nigeria vision 2020 financing challenges150313

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Nigeria Vision 2020 for Nigeria Vision 2020 for Petroleum and Energy Petroleum and Energy Sector: The Financing Sector: The Financing

ChallengesChallengesByBy

Kayode Adebiyi, FCA Kayode Adebiyi, FCA

at the at the

Mandatory Continuing Professional Education (MCPE) Mandatory Continuing Professional Education (MCPE)

Organized byOrganized by

INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA

August 2012August 2012

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Order Order

Vision fundamentalsVision fundamentals Petroleum Business and Wealth CreationPetroleum Business and Wealth Creation Nigeria Vision 2020 HighlightsNigeria Vision 2020 Highlights Financing the VisionFinancing the Vision Way forwardWay forward

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VISION FUNDAMENTALS

What is vision?What is vision?

Values -Values - Core beliefs or Core beliefs or desires that guide or desires that guide or motivate our attitudes and motivate our attitudes and our actionsour actions

Mission - Mission - Why we existWhy we exist Vision - Vision - A picture of success A picture of success

and the related plan of and the related plan of actionaction

Visioning vs. Planning (1)Visioning vs. Planning (1) PlanningPlanning

process that provides process that provides specific direction and specific direction and meaning to the day-meaning to the day-to-day activities.to-day activities.

strategic planning strategic planning places the strategic places the strategic vision into motion.vision into motion.

Fail to plan; plan to Fail to plan; plan to failfail

VisioningVisioning Picture of a Picture of a

preferredpreferred future) future) proactive plan for proactive plan for

the future.the future. It is a view of the It is a view of the

future that future that everyone can everyone can believe in.believe in.

Where there is no Where there is no vision, the people vision, the people perishperish


The essence of planning The essence of planning is order. is order.

Planning is the Planning is the substitution of errors for substitution of errors for chaos. chaos.

Outside planning, there Outside planning, there can only be a pretence can only be a pretence to orderto order

Plans are nothing: Plans are nothing: planning is everything – planning is everything – Dwight D. EisenhowerDwight D. Eisenhower

VisioningVisioning The essence of The essence of

vision vision is focus and is focus and creative imagination. creative imagination.

Absence of vision Absence of vision marks the beginning marks the beginning of “de-vision”, of “de-vision”, division, diversion division, diversion and distractionand distraction

What cannot be What cannot be measured cannot be measured cannot be managedmanaged


Poverty need no planningPoverty need no planning Age does not make a Age does not make a

spinster a married woman. spinster a married woman. Only planning weds a Only planning weds a dream with realitydream with reality

Proactive: Everything under Proactive: Everything under control; no cause for alarmcontrol; no cause for alarm

Planning makes all things Planning makes all things predictable, then predictable, then achievableachievable

Reactive: Everything under Reactive: Everything under alarm, no cause for controlalarm, no cause for control

VisioningVisioning Vision is a standard of Vision is a standard of

expectation. Where expectation. Where there is no standard, there is no standard, there can be no there can be no variance. No variance, variance. No variance, no variable no variable

Faith make all things Faith make all things believable, then believable, then possiblepossible

Any venture outside Any venture outside vision is an experience vision is an experience in energetic emptinessin energetic emptiness

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PETROLEUM BUSINESS AND WEALTH

CREATION

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Oil MarketG e olo gy

Po

liti

cs

Nature

Financ

ial eng

ineerin

g

Strategic Nature of Oil (2)

Thought for food!Thought for food!

• When there is no matter, there is nothing

• When there is no information, nothing has meaning

• When there is no energy, nothing moves

• When there is no money, there is no energy

• When there is no energy there is no money

• Therefore, money answers all things!

