NNPC Explains Lower Oil Price Benchmark for $3.3bn Crude-for-Cash Loan

The Nigerian National Petroleum Company (NNPC) Limited has clarified the rationale behind adopting a lower oil price benchmark of $65 per barrel for a $3.3 billion crude-for-cash loan. The move is aimed at reducing the risk of default and ensuring financial stability.

The facility, known as ‘Project Gazelle,’ was secured on August 16, 2023, to support the naira and stabilize the foreign exchange market. The NNPC has committed to repaying the loan by forward-selling 90,000 barrels per day of Nigeria’s offshore crude oil.

Here are the key points explained by NNPC:

1. Conservative Pricing: The NNPC opted for a conservative crude price of $65 per barrel as a safety measure against future price fluctuations. This provides a safety margin, allowing for potential increases in oil prices and faster repayment.

2. Cash Flow Security: By reserving 90,000 barrels of crude for Project Gazelle, NNPC ensures sufficient cash flow for repayment and other financial obligations. This quantity is carefully calculated to meet repayment needs while considering the expected future price of crude oil globally.

3. Accounting for Volatility: The lower crude price reflects a conservative strategy to account for the unpredictable nature of oil prices. Lenders prefer a low price for safety, while borrowers seek a high price. The negotiated price serves as a compromise between these interests.

4. Mitigating Risks: The NNPC’s spokesperson emphasized that the lower price estimate takes into account incidental costs and minimizes the impact on future oil earnings relative to Nigeria’s oil production. This approach helps mitigate risks associated with oil price volatility.

5. Operational Autonomy: Project Gazelle highlights NNPC Limited’s operational autonomy and financial acumen. The facility ensures immediate liquidity, minimizes the impact on future earnings, and has the potential to enhance Nigeria’s credit rating.

The NNPC clarified that repayments are strategically planned and tied to future oil sales, with conservative pricing in oil sales contracts helping mitigate risks associated with oil price volatility.