CNPC provides $1 billion loan to meet outstanding debt obligations and pay for general operating expenses

In July 2014, China National Petroleum Corporation (CNPC) and the Government of South Sudan engaged in a $1 billion commodity-backed facility (loan) agreement. The proceeds from this loan (which provides cash advances in exchange for future oil sales) were used by the authorities to meet their outstanding debt obligations and pay for general operating expenses, including those related to the Army and the so-called Organized Forces (Police, Prisons, Wildlife, and Fire Services). Under the oil prepayment arrangement, funds were advanced to the Government of South Sudan in a forward oil-swap deal where the Government of South Sudan was expected to repay in 45 days at a negotiated interest rate of 3 percent. The lead arranger in the oil advance arrangement was the Ministry of Petroleum and Mining, while the Ministry of Finance and Planning (MOFEP) was the primary obligor. As of December 31, 2015, the Government of South Sudan had repaid $845,713,840 of its outstanding obligations under the loan agreement. The loan’s outstanding amount was $154,286,160 as of December 31, 2015, $154,286,159.03 as of March 31, 2016, and $154,000,000 as of November 1, 2019. The Government of South Sudan's decision to enter into forward oil-swaps (also known as oil advances, oil prepayment agreements, pre-export finance facilities, PXF facilities, and pre-sales oil contracts) with CNPC and other oil companies eventually created significant cash flow problems. In April 2019, a Panel of Experts on South Sudan submitted a report to the United Nations Security Council. It concluded that ‘[t]he Government of South Sudan, however, pre-sells almost all of its oil, meaning that it takes advance payment for oil that it will deliver in the future, usually within a number of months. Companies receive a discount in exchange for making an advance payment and charge significant interest on the amount they have prepaid. Given that the number and terms of these pre-purchase agreements are not disclosed and revenues can be generated well in advance of actual production, the oversight of revenue flows is impeded. Agreements of this kind also have the effect of saddling future Governments with debts and obligations, including the Revitalized Transitional Government of National Unity scheduled for appointment in May 2019.’ Then, in June 2019, the Government of South Sudan announced that ‘[t]he president directed that all pre-sales [oil] contract[s] should be suspended. These pre-sales [oil] contracts are not healthy and they are actually destroying the economy […] When you sell to a specific company without competition, definitely you agree on certain rates but when it is free competition you give to the highest bidder’. Nearly two years later, in April 2021, another Panel of Experts on South Sudan submitted another report to the United Nations Security Council. It reviewed four oil prepayment facility agreements and concluded that these agreements had led to a 24% reduction in potential revenue for the Government of South Sudan.

Additional details

1. This loan is not captured in the Chinese Loans to Africa (CLA) Database that SAIS-CARI released in July 2020 and updated in March 2021 (which is now maintained by Boston University’s Global Development Policy Center). 2. The Government of South Sudan may have received additional funding through another oil prepayment agreement with CNPC between April 2018 and August 2019. However, this issue requires further investigation. An April 2021 report submitted by a Panel of Experts to the United Nations Security Council found that ‘[d]uring the period April 2018–August 2019, the Government [of South Sudan] received access to advanced financing through the four prepayment agreements, which resulted in the company making eight advanced payments to the Government that [totaled] $446,973,882.79. At the same time, as stipulated in the prepayment agreements, the Government [of South Sudan] paid the company $95,138,582.61 in interest, fees and costs. As detailed in the prepayment agreements and in Ministry of Petroleum reconciliation documents reviewed by the Panel, the Government [of South Sudan] was responsible for three main costs. First, the Government [of South Sudan] paid upfront arrangement fees, which incorporate the administrative costs of the financing agreement, of 1.25–3.5 per cent on the full value of the financing agreement. In total, the Government [of South Sudan] paid $68,238,400.00 in arrangement fees under the four prepayment agreements over the course of 17 months in 2018 and 2019. Second, the Government [of South Sudan] paid interest of 7 per cent above the benchmark global interest rate, [totally] $13,079,925.55, on the outstanding balance of the financing. Third, because the Government [of South Sudan] received upfront payment for the oil, the company received the oil at a predetermined discount rate below the spot market price. The four prepayment plans reviewed by the Panel included a discount rate of $1.15–$1.35 per barrel of crude oil, which resulted in $8,504,139.85 of decreased revenue in the sale of 11 cargoes from May 2018 to July 2019. The Panel estimates that the various fees and interest payments under the four short-term prepayment agreements resulted in a decrease of 24 per cent of potential government revenue, or about $5.5 million per month, compared with the expected oil value through the spot tender contracts […]. The Panel has not identified any diversion of public funds related to the four prepayment agreements. However, officials in the Ministry of Finance and Planning and the Ministry of Petroleum told the Panel that the ministries had been unable to fully track the repayment of the loans in part because of the way in which the finances were calculated and reported’. More detailed information can be found at https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/S_2021_365.pdf. 3. A pre-export finance (PXF) facility is an arrangement in which a commodity (e.g. oil) producer gets up-front cash from a customer in return for a promise to repay the customer with that commodity (possibly at a discount) in the future. PXF funds may be advanced by a lender or syndicate of lenders to a commodity producer to assist the company in meeting either its working capital needs (for example, to cover the purchase of raw materials and costs associated with processing, storage and transport) or its capital investment needs (for example, investment in plant and machinery and other elements of infrastructure). PXF facilities are usually secured by (1) an assignment of rights by the producer under an ‘offtake contract’ (i.e., a sale and purchase contract between the producer and a buyer of that producer of goods or commodities), and (2) a collection account charge over a bank account into which proceeds due to the producer from the buyer of the goods or commodities under the offtake contract are credited. There are two key documents in prepayment finance transactions: a contract providing for the advance payment by the offtaker to the producer for the purchase of goods/commodities (the 'Prepayment Contract'), and a loan agreement between a lender and the offtaker (the 'Offtaker Loan Agreement') under which the advance payment is financed. 4. This loan is not captured in the Chinese Loans to Africa (CLA) Database that SAIS-CARI released in July 2020 and updated in March 2021 (which is now maintained by Boston University’s Global Development Policy Center). 5. The CNPC oil prepayment facility was apparently collateralized against the sale of oil cargoes to ChinaOil (a subsidiary of CNPC) between 2014 and 2016 (see https://radiotamazuj.org/uploads/media/627b639c4472d/627cf16a350e7.pdf and https://www.dropbox.com/s/inurypxldaqf9tm/2015-16.pdf?dl=0).

Number of official sources

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