African Upstream Finance: Africa Oil Week Silver Sponsor Herbert Smith Freehills (HSF) shares expertise ahead of Africa Oil Week 2022 (by William Breeze and Thomas Bethel) – African Business

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By William Breeze and Thomas Bethel, Herbert Smith Freehills (https://bit.ly/3SGS7yg)

At first glance, one would expect African upstream finance to be in good shape: the price of oil is high by historical standards; gas is an essential transition fuel; domestic demand for hydrocarbons continues to grow; government support for upstream development continues; and sector returns are strong. However, the picture with regard to access to capital, and in particular to debt financing, is much more complex.

In the second half of 2021 and the first half of 2022, many commercial banks were finalizing, and have now published, their net zero goals and strategies, in many cases related to their commitments to join the Net-Zero Banking Alliance, with a focus on the impact on their oil and gas lending business. This appears to have resulted in 6-12 months of very limited new funding activity with many banks only focusing on existing funding. A limited number of commercial banks have pulled out of the upstream space entirely in some markets, but things have settled down over the last 12 or so months, and many banks, although more selective than in the past, continue to lend upstream. It became clear that the market is still open for business, and the obvious major supply and price issues globally have reinforced the sense of willingness to strike deals. We have worked on several upstream financings in recent months with lenders committing new financing to the sector, including new borrower names and new developments, which is a welcome change from the market situation there. one year old.

Environmental, social and governance requirements – the “ESG” of a thousand newspaper and scholarly articles – are now ubiquitous in the banking market. While some seek to use ESG (and in particular decarbonization) as a very blunt instrument for not lending to a sector or a project, most lenders take a more considered approach. If we take it for granted that, for decades, a large (albeit potentially tapering) volume of oil and gas production is needed (and even the most aggressive energy transition projections show a very important for some time to come), then ESG-focused lending can be a powerful tool to support and drive upstream advancements and improvements.

Another challenge for upstream funding is the approach taken by some politicians and NGOs. Some argue that there should be no more upstream development. Beyond the financial and moral inconsistency of this position (why deny countries the right to develop their natural resources for the good of their populations and to use oil royalties to build hospitals and schools?), the advertisement generally attracts upstream can have a deterrent effect on banks’ willingness to lend. It is incumbent on all market participants to advocate for responsible, world-class development, with financing terms that help operators and investors manage assets in the most efficient and prudent way possible.

However, there are other sources of financing and the lack of liquidity due to the reduced appetite of banks has been less dramatic than it might have been otherwise. Traders – whether commodity companies or trading arms of IOCs – remain active, providing funding (often on competitive terms) to sustain operations. Some development banks, recognizing the employment and economic benefit of upstream development and operations, continue to lend. A growing number of private credit investors, both specialist and general funds, are making debt available to African upstream players, often attracted by attractive returns from lower positions in the market structure. capital. And there was, until relatively recently, the beginning of a trend away from lending and towards the debt capital markets instead.

In our view, the banking market should not be dismissed too easily. There is a wealth of institutional and individual knowledge that can help solve the complexities of funding. When market conditions are tough, the value for a borrower to have a sensible conversation with their lenders and take a mutually productive approach to temporary difficulties should not be underestimated; bond investors do not have the same ability to communicate or react flexibly to market conditions and private credit, always bearing in mind the life of the fund and the IRR, may not be able to accept even brief cash shortages; and conversations about waiver and restructuring are extremely difficult to convene and move forward. Although this may not appear to be the case from the borrower’s perspective, bank debt is both more consistently available (without general periods when the market is said to be “closed”) and its price is almost invariably much more competitive than bond money or private credit.

It is inspiring to see the energy and enthusiasm brought by the new generation of owners – the independents, often Indigenous actors, who are acquiring the assets being divested by the IOCs – who are encouraging lenders of all kinds to invest in a future that seeks to develop the natural resources with which Africa is endowed, seeking to be the best from an ESG point of view and to drive constant improvement through ambitious but achievable targets.

We therefore have a picture of oil and gas in Africa that is, perhaps more than ever, an almost overwhelming mix of challenges, changes, complexity and opportunities. But we are certain that this sector, and the innovative minds that manage, develop and finance it, will find their way, for the good of the continent and its people, while minimizing the damage to the planet. We look forward to discussing these themes and more with all Africa Oil Week delegates and wish everyone an enjoyable and collaborative conference.

Distributed by APO Group for Africa Oil Week.

Media contact:
Friend Sparrow
Professional manager
[email protected]

About Africa Oil Week:
Africa Oil Week (https://Africa-OilWeek.com) is the preferred meeting place for the continent’s upstream oil and gas sector. Now entering its 28th year, the event brings together governments, national and international oil companies, independents, investors, the G&G community and service providers. Africa Oil Week takes place in the heart of Cape Town at the Cape Town International Convention Center 2 (CTICC2) from October 3-7, 2022.

This press release was issued by APO. Content is not vetted by the African Business editorial team and none of the content has been checked or validated by our editorial teams, proofreaders or fact checkers. The issuer is solely responsible for the content of this announcement.

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