Oil-for-cash spree burdens Nigeria’s future generations

The Nigerian National Petroleum Company Limited (NNPC)’s plan to secure a $2 billion loan using crude oil pre-payments as collateral has sparked debate and raised concerns about its long-term implications for the nation’s economy and future generations.

Nigeria, the largest producer and exporter of petroleum in Africa and one of the world’s top 10 producers, has not been maximizing its oil sector’s potential, opting instead for oil-for-cash deals to fund fiscal reforms. These deals involve borrowing from international lenders with future oil shipments as collateral, providing immediate funds but saddling the country with debt obligations to be repaid with future oil exports.

Experts surveyed by BusinessDay warn that prioritizing short-term gains over long-term development jeopardizes the future of Nigerian youth. A senior oil executive, who requested anonymity, stated, “Oil-for-cash loan agreements saddle future generations with the burden of repaying these loans, potentially at the expense of investments in crucial sectors like education and healthcare.”

Kelvin Emmanuel, an energy economist and board member at Obsidian Archenar Nigeria, criticized the government’s approach, saying, “It beggars belief that the Nigerian government in 2024 is embarking on the financialization of future revenues from oil and gas assets by securitizing crude oil and gas output in pursuit of immediate cash. At a time when the government should be laying out a detailed plan to conduct house cleaning for NNPC Ltd, or start book building for an IPO, it is amortizing precious future crude oil earnings in a deal structure that robs the federating units of millions of barrels of crude oil in oil-for-swap transactions, echoing the ‘Resource Curse Theory’ discussed by Jeffrey Frankel in his Harvard University working paper.”

On Tuesday, NNPC Limited announced its consideration of a new $2 billion loan using crude oil pre-payments as collateral. Group Managing Director Mele Kyari stated that the company sought a loan against 30,000-35,000 barrels per day of crude production but did not disclose the exact amount of money being sought. He mentioned that the cash raised would be used for all of NNPC’s business activities, including supporting production growth. “We have no problem covering our gasoline payments. This is just money for normal business and not a desperate act,” Kyari told Reuters.

It remains unclear which lender would arrange the loan, as three sources indicated that Afrexim would be unable to extend its exposure to Nigeria that far.

While NNPC increases its reliance on oil-backed loans, Saudi Aramco declared total dividends of $124.3 billion in 2024, a rise of almost 30 percent compared to the previous year. Similarly, the Abu Dhabi National Oil Company (ADNOC) reported revenue of $6.01 billion in the first quarter of 2024, up by 15 percent from $5.22 billion in the same quarter of 2023.

NNPC has not published its full-year 2023 reports or its first-quarter earnings for 2024. However, it is evident that the corporation is becoming more dependent on oil-backed loans. “Resource-backed loans are bad because you can’t price the assets properly,” Akinwumi Adesina, president of the African Development Bank Group (AfDB), said in a recent interview with the Associated Press. Adesina, whose Abidjan, Ivory Coast-based institution assists African countries in financing development projects, noted that these arrangements come with a litany of problems. He pinpointed the uneven nature of the negotiations, with lenders typically holding the upper hand and dictating terms to cash-strapped African nations. “This power imbalance, coupled with a lack of transparency and the potential for corruption, creates fertile ground for exploitation,” Adesina said. “These are the reasons I say Africa should put an end to natural resource-backed loans,” he added.

Adesina pointed to a bank initiative that helps “countries renegotiate those loans that are asymmetric, not transparent, and wrongly priced.” He explained that loans secured with natural resources pose a challenge for development banks like his and the International Monetary Fund, which promote sustainable debt management. “Countries may struggle to get or repay loans from these institutions because they have to use the income from their natural resources, typically crucial to their economies, to pay off resource-tied debts,” he said.

Despite being Africa’s largest crude producer with proven reserves of 36.97 billion barrels, Nigeria remains underdeveloped and lacks modern medical facilities, according to the International Trade Administration. The country has only about 35,000 doctors, despite needing 237,000, partly due to the massive migration of healthcare workers overseas.

Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, emphasized that resource-backed loans are not ideal because the process of accurately pricing the value of assets over the shelf life of the facility always favors the lender over the borrower. “The Project Gazelle Deal that was structured as a forward sale agreement by NNPC Ltd is a cautionary tale on why the Nigerian parliament needs to oppose resource-backed loans as though our lives depended on it,” Mohammed said.

Last year, NNPC’s $3.3 billion crude-for-cash loan from the African Export-Import Bank (Afreximbank) sparked debate and raised questions about its long-term implications for the nation’s economy. Evelyne Tsague, co-director at Natural Resource Governance Institute Africa (NRGI), said African leaders often take out these loans to help with their short-term political ambitions, but their countries end up severely indebted and at risk of losing collateral worth more than the value of the loan itself. “They should stop agreeing to such perilous deals, which are often negotiated by poorly-managed state-owned enterprises that often bypass parliaments and national budgets,” Tsague said in a report entitled, “Resource-Backed Loans: Pitfalls and Potential.”

David Mihalyi, co-author of the report and senior economic analyst with NRGI, added, “These deals, sometimes labelled as oil advances, often resemble payday loans: they have short maturities, high interest rates and fees, and no commitments on how the money will be used. Countries should stay away from oil advances containing such harmful terms.”

Besides Nigeria, BusinessDay’s findings showed that resource-backed loans have significantly contributed to severe debt problems in four other African countries: Angola, Chad, the Republic of Congo, and South Sudan.