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Energy and FinanceEnergy and Finance

““The world runs on energy but The world runs on energy but energy runs on finance”energy runs on finance”

Meeting Nigeria’s reserve and Meeting Nigeria’s reserve and production targets call for huge production targets call for huge capital investments and capital investments and innovative financinginnovative financing

Wealth, risk, finance all the way!Wealth, risk, finance all the way! He who know He who know howhow will work for will work for

he who know he who know whywhy – David Roth – David Roth

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E&P Business EnvironmentE&P Business Environment

Exploration is the most risky segmentExploration is the most risky segment Profitability varies from segment to Profitability varies from segment to

segmentsegment Reserves are the principal assets of Reserves are the principal assets of

the industrythe industry The industry is not allowed to be self The industry is not allowed to be self

regulating and is very susceptible to regulating and is very susceptible to significant outside political and significant outside political and mercantile controlmercantile control

The industry is probably the most The industry is probably the most heavily taxed of all business heavily taxed of all business enterprises worldwideenterprises worldwide

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What makes financing oil and gas What makes financing oil and gas projects so scary? (1)projects so scary? (1)

Risky and volatile, notoriously soRisky and volatile, notoriously so Highly uncertain, almost a gambleHighly uncertain, almost a gamble High capital intensity, big-time High capital intensity, big-time

money guzzlermoney guzzler Subject to a wide regulatory (and Subject to a wide regulatory (and

unregulated) frameworkunregulated) framework Lag time between investment and Lag time between investment and

effects, “expensive” patienceeffects, “expensive” patience

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What makes financing oil and gas What makes financing oil and gas projects so scary? (2)projects so scary? (2)

Global, dollar denominated and Global, dollar denominated and technology driventechnology driven

International market pricingInternational market pricing Potentially significant Potentially significant

environmental impactenvironmental impact

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Features of Oil and Gas Projects (1)Features of Oil and Gas Projects (1)

Typically involve large Typically involve large minimumminimum capital size capital size often spanning several yearsoften spanning several years

Involve imported technology and most times Involve imported technology and most times foreign expertiseforeign expertise

Create new facility or fixed assets which should Create new facility or fixed assets which should add value or meet a regulatory requirementadd value or meet a regulatory requirement

Designed to produce discernible benefits which Designed to produce discernible benefits which translate to a boost in cash flowtranslate to a boost in cash flow

Involve elaborate project management Involve elaborate project management structurestructure

Requires support of a capital expenditure Requires support of a capital expenditure budget which is drawn by means of an approval budget which is drawn by means of an approval for expenditurefor expenditure

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Features of Oil and Gas Projects (2)Features of Oil and Gas Projects (2)

Usually require elaborate justification in Usually require elaborate justification in terms of costs and benefitsterms of costs and benefits

Requires a contract with contractors or a Requires a contract with contractors or a consortium of contractorsconsortium of contractors

Payment made against pre-determined Payment made against pre-determined milestones and supported with interim milestones and supported with interim payment certificatespayment certificates

Requires a carefully drawn financing planRequires a carefully drawn financing plan Characterized by long lead time for Characterized by long lead time for

project identification, planning and project identification, planning and executionexecution

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The up sideThe up side

Large returnsLarge returns Large rewardsLarge rewards Large benefitsLarge benefits Satisfaction of playing in the real Satisfaction of playing in the real

big stakesbig stakes Positive contribution to national Positive contribution to national

economy and public goodeconomy and public good

Biggest Resource Curse

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“Countries dependent on oil are more likely than resource

poor countries to have civil wars; the wars are more likely to

be secessionist and of greater duration and intensity

compared to wars where oil is not present. Oil may be a

catalyst to start a war; petrodollars and pipelines may serve

to finance either side and prolong the conflict. And this is, of

course the biggest resource curse of all” Source: Covering

Oil

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A country’s existing reserves and their ability A country’s existing reserves and their ability when when produced to generate positive cash flow produced to generate positive cash flow

Her Her willingness and ability to invest in willingness and ability to invest in finding, acquiring and producing oil and gas finding, acquiring and producing oil and gas reservesreserves

HHer er peoplepeople and their ability to find, develop and their ability to find, develop and produce oil and gas reservesand produce oil and gas reserves

The investment capacity of the country in The investment capacity of the country in the downstream sector and the ability to the downstream sector and the ability to transform crude oil to usable products at a transform crude oil to usable products at a profitprofit

Key Drivers of Petroleum wealth (1)

