The recent report that Shell Petroleum Development Company (SPDC) has started testing the Trans-Forcados crude export pipeline for a potential restart after months of repair is expected to have positive effects on banks’ earnings, according to analysts at Lagos-based CSL Stockbrokers Limited.
The analysts noted that the resumption of production may result in a reclassification of some bank loans that had been previously classified as non-performing loans (NPLs) and consequently results in a reduction in the NPL ratio of the affected banks.
Based on available data, FBN Holdings and Sterling Bank have a significant proportion of their non-performing loan portfolio from the upstream oil and gas sector, the report revealed.
Trans Forcados is owned by the Nigerian Petroleum Development Company (NPDC) and operated by SPDC. Trans Forcados is a major evacuation route for onshore oil production but it is a sitting duck for militants due to its design (onshore that is not buried under the ground). The pipeline links a number of oil fields and oil mining leases (OMLs) in the western Niger Delta with the Forcados terminal on the coast and is also associated with a number of Nigerian bank’s loans to the indigenous upstream oil & gas sector.
Many of these OMLs were once owned by Shell Nigeria but were sold to indigenous Nigerian upstream companies, in many cases financed by Nigerian banks.
There is therefore concentration of Nigerian upstream oil and gas bank risk in the basin served by the Trans Forcados pipeline.
The pipeline has remained under force majeure since mid-February 2016 following an attack. An attempt to resume production after repairs in November last year was frustrated by another attack. The Trans Forcados pipeline system usually transports around 250,000 barrels per day (bpd) oil on average. Several upstream oil & gas companies use the Trans Forcados pipeline including Seplat, Shell Nigeria; Shoreline Resources; First Hydrocarbon Nigeria; the government-owned Nigerian Petroleum Development Company (NPDC), Pan Ocean, Midwestern oil and gas, Eland oil & gas, Neconde, Aiteo, Newcross, Walter Smith and Oando Energy Resources.
To analysts at CSL Stockbrokers Limited, the declaration of force majeure on the pipeline since last year had caused significant strain on the cash flow of these companies and consequently inability in some cases to service their bank loans. Some of these companies were also significantly leveraged.
The Managing Director/CEO of Seplat Petroleum Development Company Austin Avuru had noted that some companies operating in Nigeria have not been producing since the Trans Forcados pipeline was shut-in in February.
“Resumption of exports through Trans Forcados should bring some needed respite to these indigenous companies and the banks that have lent to them. Several banks lent significant sums to the indigenous oil and gas companies to purchase marginal oil fields from the international oil companies (IOCs).
“As most of these indigenous oil and gas companies are not listed companies, the table below only shows bank exposure to the listed companies. Companies listed also partly or totally rely on Trans Forcados for exports. In many cases bank debt to the oil and gas companies have been re-structured (with moratorium granted in some cases) and as such do not form part of the Non- Performing loan portfolio of most of the banks concerned.
” Beyond these grace periods however, problems may well recur unless production level improves following successful repair of damaged infrastructure and the ability federal government to reach a truce with the Niger Delta militants. Consequently, news of resumption of exports via Forcados and improved negotiations with the Niger Delta militants as we have seen recently assures us of the necessary cash flow to meet repayment after these grace periods.
“We believe recent actions taken by the government concerning the Niger Delta are increasingly eliciting grass root approvals in the region. Among other things, the general perception is that the level of engagement with the indigenous communities has improved and the government’s approach in doing this appears to be less hostile than previously. This appears to be holding militants back from further attacks on facilities in the region. Year to date, there has been no record of any attack. This, coupled with news of resumption of Trans Forcados is overall positive news for banks,” the report added.