted that as head of commercial and business development, her primary responsibility was reviewing asset project economics, developing power energy, handling farm in and farm out negotiations.

According to her, there is need to dimension the problem in terms of energy finance and consider different aspect within the value chain. The oil and gas space, upstream, midstream, gas infrastructure and power are all in focus. Increasingly, in energy transition, how can renewables be financed? The basic concept is issues around asset to market between the government and private sector, how they can collaborate to ensure that companies achieve their goals.

Considering the market over the last decade, the big challenge for Nigerian banks is liquidity and is not the fund that is available but at what price? Is the expectation of those seeking investment valid? If a bank is funding an upstream oil and gas transaction, there will be no investment committee without requirement hedge. Another issue is where the market heads.

Lucciano-Gabriel gave an insight into transaction between Seplat and Elland including efforts made by the indigenous company to acquire it. It has been argued by stakeholders if the company breaks the premium development because presently in the market, oil and gas business cannot be done without value. The purchaser in the transaction had to pay a premium which was met since it was considering an upside in future cash flows. The purchaser could raise fund because it has access to global commercial investors which was a major consideration.

In terms of financing and raising capital, the issue for investors on upstream oil and gas is long term upside value that a particular transaction will bring? There are people who are willing to pay premium.

The Commercial and Business Head of Sahara Group stated further that a major issue bedeviling the energy sector is institutional knowledge. For several decades, the Nigerian financial space is structured primarily to support upstream, midstream and downstream oil and gas including the power space. But since there is a major risk opportunity for global energy transition, is there any institutional knowledge to effectively mobilize capital into newer funds for energy? For example, not many people are aware that solar energy is cheap compared to conventional energy sources. Even though many projects may capex heavy in the alternative energy space over a period of time they have low operating expenditure. A diesel generator is not really expensive but in terms of maintenance over time huge capex requirement goes into it.

Lucciano-Gabriel observed that in project economics, funding alternative energy should be a financially viable proposition. It is not about lack of access capital but understanding the space. Projects that have succeeded in attracting funding either power or oil and gas, the two basic principle has been access to feedstock and offtake. Without offtake there will be no viable project.

She added that one of the things that beset Nigeria’s power is that the country has had legacy issues on power which is close to N1.7 trillion in deficit legacy issues, how do you realise money across the entire value chain? From the Generating Companies (GenCos) to gas suppliers and through to offtake. The biggest shift around raising fund is securitization of asset through cash flows for future projects.

A capital is issued at what price? The local banking sector has been struggling in terms of dollar financing where currency must match with funding cash flow. This has led to focus on the offshore. Where the global market is going, if the idea of domestic market is focused on international sources of funding, there is need for project to be structured in ways that they achieve several goals in order to widen the access to capital.

If a company involves in upstream oil and gas project which is conventional fossil fuel, “are there ways as companies and entrepreneurs, we can think of element and involve some sort of climate mitigation.”

“So, if you are producing associated gas alongside conventional crude oil, is there a monetization aspect or commercialization flare aspect that will allow you to tap into several bucket funding that when you are able to pull them together you can achieve your commercial goal?” These are some of the ideas that should be explored as a market.

Lucciano-Gabriel enlightened operators that one of the ways of overcoming challenges is to grow financial and technical capacity inhouse. When a company approaches bank for financing, the financial institution wants to see the economic model if the asset can pay for loan being requested. Most indigenous companies do not have the capability inhouse. It is important to grow capacity or outsource for it before approaching a bank for loan. A bank must know what the asset is capable of doing. Project cost must be kept low and financiers are keen on vendors to be used to carry out projects so that they can have confidence on the aspect to technicality.

Competition is rife, a would-be company seeking for loan should have in mind that banks have other projects to fund such as sustainable and renewable energy in-country and other parts of Africa. The project must be viable for banks to fund.

On exploration risk, she opined that companies should get their technical service agreement with funding partners and farming out some equity to other operators.

These are antidotes to be considered for energy sector financing.