Financing the LPG Value Chain

3rd Annual NLPGA Conference

Riverbank Capital

Thursday, 28 November 2013

Page    

1   Correla)ons-­‐Energy  &  Poverty   3  

2   LPG  Value  Chain   12  

3   LPG  –  Financing  the  Sector   16  

4   LPG  –  How  Financiers  view  the  Sector   23  

5   Conclusion   28  

2  

CORRELATIONS

3  

Correlation between Energy Access & National Poverty

Poverty Levels in Nigeria (30 year trend)

4  

The  Nigeria  has  no  history  of  budge)ng  for  cooking  energy  programmes.  Un)l  recently,  governments  at  all  levels,  almost  without  excep)on  had  not  addressed  the  cooking  energy  challenges  faced  by  poor  families.    

Correlations…Electricity Use Highest in Cities

Household Electricity Access by State (x 1 million)

5  

Talk  of  extremes,  in  Lagos  State  virtually  all  the  1.7  million  households  are  connected  to  the  grid.  At  the  other  end,  over  one  million  households  in  Kano  are  not  connected  to  the  grid    

Correlations…northern parts of the country have over 90% of households that depend on firewood for cooking

% Household Firewood Use by State

6  

Correlation…More families in the South use kerosene for cooking than in the North

% Household Kerosene Use for Cooking by State

7  

Correlations…Per capita LPG use in Nigeria is one of the lowest in Africa, despite being one of the world's leading exporter of natural gas

% Household LPG Use for Cooking by State

8  

Even  in  Lagos  and  the  FCT  -­‐  two  states  that  top  the  na)onal  LPG  usage,  the  number  of  households  cooking  with  gas  is  s)ll  dismally  low.  

Correlations…A majority (56%) of households in semi urban and urban areas depend primarily on firewood for cooking.

Household Energy Use Profile Use for Urban Areas

9  

Inadequate  access  to  finance:  Families  and  SMEs  have  no  available  financial  products  that  enable  them  to  acquire  pro-­‐poor  energy  services  such  as  clean  burning  LPG  cook-­‐stoves.  

Correlations… 38% of households in Nigeria buy firewood with a 2007 survey showing that households in urban areas spend significant portion 50-75% of their budget on buying firewood

Monthly Expenditure on Firewood and charcoal by Urban Households (Naira)

10  

Affordability  is  therefore  key  to  encourage  switching  and  increased  LPG  usage  with  a  target  average  monthly  spending  of  N2,774  on  poor  fuel  sources  

Correlations… Just 1% of grants and intervention funds have been directed to energy access & environmental issues with the latter taking the lions share

Sectoral breakdown of grants to Nigeria 1999-2007

11  

Lack  of  global  governmental  priority  means  financing  for  the  sector  must  come  from  private  sector  

LPG VALUE CHAIN

12  

13  

•  30 Nos Depots & Warehouses •  $30m ($1m each)

•  500 Trucks •  $25m ($50k each)

•  3million Bottles (over 3years) •  $114m ($38 each)

•  1 million Stoves •  $30m ($30 each)

14  

•  15-30,000MT Vessel •  $30-50m

•  40,000MT New Storage •  500,000 MT

Throughput •  $150-200m

•  100 Bridgers & 200 Bobtails •  $26m ($100k and

$80k respectively)

•  12 No Bottling Plants •  $120m ($10m each)

Requirements for a 500,000 MT LPG Annual National Usage (10% of Population Using)

Total Investment for a 500,000 MT LPG Annual National Usage is $525m-$595m

•  Depots & Warehouses – 10% •  $50m

•  Retail – 22% •  $110m

•  Retail – 22% •  $110m

•  Mass Retail – 28% •  $140m

15  

•  Imports & Trades – 8% •  $40m

•  Storage – 15% •  $75m

•  Transport 6% •  $30m

•  Bottling Plants 11% •  $55m

Total revenues for a 500,000 MT LPG Annual National Usage is almost $500m (at $1000/MT)

Total Value capture potential for a 500,000 MT LPG Annual National Usage is $495m p.a.

