The sun sets behind a crude oil pump jack on a drill pad in the Permian Basin in Loving County
Reuters

The Nigerian National Petroleum Company (NNPC) Limited said that adopting a lower price benchmark for a $3.3 billion loan, also known as Project Gazelle, is aimed at reducing default risk and ensuring financial stability.

The official X handle shared a document signed by NNPC's chief corporate communications officer Olufemi Soneye on Sunday, answering frequently asked questions regarding Project Gazelle.

"There has been a lot of interest from the public and stakeholders in recent weeks regarding the $3.3 billion crude oil pre-payment loan," Presidency Nigeria's X handle posted. "This is a financing agreement secured by NNPC Limited to prepay future royalties and taxes to the Federal Government."

The post directed to a link that explained that the rationale of lower crude prices in Project Gazelle.

"Lenders prefer a low price for safety to ensure a limited risk of default. On the other hand, Borrowers prefer a high price to minimize pledged volumes. The negotiated price sits in the middle and is usually a compromise between these two interests," Soneye noted.

"A portion of the revenues generated to cover costs before repaying the loan. A lower price estimate also accounts for these incidental costs," he added.

NNPC secured the loan in August last year to support the local Nigerian currency, Naira and stabilize the foreign exchange market, as per The Cable.

Talking about the benchmark pricing strategy, the NNPC explained that Project Gazelle uses a conservative crude price of $65 per barrel to calculate the allocated crude that will be produced and sold in the future, noting that this "provides a safety margin for price fluctuations in future."

The allocated 90,000 barrels of crude will ensure sufficient funds for the repayment of the facility upon its maturity and allows NNPC Limited to meet other cash flow obligations, considering the future price of crude oil worldwide.

The document also stated that this arrangement will improve Nigeria's foreign exchange inflow by using upfront funding, adding that "international banks have a history of providing forward-sale financings, which can bring new foreign direct investments into Nigeria."