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Her Her recognition of oil and gas reserves as a recognition of oil and gas reserves as a non-renewable resource; ability to design, non-renewable resource; ability to design, implement and follow-through a thoughtful implement and follow-through a thoughtful depletion policy, fix appropriate prices based depletion policy, fix appropriate prices based on “user cost” and replace reserves producedon “user cost” and replace reserves produced

The ability of her people to translate oil The ability of her people to translate oil revenues to productive capital thereby revenues to productive capital thereby converting a nonrenewable resource into a converting a nonrenewable resource into a renewable onerenewable one

The totality of the economic environment, The totality of the economic environment, systems and procedures in place to obtain, systems and procedures in place to obtain, retain, sustain, increase and multiply retain, sustain, increase and multiply petroleum wealthpetroleum wealth

Key Drivers of Petroleum wealth (2)

Nature, Money and MenNature, Money and Men

Nature and money determine capacities. Nature and money determine capacities. Nature Nature determineddetermined the extent and location of oil the extent and location of oil

and gas deposits. and gas deposits. Money Money determinesdetermines the vigour and momentum of the vigour and momentum of

the effort to find oil and the extent of the the effort to find oil and the extent of the investment in production, transportation, refining, investment in production, transportation, refining, petrochemicals and storage. petrochemicals and storage.

Within natural constraints, economics determines Within natural constraints, economics determines the rate and extent of field development. the rate and extent of field development.

Men Men decidedecide whether or not oil will be produced whether or not oil will be produced and whether oil revenues will translate to wealth.and whether oil revenues will translate to wealth.

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Wealth is in the journey! (1)Wealth is in the journey! (1)

I have learned.... That everyone wants to I have learned.... That everyone wants to live on top of the mountain,live on top of the mountain,but all the happiness and growth but all the happiness and growth occurs while you're climbing it. - Andy occurs while you're climbing it. - Andy RooneyRooney

Connection begats collectionConnection begats collection

In life, everything connects. WhereIn life, everything connects. Where

there is no linkage, there will be there is no linkage, there will be leakage. leakage.

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Oil industry is an enclaveOil industry is an enclave Fiscal linkagesFiscal linkages Forward linkagesForward linkages Backward linkagesBackward linkages Consumption linkagesConsumption linkages Socio-political and cultural Socio-political and cultural

linkageslinkages Environmental linkagesEnvironmental linkages

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Significant increase in direct and Significant increase in direct and indirect employment generation indirect employment generation

Increased employment opportunities Increased employment opportunities in the manufacturing and service in the manufacturing and service sector; sector;

Significant proportion of the spend Significant proportion of the spend retained in the Nigerian economy; retained in the Nigerian economy;

Significant revenue generation for Significant revenue generation for FGN through taxes; FGN through taxes;

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Increased capacity utilization in the Increased capacity utilization in the manufacturing and service sectors; manufacturing and service sectors; and and

Increased business efficiency across Increased business efficiency across all sectors. all sectors.

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April 15, 2023 27

Physical production linkagesPhysical production linkages

Production A

Imported inputs

Domestic production of inputs

Final demand orproduction B

Production C

Backward linkage

Forward linkage

April 15, 2023 28

Consumption linkageConsumption linkage

Production A

via L-intensive methods

Final demand

Consumption goods industry

Potential backward linkages

Potential forward linkages

Consumption linkage from labor incomes

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Fiscal linkageFiscal linkage

Government

Production A

Limited production linkages

Limited consumption linkages

Enhance production linkages

Enhanceconsumption linkages‘Enclave’

production

Sociopolitical environment critical

Typical of mineral and fossil fuel extractive industries

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VISION 2020 FO

R PETROLEUM A

ND ENERGY:

HIGHLIG

HTS

Creating an Enabling

Environment in the Niger Delta

RealiseValue & Revenue

and Growth4.5 million BOPD

(oil)+

4 Billion scfd (gas)

Realise Economic Benefit to Nigeria

Structural FundingSolution &

industry Re-structure

Un-Leashing the Nigeria oil and Gas Industry

Gas utilisation / infrastructure to support local industry

Nigeria Content Develop Development(Local Content)

Linkages to the Nigerian Economy

Realise the potential of the Niger DeltaLaw & order a MUSTFreedom to operation for the industry

New Funding solution to enable sustainable growthOptimise NNPC, DPROPEC quota increase

Nigeria Vision 2020: Highlights (1)Nigeria Vision 2020: Highlights (1)

Oil and Gas sector is very strategic to Oil and Gas sector is very strategic to the sustenance of rapid economic the sustenance of rapid economic growth and development in Nigeria. growth and development in Nigeria.

