Read the market, name the risk, then invest: energy finance in order
A chartered accountant in oil and gas sets out the order he works in: understand the market, name the risks inside it, and only then decide how to invest.
After the conflict between Iran and Israel began in March, crude that had traded as low as 70 dollars a barrel reached 120, and Nigerian pump prices moved with it. For the facilitator of this GEPA workshop, a chartered accountant working in oil and gas, that swing is where his argument starts. The energy market is no longer predictable. It is still profitable.
His answer is to think in a fixed order: understand the market, name the risks inside it, and only then decide how to invest. He sees finance in this sector as more than compliance: as a strategic tool for creating value.
Start with where you sit
Oil and gas runs in three segments. Upstream explores for and extracts crude, midstream moves it from field to refinery, and downstream distributes, sells and trades the refined product. A barrel yields far more than petrol, including diesel, aviation fuel and lubricants, so a business must choose its niche. Power runs from generation to transmission to distribution, with generation either conventional or renewable.
Prices do not move by themselves. The facilitator names six drivers: demand and supply, economic conditions, government policy, market and finance factors, technology, and geopolitics. One geopolitical event can lift the whole market, and news that a blocked shipping strait has reopened can start to bring it down.
Name the risk before it names you
Reading a market is not the same as understanding its risks, and he warns that ignoring the second can end a business in one event. He works through price risk, political and regulatory risk, credit risk, which is the chance that a buyer or borrower does not pay, and operational risk.
His own example is a 2021 cargo for a first-time buyer in Equatorial Guinea. His company checked whether the buyer could pay, bought product and shipped it from Togo. Pirates hijacked the vessel, and the buyer's vessel then suffered a technical failure. The trade was lost, but piracy had been foreseen, cargo and vessel were insured, and the insurer covered the loss. His company now also puts armed naval guards on board.
Identifying a risk still leaves a decision: absorb it or transfer it, and check that you remain profitable either way. Hedging, he explains, is a contract: it fixes the price in advance. In his illustration, a crude supplier locks in about 82 dollars a barrel against a market of around 85. If the price falls to 70, the seller is protected. If it rises to 95, the seller is still bound to the agreed price. The aim is certain revenue, not winning.
Fund it with others, and for long enough
Energy is too capital intensive for one party. The facilitator points to the Dangote refinery, which, as he tells it, brought in NNPC and lenders such as Afreximbank, and met currency risk by arranging to buy crude in naira rather than dollars, since its product sells in naira. He adds diversification, as when Seplat, by his account, bought ExxonMobil's shallow water business in 2022 to add oil to its gas base, and long-term contracts, which turn uncertain income into a known stream.
Afterwards the session chair, a lawyer who works in power, added four points from practice:
- Lenders lend against contracted revenue, so a five-year loan needs an offtake contract of six years or more.
- Cost follows risk: ask a seller to carry delivery risk and the price goes up.
- A long contract locks in prices, so build in a review mechanism triggered by conditions such as inflation.
- A dollar loan repaid from naira income is an exposure in itself, and a currency swap agreed in advance makes it predictable.
On insurance, the facilitator showed where it sits in the price: product cost, then insurance, then voyage costs, then margin. He believes cargo cover is calculated at 125 per cent of product cost. The chair closed with the advice to mitigate what you can, insure the rest, and pass the cost to your counterparty without pricing yourself out. The facilitator agreed that the cost must be passed on.
The full course, taught from the workshop recording, is in the catalogue.
