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

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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 the internal demand for hydrocarbons continues to grow government support for upstream development continues and returns in the sector are strong However the picture regarding access to capital and in particular debt financing is significantly 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 by joining the Net Zero Banking Alliance with a particular focus on the impact on your oil and gas loan business This appears to have resulted in 6 to 12 months of very limited new financing activity with many banks focusing solely on existing financings A limited number of commercial banks have pulled out of the upstream space altogether in certain markets but things have calmed down in the last 12 months and many banks while more selective than in the past continue to lend upstream Clarity has emerged that the market is still open for business and the obvious major supply and price issues globally have added to a sense of willingness to proceed with deals We have been working on several upstream financings in recent months with lenders committing new funds to the sector including new borrower names and new developments which is a welcome change compared to the market a year ago Environmental social and governance requirements the ESG of thousands of news articles and academic papers are now ubiquitous in the banking market While some seek to use ESG and in particular decarbonisation as a very forceful instrument as a reason not to lend to a sector or project most lenders are taking a more considered approach Assuming that a large albeit potentially tapering volume of oil and gas production is needed for decades to come and even the most aggressive energy transition projections show a very significant supply requirement for some time So ESG focused lending can be a powerful tool to support and drive advancements and improvements upstream Another challenge for upstream finance is the approach taken by some politicians and NGOs There are those who argue that there should be no more upstream development Leaving aside the financial and moral incoherence of this position why should countries be denied the right to develop their natural resources for the good of their populations and use oil royalties to build hospitals and schools advertising The headwinds that the upstream sector generally attracts can have a chilling effect on banks willingness to lend It is up to all market participants to champion responsible best in class development with financing terms that help traders and investors manage assets as efficiently and prudently as possible There are however other sources of financing and the liquidity deficit due to the reduction in bank appetite has been less dramatic than it might have been otherwise Merchants whether they are commodity houses or the trading arms of IOCs remain active and provide financing often on competitive terms to secure consumption Some development banks recognizing the economic and employment potential of upstream development and operations continue to make loans A growing number of private credit investors whether specialized or general funds are making debt available to African upstream players often attracted by attractive returns from lower positions in the capital structure And there was until relatively recently the beginning of a trend away from lending and instead turning to debt capital markets In our view the banking market should not be dismissed too easily There is a wealth of institutional and individual knowledge that can help resolve financial complexities When market conditions are challenging the value of a borrower being able 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 respond flexibly to market conditions and private credit with the life of the fund and IRR always in mind may not be in a position to accept even brief cash flow shortfalls of cash and waiver and restructuring talks are extremely difficult to convene and progress Although it may not seem like it from a borrower s perspective bank debt is more consistently available with no general periods when the market is said to be closed and is almost invariably much more competitively priced than bank money bonds or private credit It is inspiring to witness the energy and enthusiasm brought by the new generation of owners the independent often indigenous who are buying the assets being shed by IOCs which is serving to encourage lenders of all kinds to investing in a future that seeks to develop the natural resources Africa has been blessed with seeking to be best in class from an ESG perspective and driving constant improvement through ambitious yet achievable goals So we have a picture for oil and gas in Africa that is perhaps more than ever an almost overwhelming mix of challenge change complexity and opportunity But we are sure 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 topics and more with all delegates at the African Oil Week and wish you all an enjoyable and collaborative conference
African Upstream Finance: Africa Oil Week Silver Sponsor Herbert Smith Freehills (HSF) shares his experience ahead of Africa Oil Week 2022 (by William Breeze and Thomas Bethel)

doing blogger outreach nigerian papers

William Breeze and Thomas

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; the internal demand for hydrocarbons continues to grow; government support for upstream development continues; and returns in the sector are strong.

nigerian papers

However, the picture regarding access to capital, and in particular debt financing, is significantly more complex.

nigerian papers

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 by joining the Net-Zero Banking Alliance, with a particular focus on the impact on your oil and gas loan business.

This appears to have resulted in 6 to 12 months of very limited new financing activity, with many banks focusing solely on existing financings.

A limited number of commercial banks have pulled out of the upstream space altogether in certain markets, but things have calmed down in the last 12 months and many banks, while more selective than in the past, continue to lend upstream.

Clarity has emerged that the market is still open for business, and the obvious major supply and price issues globally have added to a sense of willingness to proceed with deals.

We have been working on several upstream financings in recent months with lenders committing new funds to the sector, including new borrower names and new developments, which is a welcome change compared to the market a year ago.

Environmental, social and governance requirements, the “ESG” of thousands of news articles and academic papers, are now ubiquitous in the banking market.

While some seek to use ESG (and in particular decarbonisation) as a very forceful instrument as a reason not to lend to a sector or project, most lenders are taking a more considered approach.

Assuming that a large (albeit potentially tapering) volume of oil and gas production is needed for decades to come (and even the most aggressive energy transition projections show a very significant supply requirement for some time), So ESG-focused lending can be a powerful tool to support and drive advancements and improvements upstream.

Another challenge for upstream finance is the approach taken by some politicians and NGOs. There are those who argue that there should be no more upstream development.

Leaving aside the financial and moral incoherence of this position (why should countries be denied the right to develop their natural resources for the good of their populations and use oil royalties to build hospitals and schools?), advertising The headwinds that the upstream sector generally attracts can have a chilling effect on banks’ willingness to lend.

It is up to all market participants to champion responsible, best-in-class development with financing terms that help traders and investors manage assets as efficiently and prudently as possible.

There are, however, other sources of financing and the liquidity deficit due to the reduction in bank appetite has been less dramatic than it might have been otherwise.

Merchants, whether they are commodity houses or the trading arms of IOCs, remain active and provide financing (often on competitive terms) to secure consumption.

Some development banks, recognizing the economic and employment potential of upstream development and operations, continue to make loans.

A growing number of private credit investors, whether specialized or general funds, are making debt available to African upstream players, often attracted by attractive returns from lower positions in the capital structure.

And there was, until relatively recently, the beginning of a trend away from lending and instead turning to debt capital markets.

In our view, the banking market should not be dismissed too easily.

There is a wealth of institutional and individual knowledge that can help resolve financial complexities.

When market conditions are challenging, the value of a borrower being able 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 respond flexibly to market conditions and private credit, with the life of the fund and IRR always in mind, may not be in a position to accept even brief cash flow shortfalls of cash; and waiver and restructuring talks are extremely difficult to convene and progress.

Although it may not seem like it from a borrower’s perspective, bank debt is more consistently available (with no general periods when the market is said to be “closed”) and is almost invariably much more competitively priced than bank money.

bonds or private credit.

It is inspiring to witness the energy and enthusiasm brought by the new generation of owners (the independent, often indigenous, who are buying the assets being shed by IOCs), which is serving to encourage lenders of all kinds to investing in a future that seeks to develop the natural resources Africa has been blessed with, seeking to be best-in-class from an ESG perspective, and driving constant improvement through ambitious yet achievable goals.

So we have a picture for oil and gas in Africa that is, perhaps more than ever, an almost overwhelming mix of challenge, change, complexity and opportunity.

But we are sure 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 topics and more with all delegates at the African Oil Week and wish you all an enjoyable and collaborative conference.

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