Accounts for over 95 per cent of Accounts for over 95 per cent of Nigeria’s total foreign earnings and 85 Nigeria’s total foreign earnings and 85 per cent of total government revenueper cent of total government revenue

Impact on employment generation, Impact on employment generation, value addition and diversification is low. value addition and diversification is low.

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•Grow reserves from 40b bbls in 2010 to 50 bbls by 2013; •Grow crude oil production capacity from 2,8mb/d in 2010 to 4.5 mb/d by 2013; •Grow in‑country refining capacity from 0.45mb/d to 0.750mb/d by 2013; •Increase OPEC Quota allocation from 1.67mb/d to 4.5mb/d by 2013; •Increase local content in Oil and Gas from current 20 per cent in 2009 to 35 5 per cent in2010 and to 70 per cent by 2013; •Grow gas reserves from 187TCF in 2010 to 220TCF by 2013; •Attain zero flare from 34 per cent gas produced as in 2006 to what is technically allowed in 2010 ; and •Increase the use of LPG gas in homes and industries and LPG penetration from current 0.5kg to 1.0kg per capita by 2013. •Develop alternative energy in the quest for overall sustainable development in alignment with global initiative to reduce global warming

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•Grow reserves from 40b bbls in 2010 to 50 bbls by 2013; •Grow crude oil production capacity from 2,8mb/d in 2010 to 4.5 mb/d by 2013; •Grow in‑country refining capacity from 0.45mb/d to 0.750mb/d by 2013; •Increase OPEC Quota allocation from 1.67mb/d to 4.5mb/d by 2013; •Increase local content in Oil and Gas from current 20 per cent in 2009 to 35 5 per cent in2010 and to 70 per cent by 2013; •Grow gas reserves from 187TCF in 2010 to 220TCF by 2013; •Attain zero flare from 34 per cent gas produced as in 2006 to what is technically allowed in 2010 ; and •Increase the use of LPG gas in homes and industries and LPG penetration from current 0.5kg to 1.0kg per capita by 2013. •Develop alternative energy in the quest for overall sustainable development in alignment with global initiative to reduce global warming


Deregulate petroleum product pricing. Deregulate petroleum product pricing. Promote private investment to distribute Promote private investment to distribute

petroleum products to all the state petroleum products to all the state capitals capitals

Privatize and/or private equity Privatize and/or private equity participation in the existing refineries. participation in the existing refineries.

Encourage the establishment of necessary Encourage the establishment of necessary structures for effective gathering, structures for effective gathering, processing, transmission and distribution processing, transmission and distribution of gas nationwide.of gas nationwide.

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Develop the appropriate pricing regime Develop the appropriate pricing regime for the gas sub‑sector to promote for the gas sub‑sector to promote investment in various phases of gas investment in various phases of gas production, transmission and production, transmission and distribution. distribution.

Passage of the Petroleum Industry Bill Passage of the Petroleum Industry Bill (pending)(pending) and Local content Bill into law and Local content Bill into law (achieved)(achieved)

Develop a database on the country’s oil Develop a database on the country’s oil and gas deposits, facilities and and gas deposits, facilities and professionals. professionals.

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Facilitate projects that transfer Facilitate projects that transfer technology and generate technology and generate employment in the non‑oil employment in the non‑oil

sector, especially the petrochemical sector, especially the petrochemical ndustry. ndustry.

