By Leoncio Amada Nze Nlang*
Since Colonel Drake discovered oil in Pennsylvania, United States, in the 19th century, the financing of the oil industry originated from the resources of the oil companies of the time. There were many cases in which failures were reported, but those who had the financial capacity to apply their own resources to the exploitation of oil, and later to its distillation, were the ones who promoted the development of the oil industry. Mention can be made of the oilman Rockefeller, who, through unfair market practices, managed to create the first large oil corporation in North America, Standard Oil.
Since then, the financing of oil activity has seen spectacular progress and has been democratized with the appearance of financing through large banks, specialized banks, investment funds, capital increases, financial markets, etc.
In the development of activities in the oil industry, companies face a wide variety of risks that have influenced investment decision-making, particularly in relation to exploration actions. For example, a company can allocate funds to hydrocarbon exploration and not find reserves with a high probability of exploitation, a situation that destines it to lose its invested resources. These investments are growing to the extent that there are complex feasibility conditions for finding oil and natural gas. But not only in exploration can money be lost, there is the possibility that once a well is drilled, either there is not enough pressure, or there are not abundant hydrocarbons expected for a profitable operation, or simply that the fiscal terms of a certain country do not allow the monetization of hydrocarbons discovered. But that does not stop there, the complexity of the operations, whether successful or not, implies the need to channel resources towards various aspects of the exploitation of hydrocarbons such as avoiding or combating environmental, social and even political problems.
Multinationals and Independent companies
The large oil multinationals have always sought to target their activities in those nations that have greater access to private initiative; that they offer the potential for growth, both in terms of their GDP and their energy demand; they have projects where costs can be low and manage to develop products with considerable demand potential, as is the case with the natural gas and liquefied petroleum gas markets. In other words, the funds are directed to those areas where the investor has the greatest possibilities of realizing considerable rates of return; This is the dynamic with which large multinationals move, including their operations on the African continent.
Another subgroup of companies to consider are the so-called Independents; It is estimated that in the United States in the year 2000 there were around 8,000 independent private oil companies, which drilled 85% of the wells in the country and obtained 40% of the national production. Some companies in this subgroup have made inroads into the African continent and are doing well.
In today’s world, the basis for developing any economic, social and political activity is linked, among other things, to its financing capacity. Even when in many cases the possibility of carrying out activities without resources is viable, the development of any project or company cannot be understood without a fundamental base of financial resources for investment and operation to achieve objectives of economic and social profitability.
But not only the aspect of profitability is fundamental in the justification of economic agents to carry out financing operations, since it is evident that the dynamics of market growth and the existence of technological advances have promoted a highly competitive and complex environment in which the different economic units must fully justify, and offer optimum guarantees, in order to have access to the desired financial resources. In fact, the growing capacity of economic agents to incorporate risk measurement as a basis for the optimal channeling of their financial resources is a fundamental condition for any financial operation.
The evolution of the financing of the world oil industry has shown different moments, a reflection of the conditions that the market has faced over time, such as armed conflicts, inequitable distribution of technology development, insufficient resources for investment, production costs, among others. The large size of the hydrocarbon industry involves several activities that are spatially separate and technically different, but closely linked. These start from the activities of exploration, exploitation, refining, transportation, storage, distribution and sale to consumers, and involve the use of machinery, equipment, transportation and communication infrastructure, land acquisition, hiring of qualified labor, research and development, as well as aspects related to financial costs, marketing, technology acquisition and taxes, Local Content policies among the most important. Medium, large, multinational and transnational, public, private or mixed capital companies participate in the industry; that can operate depending on the international markets for oil, natural gas, oil derivatives or in the production of more value-added goods such as petrochemicals. The common denominator of all these activities is the search for economic and financial profitability of economic agents, whether private or government.
Financing in developing countries
In the case of the financing of the oil industry of the oil developing countries (PEDP), different circumstances have been presenting themselves in the process of growth of their production capacity. Some are linked to political, economic and social factors, which interact to a different extent and affect the decision to channel investment resources to the oil industry.
The African Context
One of the conditions that limit financing to state oil companies in developing countries such as those in Africa is the apparent financial weakness of their governments, which, in their eagerness to reduce social imbalances, have given priority to meeting the demands and stabilizing their economies without having a priori solid economic programs that guarantee the creation and generation of wealth in a sustainable manner. Due to the above, the financial requirements for the creation of national infrastructure and the know-how to produce hydrocarbons have competed with the construction of schools, highways, and hospitals, among others. Projects that in most cases do not usually have an intelligible economic justification.
In many cases, a growing financial weakness is observed in developing countries, but also in their state oil companies. The main financing mechanism for the growth of its oil industries, external indebtedness, is running out, due to the increase in country risk because of the deficient administration of oil income, as well as the vices generated in its productive structures derived from the lack of competitiveness, technology, bureaucracy, political and social problems. Fortunately, possibilities are opening up for several countries to access international financial markets under competitive conditions.