NIGERIA LPG - FINANCING THE SECTOR

16  

•  Different Capital sources have different requirements and are appropriate for a variety of projects

17  

•  Company Cash Flows (Salaries, LPG gas fills)

•  Supplier’s credit (Cylinders, Trucks)

•  Working capital loans/Overdraft/Trade Finance/IFF (Stoves, hoses, pipes)

•  Domestic long term bank loans (Bullet tanks, bottling equipment)

•  Project Financing Arrangements (Storage Terminals, Vessels)

•  Development Financing (Cylinders, Stoves, many others)

•  Export Credit Agencies (All capital equipment)

•  Other non conventional financing options: Technical Partnerships with Financing options

18  

•  Global – Slow Global economic growth means financiers are looking at emerging market projects in search of alpha (returns)

•  Prime lending rate at record lows •  Libor rate ranged from 0.25% to 1.5% since the liquidity crisis

–  Compared to CBN MPR at 12%

•  Foreign commercial funds often require local bank guarantees to finance •  Local bank additions can add 5-8% depending on quality of credit •  Loan documentation is a keen affair •  Some non-conventional models now standard: Technical partnership with

foreign operator who helps to raise financing from his home market

19  

•  Private Equity (Over $1.5bn in equity pools) –  ACA –  EAIF –  FMO –  CDC –  AFC –  VSA –  US Hedge Funds

•  Public Equity (IPO etc) –  NSE trying to make inroads to downstream oil & gas companies

20  

•  Sector Issues •  Inadequate funding capacity of local financial institutions •  Inadequate securities/collateral for loans •  Low Credit ratings of Oil companies •  Low credibility ratings i.e. High default rate •  Poor Credit Management Record •  Lack of Project Finance mechanisms

21  

•  Price Risk –  Changes in market prices. Ripple effect from NLNG or Platt’s prices

•  Foreign Exchange Risk – –  Currency movements –  Performance Risk / Credit Risk – e.g., non-performance by counter party

•  Operational Risk –  Cargo Delays –  Demurrage –  Off-spec cargo etc

•  Market Risk –  Competition among rival companies which could change local market

projections

•  Monetary Policy Risk (interest rate) –  Increase in interest rate and other monetary policy, challenge to borrowing

•  Country Risk –  Political unrest, changing government policies, etc

22  

NIGERIA LPG – HOW FINANCIERS VIEW THE SECTOR

23  

•  Country - Credit ratings / Issuer Default ratings (IDR) Nigeria BB+ –  Socio-political environment –  Economic policies / ever-changing government policies –  Regulation vs Free market –  Balance of Trade

•  Multiple layers of taxation and uneven tariffs

24  

25  

BMI Oil & Gas Outlook 2013

26  

•  Despite access to cheap domestically produced feedstock across much of the continent, fuels subsidies have left refining margins under pressure and made for a challenging downstream investment climate.

•  Nigeria's Downstream Rating - Overview –  Nigeria is in the upper half of the league table in BMI's downstream RRRs with a

few high scores. It is ranked fourth, behind Algeria, due largely to poor Country Risk factors that undermine further a regulated and largely state-controlled industry.

•  Nigeria Downstream Rating – Rewards –  Industry Rewards: On the basis of downstream data alone, Nigeria ranks high in

terms of Industry Rewards, reflecting large refining capacity, strong gas demand growth and retail site density.

–  Country Rewards: The population is the highest for the region, while the growth outlook for nominal GDP and GDP per capita both offer positive prospects.

•  Nigeria Downstream Rating - Risks –  Industry Risks: Nigeria's low Industry Risks rating reflects the unfavorable

regulatory regime and limited progress in terms of privatization of government-held assets.

–  Country Risks: Nigeria's broader Country Risks environment is much more attractive. The best score by far is for short-term economic external risk, although short-term economic growth risk also fares well and the score for short-term policy continuity is around the regional average.

27  

CONCLUSIONS

28  

1   LPG  Value  chain  needs  $525-­‐$600m  in  new  capital  to  grow  

2   The  whole  value  chain  has  to  grow  together  for  financiers  not  to  concentrate  on  one  part  of  the  chain  while  ignoring  the  others.  Annual  revenue  opportunity  is  approximately  $500m  per  annum,  at  the  most  a  1.5  year  breakeven  proposi)on  

3   Appropriate  capital  must  be  sought  for  the  investment  at  hand.    

4   Interna)onal  firms  evaluate  sector  investments  through  a  prism  of  industry  and  country  risk  

5   Government  interven)on  seems  necessary  at  this  point  to  bring  reforms  and  equal  treatment  of  compe)ng  fuels  and  in  this  case  different  sources  of  the  same  fuel  

29  

30