Tuesday, May 18, 2010

China's $23 Billion Deal in Nigeria: How Real Is It?

The Nigerian National Petroleum Corporation (NNPC) announced on Thursday last week that it had signed an MOU with China State Construction Engineering Corporation Ltd. to construct three oil refineries (about 250,000 bbl/day capacity each) and a petrochemical plant. The total cost would reportedly be $23 billion (or $23.8 billion, according to Beijing's official mouthpiece People's Daily, which also announced the MOU). If we disregard the petrochemical plant, the projected cost would be about $30,666 per capacity-barrel (a measure I think I just invented).

The endeavor still needs to secure loan financing: a combination of supplier's credits guaranteed by SINOSURE, and loans from a consortium of Chinese banks (as far as I know, SINOSURE is simply an export insurance/guarantee agency; it doesn't supply finance itself). This is clearly not a Chinese, but a Nigerian investment. As the People's Daily noted: "Nigeria State Petroleum Corp is responsible for the construction funds."

According to All Africa, 80% of the funding would be supplied by CSCEC, and 20% by NNPC.  If CSCEC merely supplies loans, this doesn't imply any equity shares in the refinery.

How solid is this news? CSCEC is a Beijing firm, a Shanghai stock exchange-listed company, and a subsidiary of China's largest state-owned construction company. It's a very respectable company, unlike the mysterious Hong Kong-based China International Fund we've seen a lot of lately.

But it's still early. An MOU is a sign of intention:  more than a first date, but much less than a wedding ceremony. The chances of this being derailed, like other large Chinese projects in Nigeria, are high. Yet it also has all the hallmarks of China's more successful deals in Africa. No bids. Creative loan financing. Chinese concern about loan repayment. "Agency of restraint" that locks some of a county's natural resources into directly useful infrastructure. Note these provisions, in particular:
...the operational mode of the new refineries will be different from that of the existing ones, ... government will have no shares or financial contribution to make in the construction and management of the plants as the entire project will be executed with loans sourced by NNPC and the Chinese firm. The refineries are to be managed by CSCEC consortium upon completion until the full recovery of their loan used on the project.
With this much detail, it sounds like the project(s) are indeed fairly advanced. They also sound like BOT (Build, Operate, Transfer), projects, rather than BOOT (Build, Own, Operate, Transfer). This would differ from the model set up with Sicomines in the DRC. Chinese lenders will expect the loans to be secured, probably with oil export proceeds sent to a Chinese escrow account. Also in contrast to the DRC, there is no talk of a resource concession linked directly to the deal.

SINOSURE is very conservative. If they do get involved in guaranteeing the loans, they will want to make very sure they don't lose their shirt.  But will the Nigerian government provide a sovereign guarantee? There could be more wrangling around sovereign guarantees such as we saw in the DRC with the $9 billion (now $6 billion) copper project.

Could this still be win-win for Nigeria? It would be terrific if Nigerians could finally refine their own oil. They presently import about 85% of their fuel needs, despite being a major oil producer. Some 20,000 Nigerians are expected to find direct and indirect employment through the construction and operation of the plants. But ultimately the benefit for Nigerians rests not just in employment and in the national pride of refining their oil, but in the cost of refining versus importing it. International tenders and competitive bidding are supposed to ensure that countries get value for their money. Not that this always works.

A quick search of refinery construction costs yielded one recent report of a refinery planned for Kuwait of 615,000 bbl/day capacity, for $19 billion ($30,894 per barrel of capacity). But that contract was canceled after opposition members objected that even though it was an international tender, it had not been done properly. (The companies were South Korean, Japanese, and American). The projected costs of the Nigerian project seem to be in line with the estimates for the proposed Kuwait construction. Another project proposed in South Africa was estimated to cost $10 bn for a 400,000 bbl/day capacity refinery, or $25,000 per barrel of capacity.

I remember analyzing the cost of producing irrigated wheat in Nigeria while on a World Bank mission there in 1987. We found that it cost 10 times as much in foreign exchange to produce irrigated wheat in Nigeria as was saved by not importing the wheat. If they do come to pass, let's hope these oil refineries are a more efficient venture. But if they don't come to pass, this will reinforce what Peter Bosshard said in response to my post on Nigerian power plants: 
Because of financial and political spoils, signing a contract for a big infrastructure project is more attractive than actually building and operating it. This is one reason why so many deals are announced but then never materialize. (See more on this in his blog post: Money for Nothing (Or How Corruption Fuels Dam Building in Nigeria).
So ... who wants to take bets on these projects going forward? A hat tip to Peter Lewis for this story.


Anonymous said...

The MOU itself is a sign of policy change by President Goodluck Johnathan towards doing business with China. It's beyond imagination if late President Yar'Adua is still in power.This is quite like what happened in South Africa,when Mr. Mbeki was more suspicious towards China's business while Mr. Zuma is less so.

Certainly a project this big has its risks. But whether it will be fruitful IMHO depends mainly on Nigeria's commitment. You see China has a huge of problem with its astronomical foreign reserves at hand, but hard to find enough valuable projects to invest. The world's biggest market i.e. the West has continuously block large deals China intended. So China is eager to find other place to park the money,with Africa seems the most favorable place. Many analysts have pointed out many of China's bid in Africa are not profitable in western company's calculation, those bid's main purpose is to secure resource. I would add to find a good place for the money to park is also a consideration. China certainly takes note to the heavy loss of Japan's investments to US's real estates in the boom time.


Alex G said...

An interesting move by the Chinese to try again to get their foot back in the Nigerian door.
But it's definitely not a good sign for the deal that NNPC GMD Lawal was sacked yesterday, just after this deal was announced. No word that the 2 events are linked, but new leadership usually brings new deals. So my bet is against this one, unfortunately for Nigeria's fuel consumers...
thanks for the good post!

Anonymous said...

I think Nigeria should be very careful dealing with china because the Chinese want to take and not give. They tend to employe only chinese workers and want the contracts to be given to Chinese companies. I have it quiet sad Africa is still understand that its sources if manage well all its population will be economically ok. The Chinese and West do bad deals with our leaders and citizens remain forever poor, uneducated, dying young and unware that they are so rich beyond their imagination. Africans still think as salves and believe they cannot do great things without looking up to white people or the Chinese. I hope that Nigeria will not allow the Chinese to come into Nigeria without economic deals that will benefit us. There are envogh well trained Nigerians around the world who can help develop the country with their skills.


Unknown said...

The three Greenfield refineries will add about 750,000 barrels per day capacity to Nigeria's refining infrastructure and position NNPC to engage profitably in the international trading of refined petroleum products.
makati office space

Anonymous said...

As you might know now, the deals never materialized into real projects. I hope you earned some money on your bets.

I wonder if you have any thoughts on the new $80bn etc. Chinese deals recently announced by the new government.

Deborah Brautigam said...

There is always much excited media discussion around possible Chinese investments, mainly due to their potential size. But very, very few of these large investment projects every materialize. Some say that this is a characteristic of Chinese engagement -- lots of promises, little follow through. However, from what I have seen, the Chinese central government seems to be pretty consistent in following through with genuine pledges. What's really going on here and elsewhere when we hear these mega-announcements is that African government officials are making them, to score some kind of political points. Always check the media reports to see who is making the announcement...