Different alternatives created by developing countries can be identified to attract investment resources and encourage their hydrocarbon sectors. One of them is allowing the participation of private companies in the social capital of state companies (as in the case of Petrobras) and even the total sale of the oil company (as in Argentina with YPF). In this case, the contribution of resources for investment, the growth of the companies would come from the capital increases and the raising of debt resources contracted with the support of the private sector. Unfortunately, the African oil sector has not fully aligned itself with this type of financing (the entry of private capital into state-owned companies), which constitutes a real brake on the development and expansion of the African oil industry.
Production Sharing Contracts. An obsolete model?
I believe that Production Sharing Contracts (the so-called PSCs) used by African oil-producing countries for the exploration and production of their hydrocarbons, although they have allowed the continent to amass huge amounts of money; they constitute today a real brake on the modernization of a sector as vital to African economies as the oil sector. Well, in the PSCs, the oil-producing countries do not assume risks associated with the exploration of hydrocarbons (they do not put any cents) in the exploratory phase, leaving all the burden and financial risks to the multinational on duty, ignoring the toll to be paid to access to resources in the event of a commercial discovery, since the multinational ends up imposing unfavorable conditions on the host country, what we call “Government Take” in the oil world. This state of affairs has allowed the proliferation of zombie state companies that totally depend on the technology and know-how of the multinational with which they are associated in a certain PSC, companies that after more than 50 years of oil activity, have been unable to establish themselves as leaders in the continent, control their natural resources and the destiny of their continent in terms of energy policies. If a private company like Springfield Group of Ghana led by Kevin Okyere has been able to get into the exploratory activity with good results, let no one tell me that the African NOCs that have more financial resources and political support are incapable of doing the same if they really meant it.
In a world in which the financing of oil projects is becoming increasingly difficult through extra-African banking institutions due to the pressure exerted by extremist environmental lobbies; the hydrocarbon sector of the African continent has to get its act together to design an oil model in which the producing countries really control their natural resources; this control passes inexorably through the assumption of responsibilities inherent to the oil activity (putting the money, dominating the processes of exploration, production, transport to international markets, refining, marketing, etc.), in other words, controlling the entire value chain to generate more wealth within the African continent.
Financing of the African oil sector with African money.
Let no one tell me that we do not have the financial resources to face the challenges and costs associated with oil activity, this assumption is a fallacy and must be vigorously combated. In fact, the average daily production of crude oil on the African Continent is estimated at about 8.5 million barrels during the year 2022; All African oil-producing countries governments have used oil prices that are in the range of $40 and $45 dollars per barrel for Estates-General Budgets purposes The price of crude oil in international markets is close to $90 a barrel today, with a clear trend towards $100 a barrel before June 2022. In other words, oil-producing African governments will have at the end of 2022 a surplus of funds from the sale of crude oil (real price of crude oil on international markets – price for budget purposes) * Total crude oil production for the same period ) of approximately 171 billion USD. This amply demonstrates that Africa has the muscle and the financial capacity to meet the challenges of its oil industry, to assume its moral responsibility before the international community to provide electricity to more than 600 million Africans who continue to be submerged in the most absolute energy poverty and to assume once and for all control of its oil industry through competitive and efficient national companies capable of competing on the global stage and forging an African energy model of its own that is aligned to our economic, financial and cultural context.
No country has come out from underdevelopment and economic and financial dependency thanks to international aid or through senseless indebtedness; Countries advance thanks to the vision and leadership capacity of their leaders (political and private) when they assume their historical responsibilities.
Regarding dependency on foreign aid, it should not be forgotten that this is generally linked to conditions that, whether we like it or not, affect the economic, political, and social dynamics of a country. It is difficult to argue that a country must give resources to another country without being able to attach conditions to this financing, but it is also difficult to deny that receiving aid under conditions set by external parties can condition the political and economic power of a country. On the other hand, the dependence on this type of funds increases the uncertainty of the receiving country, since these are generally volatile and unpredictable and usually, as is the case now, decrease in adverse circumstances such as the current crisis.
Sub-Saharan Africa is the poorest region in economic terms, with the lowest development rates and where a large part of its population lives in conditions of absolute poverty, including energy poverty, as stated in “The State of African Energy 2022” published by the African Energy Chamber #AEC where the shortage and energy poverty suffered by 600 million Africans is indicated.
It is in this sense that we call the African political leaders to reason by inviting them to allocate 10% (17 billion USD) from the surplus of funds obtained from Oil sales during 2022 to set up a pan-African bank. which would be devoted exclusively to financing energy projects on the continent.