Traders, Gulf banks move to fill financing 'vacuum' in African oil

For decades international oil companies pumped money into established African basins, fueled by loans from Western banks. With the global energy transition gathering pace, much of that funding has dried up.

Increasingly, though, trading houses and Middle Eastern lenders are helping to fill that financing gap, according to market sources and analysts.

From the 1950s onwards, West Africa was among the world's leading destinations for upstream investment, creating petrostates like Angola, Equatorial Guinea, Gabon and Nigeria. But the flight of capital has left production at all-time lows.

Equatorial Guinea's oil output has fallen 79% from its peak of 289,000 b/d in 2015, according to the monthly Platts OPEC Survey from S&P Global Commodity Insights. Angola, a former OPEC member, pumped 1.9 million b/d in 2010 but just 1.07 million b/d in May, according to official figures.

African oil officials blame the energy transition, rig market tightness, bearish predictions of peak oil demand, and exodus of IOCs from mature basins in favor of frontiers like Namibia and Guyana and less carbon-intensive projects, such as LNG.

Nigeria has seen Eni, Equinor and ExxonMobil, Shell and TotalEnergies decide to offload assets to local companies since 2022. All except Equinor hold acreage in Namibia.

Meanwhile, Western banks and insurers have shunned the 230,000 b/d East African Crude Oil Pipeline (EACOP) linking Uganda's Rift Valley oilfields with Tanzania's Tanga port, a key target for environmentalists.

"We have seen a reduction in the pools of traditionally available capital to fund oil and gas M&A and projects," said Adam Blythe, a partner at law firm Bracewell.

"One significant continuing and growing source is the traders, who are willing to fund acquisitions in return for production offtake rights."

Fellow Bracewell partner Oliver Irwin added: "A relatively new development that we are starting to see is Middle Eastern banks participating in upstream oil and gas financing."

Panacea

Trading houses have long been active in Africa but are now involved in every major upstream M&A deal on the continent, according to people familiar with the transactions.

They cite three reasons: deep pockets; a higher tolerance for political and environmental risk; and an eagerness to be embedded across the entire oil and gas value chain to ensure access to barrels.

In the early 2010s, some traders considered transitioning into integrated "mini-majors' but were knocked back by the 2014 oil price crash. Now, though, the retreat of IOCs and banks from mature basins hands them a second chance, analysts say.

Gabon's audacious acquisition of Carlyle's 40,000 b/d Assala Energy assets in June was facilitated by an $800 million loan from Gunvor in return for oil marketing rights.

Mercuria holds a minority stake in Seplat Energy, which will become Nigeria's largest oil producer when it acquires ExxonMobil's assets.

Meanwhile, Glencore has helped Chad's government buy Chevron's oil assets, lent Africa-focused Tullow Oil $400 million last November, and holds stakes in oil acreage in Cameroon and Equatorial Guinea. Vitol produces crude from Ghana's Sankofa Gye Nyame project alongside Eni.

Experts caution that loans from traders can pose challenges down the line, particularly when oil price fluctuate. Congo-Brazzaville and Chad have both struggled recently to meet their financial obligations to traders. Platts, a unit of Commodity Insights, last assessed Dated Brent at $86.20/b on July 17, up $10/b since early June.

NJ Ayuk, chair of the Africa Energy Chamber, said traders rarely funded vital exploration.

"The oil traders have basically become the panaceas of African energy markets," Ayuk said. "They fund short-term projects, they will be marginal field production projects, with [fast] turnaround...but the rest they just would not do." What African producers really need, he said, is "patient capital."

Waiting in the wings

In the decade to 2021, China, US, Europe and the World Bank supplied the majority of energy finance to Africa, but that has been drying up, Commodity Insights data showed.

And while African institutions like Standard Bank and the African Development Bank are expanding their energy portfolios, they cannot finance projects alone. Lenders in Gulf states such as the UAE and Saudi Arabia are increasingly interested in helping.

"There is clearly an opening for the Gulf and clearly some of these investment firms, sovereign wealth funds are stepping in to take advantage of that," said Andrew Farrand, MENA director at Horizon Engage.

"I suspect we are going to see those sovereign funds be in the lead in this regard in the next years with commercial banks following behind doing smaller projects."

Uganda is in talks with Alpha MBM Investments, run by a Dubai royal, to build a 60,000 b/d refinery, while the Jeddah-based Islamic Development Bank pumped $100 million into EACOP.

Neighboring South Sudan agreed a $12 billion cash-for-crude deal in December with a member of the UAE ruling family, according to a leaked term sheet.

And "a number of investors and countries in the Middle East that believe that the oil and gas industry has a future" are "waiting in the wings" to help fund the new $5 billion Africa Energy Bank, Omar Farouk Ibrahim, who is leading the initiative, told Commodity Insights.

Meanwhile, Gulf NOCs are also investing in African hydrocarbons, from gas projects in Mozambique to Nigerian refineries, just as these states are building influence with diplomatic maneuvers, ports and military bases. And Saudi Arabia's Oil Sustainability Program, which aims to boost global oil and gas demand through seed investments, is increasingly active in Africa, sources said.

Ultimately, energy insecure African nations are unlikely to be picky amid a financing "vacuum", Farrand said. "Things that have been in national plans on the decade-to-decade level suddenly are in doubt, and it casts a big cloud over state finances."