Improve security (against vandalism Improve security (against vandalism at facilities), and strengthen DPR at facilities), and strengthen DPR

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Stimulate investments into the Stimulate investments into the upstream and downstream sectorupstream and downstream sector

Increase local value addition to promote Increase local value addition to promote the utilization of local resourcesthe utilization of local resources

Diversify oil exports to include Diversify oil exports to include exportation of refined products and exportation of refined products and petrochemicals petrochemicals

Increase crude oil refining capacityIncrease crude oil refining capacity increase the nations oil & gas reservesincrease the nations oil & gas reserves

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Create an oil and gas sector that will be Create an oil and gas sector that will be the engine of sustainable social, economic the engine of sustainable social, economic and industrial growth and industrial growth

Increase proven oil reserve from Increase proven oil reserve from 37.8billion in 2009 to 40 billion barrels by 37.8billion in 2009 to 40 billion barrels by end 2010 and to 45 billion barrels by end 2010 and to 45 billion barrels by 2013; and proven gas reserve from 187tcf 2013; and proven gas reserve from 187tcf in 2010 to 215tcf by 2013)in 2010 to 215tcf by 2013)

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Creating an Enabling Environment in the Creating an Enabling Environment in the Niger Delta Niger Delta

Oil and Gas Industry ‑ Links and Oil and Gas Industry ‑ Links and Economic ImpactEconomic Impact

Nigeria Content Development Nigeria Content Development Technology DriveTechnology Drive Capacity Building/ Manpower Planning Capacity Building/ Manpower Planning Utilisation of the Gas to fuel the Nigerian Utilisation of the Gas to fuel the Nigerian

Economic GrowthEconomic Growth

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Infrastructure Development Infrastructure Development Marketing Infrastructure Marketing Infrastructure Servicing of E&P ActivitiesServicing of E&P Activities

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FINAN

CING

Finding the Finance (1) Finding the Finance (1)

Govt funding of its equity share from Govt funding of its equity share from appropriated funds from the FGN appropriated funds from the FGN budget; budget;

Project FinanceProject Finance IOC Partner Financing (Alternative Funding); IOC Partner Financing (Alternative Funding); Short Term Corporate Loan for venture Short Term Corporate Loan for venture

partners of banks; and partners of banks; and Minor equity sell‑down to raise capital Minor equity sell‑down to raise capital

for major projects for major projects

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Finding the Finance (2)Finding the Finance (2)

Incorporation of JVs; Incorporation of JVs; Commercialisation of NNPC; Commercialisation of NNPC; Conversion of the JV/MOU business to Conversion of the JV/MOU business to

PSC; PSC; Structural Partner Financing Structural Partner Financing

solutions; and solutions; and Third Party Financing solutions. Third Party Financing solutions.

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Federal Government Revenues – Major Drivers

1. Crude oil, condensate and gas sales volumes

2. Prices of products in the international market

3. OPEC constraints, where applicable

4. Security situation in the Niger Delta

5. Role of Gas projectsa. Gas investments replacing oil investmentsb. Gas investments recovered from oil tax

revenues due to AGFA

6. Other fiscal incentives granted by government

Note: Product volumes are affected by the inability of government to meet Its funding obligations in the JV companies

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Financing Options Explored

Partner Financing (Carry) – Framework

Framework was approved by the government in 1999 Applicable to Green field projects Brown field projects that can be ring fenced are

considered Only Capital Expenditures (CAPEX) are funded through

this mechanism Principal payment is mainly through tax benefits due

NNPC on its equity funded (up to 85% of CAPEX) Remaining Principal is repaid through allocation of NNPC

equity crude to the financing partner (up to 15% of CAPEX)

Financing Partner lifts a share of NNPC equity crude to cover cost of funds – share oil ceiling is put at a volume to enable financing partner achieve a 10% rate of return (ROR) on the Carry

Third Party Financing

Third party financiers, mainly banks provided required funding These loans are typically non recourse loans Repayment of interest and principal are from the projects

being financed

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Financing Opportunities in the Financing Opportunities in the Petroleum Sector (1)Petroleum Sector (1)

Gas utilization projectsGas utilization projects Asset maintenance and replacementAsset maintenance and replacement LNG, LPG and GTL ProjectsLNG, LPG and GTL Projects IPPsIPPs Deepwater field developmentDeepwater field development Efforts at meeting nation’s reserve Efforts at meeting nation’s reserve

and production targetand production target Privatization of refineriesPrivatization of refineries

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Financing Opportunities in the Financing Opportunities in the Petroleum Sector (2)Petroleum Sector (2)

State-owned and private refineriesState-owned and private refineries Downstream sector deregulationDownstream sector deregulation Nigerian content developmentNigerian content development Marginal field developmentMarginal field development Production of Petrochemicals and Production of Petrochemicals and

fertilizersfertilizers Products supply, distribution and Products supply, distribution and

incidental opportunitiesincidental opportunities

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Wanted! Wanted! Wanted!Wanted! Wanted! Wanted!

