The debt financing for the AccuGas gas processing and pipeline project in Nigeria is small – only $60 million – and smaller than either its equity component or government contribution. But it marks a huge step forward in the types of assets that Nigerian banks have been asked to fin­ance, and it outlines a way by which Nigeria’s various states can encourage the development of assets outside the upstream oil and gas sector.

The sponsor of the AccuGas project is Seven Energy, originally formed to buy Weatherford Inter­national’s upstream assets in Nigeria. Seven, which trades as SEPTA Ener­gy in Nigeria, has attracted equity fund­ing from Capital International, Investec (together $85 million in 2008), Standard Chartered Private Equity and the Africa Finance Corporation (together $65 million in 2009).

Seven signed a 10-year 43 million cubic feet per day gas supply agreement with Ibom Power Corporation, which operates the 180MW power plant of the same name. Ibom is itself something of a trailblazer for the domestic independent power producer market in Nigeria. Ibom wants to expand to 500MW, and will need access to vastly more gas at this size.

Like many users of gas in this oil and gas-rich country, it struggles to find reliable supplies of gas, despite the existence of a large LNG sector and the persistence of gas flaring in the oil production industry. The reasons for the lack of investment in midstream infrastructure are primarily the unstable situation in the Niger delta, where the majority of the country’s oil industry is located, and difficulties in raising competitive debt capital for midstream assets, at a time when the upstream sector commands enormous interest from Nigerian lenders.

AccuGas is building a 65km pipeline from Seven’s Uquo gas field to Ikot Abassi in Akwa Ibom state. It also operates a gas processing plant at the field with its joint venture partner Frontier Oil Ltd, a domestic independent exploration and production company. The Uquo field is the first non-associated gas field development in Nigeria.

Given Seven’s success in raising equity and its portfolio of hydrocarbons assets, it might have been able to fund the project using corporate debt or a reserves-based financing. But by setting up, and separately financing, a pipeline subsidiary, it was able to take advantage of government support mechanisms and incen­tives, not least among them a three-year (with a two-year exten­sion option) tax holiday.

The state of Akwa Ibom provides additional support, including a backstop of the take-or pay agreement with Ibom Power, of which it is a shareholder through the Akwa Ibom Investment and Industrial Promotion Council. Most crucially, the state is providing $64 million as a gas supply deposit, essentially a low-cost loan to the project, which will be repaid over ten years after completion with the proceeds of revenues from the pipeline.

The sponsor also provides support to the project, in the form of a completion guarantee, and a minimum gas supply guarantee. It is not using a standard engineering, procurement and construction contract, but supervising the process in-house, after hiring a large number of pipeline specialists with a background working at Shell. The project also features low leverage, solid coverages, and an offshore accounts structure.

The sponsors brought in Stanbic IBTC Bank as structuring, modeling and documentation bank, which was subsequently joined by United Bank for Africa. The eight-year loan is priced at 800bp over 3-month Libor in year one and 700bp thereafter, while the leads receive a 55bp commitment fee and 100bp arranging fee.

Although by the standards of either institution the loan is not large, and neither is likely to sell down its commitment, the leads spent considerable amounts of time persuading the borrower to line up sufficient government, supplier and offtaker support

The lenders also insisted that the project maximise its use of labour from the surrounding area, and as a result of consultations with one village, agreed to divert the route of the pipeline. Stanbic, as part of Standard Bank is a signatory to the Equator Principles, but the insistence on the use of local labour, and making sure the pipeline features extensive leak prevention measures, is straightforward credit risk management. Hydrocarbons operators that are perceived to use mostly foreign labour and have a poor environmental record have a much greater chance of attracting violence.

The financing signed on 24 June, roughly five months after the bank mandate was signed, and funded three weeks later. Since then, sponsor and bankers have been working on an expansion. The project is in the process of finalising a new take-or-pay gas sales agreement with the Aluminum Smelter Com­pany of Nigeria. The agreement would take the pipeline close to its current 100 million cubic-feet-per-day capacity, and necessitate an expansion and extension.

The first phase was documented to allow for an expansion, but the sponsor is likely to refinance the first phase debt with a larger loan. Once it has lined up a wider range of offtakers, Seven becomes more established, and by having an operational asset is in a position to put pressure on lender margins.

But the first phase financing stands as an important proof of concept. In a region where political violence is a serious problem, but government is under pressure to deliver important commercial infrastructure, the mix of public and private funding indicates that onshore gas infrastructure development is possible, and that the private sector – private equity even – is in a position to deliver.

AccuGas Limited
Status: Closed 24 June 2010
Size: $250 million
Location: Akwa Ibom State, Nigeria
Description: 65km gas pipeline
Sponsor: Seven Energy
Equity: $126 million
Debt: $60 million
Gas supply deposit: $64 million
Tenor: 8 years
Lead arrangers: Stanbic IBTC Bank (structuring, modeling and documentation bank) and United Bank for Africa
Lender legal counsel: Aluko & Oyebode (local), Baker Botts (international)
Lenders’ technical consultant: Zishan Engineers
Lenders’ environmental consultant: Golders Associates
Sponsor legal counsel: Udo Udoma and in-house
Sponsor environmental consultant: ERM