Creative Financing DealsCreative Financing Deals Innovative financing solutionsInnovative financing solutions Nothing new under the sunNothing new under the sun There are only five basic coloursThere are only five basic colours Only combinations, permutations Only combinations, permutations

and applicationsand applications Creativity is essentially about Creativity is essentially about

synthesizingsynthesizing

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Typical Funding StrategyTypical Funding Strategy

Select the optimal mix of available Select the optimal mix of available funding sourcesfunding sources

Maintain flexibility as long as possibleMaintain flexibility as long as possible Ensure funding is committed at the Ensure funding is committed at the

outset for the full cost of the projectoutset for the full cost of the project Make contingency plan for cost Make contingency plan for cost

overruns, delays and unavailability of overruns, delays and unavailability of a particular funding sourcesa particular funding sources

Retain option for refinancing post Retain option for refinancing post completioncompletion

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Packaging the FinancePackaging the Finance

Facility typesFacility types Lending vehicleLending vehicle Lender structuringLender structuring TenorTenor RiskRisk RepaymentRepayment SecuritySecurity

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Managing the Financing (1)Managing the Financing (1) Project review and monitoring – Project review and monitoring –

Financing banks should work Financing banks should work closely with the closely with the sponsors/owners, project sponsors/owners, project management and contractors of management and contractors of the project while the project is in the project while the project is in progress. The involvement of key progress. The involvement of key project stakeholders etc. needs project stakeholders etc. needs critical reviewcritical review

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Managing the financing (2)Managing the financing (2) Project management expertiseProject management expertise Continuously review the Continuously review the

assumptions at the feasibility studyassumptions at the feasibility study When things go wrong, don’t go When things go wrong, don’t go

wrong with themwrong with them When things go wrong, take When things go wrong, take

remedial actionremedial action When things go wrong, run for When things go wrong, run for

covercover

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WAY

FORW

ARD

Maximising the Maximising the Opportunities (1)Opportunities (1)

•Get the politics right•Forward planning•Economic policy sequencing•Resource management funds•Managing revenue flows and expectations 55

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Maximising the Maximising the Opportunities (2) Opportunities (2)

There is considerable dearth of There is considerable dearth of knowledge of the industry by knowledge of the industry by accountantsaccountants

Need to build the knowledge gap and Need to build the knowledge gap and expertise in oil and gas financingexpertise in oil and gas financing

Appreciate the strategic importance of Appreciate the strategic importance of increased domestic financing of the oil increased domestic financing of the oil and gas sector to the Nigerian economyand gas sector to the Nigerian economy

Knowledge is key to financial Knowledge is key to financial intermediation as it relates to the intermediation as it relates to the industryindustry

Need to form international alliancesNeed to form international alliances

For the Road….For the Road….

““A vision without a mission is just a A vision without a mission is just a dream…. A mission without a vision just dream…. A mission without a vision just passes the time…. A vision with action can passes the time…. A vision with action can change the world.” change the world.” —Joel Barker—Joel Barker

Planning without action is futile; action Planning without action is futile; action without planning is fatal - Unknownwithout planning is fatal - Unknown

The man who does not know where his The man who does not know where his next dollar is coming from usually does next dollar is coming from usually does not know where his last dollar went - not know where his last dollar went - UnknownUnknown

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Thank You!Thank You!Kayode AdebiyiKayode Adebiyi

gsm: 08033181225 gsm: 08033181225

email:[email protected]:[email protected]

nigeria vision 2020 financing challenges150313

Economy & Finance

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strategic vision

highlightsnigeria vision

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alarmalarm planning

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