From Reserves To Renewables: Rethinking Energy Finance Beyond Reserve-Based Lending (RBL)

Introduction

Over the years, exploration and production (“E&P”) companies have relied on a range of traditional financing mechanisms to fund acquisitions and develop projects. Among these mechanisms, Reserve-Based Lending (“RBL”) has emerged as a distinctive and increasingly utilised financing option within the oil and gas industry. RBL is a form of financing in which loans are secured against a borrower’s oil and gas assets, whether developed or undeveloped, and producing. As the name suggests, the amount of financing available to the borrower is directly linked to the value of its proved oil and gas reserves (known as Borrowing Base).

In Nigeria, indigenous E&P companies have successfully leveraged RBL to transform their operations and expand their asset portfolios. A notable example is Oando’s use of RBL financing to support its acquisition of Nigerian Agip Oil Company Limited (now known as Oando Energy Resources Limited), amongst other RBL facilities for which we acted as Nigerian counsel to the lenders.

However, the global energy landscape is undergoing a significant transformation, driven by climate considerations and the growing demand for cleaner energy sources. This shift has led to the gradual emergence of alternative financing models, including green finance and sustainability-linked loans, which are increasingly complementing and, in some cases, challenging traditional financing models such as RBL.

In this article, we examine the legal and regulatory considerations applicable to RBL transactions in Nigeria, explore alternative financing structures beyond RBL, and consider the evolving landscape for financing renewable energy projects in the country.

Key Features of Reserve-Based Lending

In Nigeria, RBL financing is based on the projected net present value (“NPV”) of the future cash flows expected to be generated from oil and gas reserves. Some of the features of RBL are as follows:

• Borrowing Base Facility:The borrowing base is a key feature of an RBL facility and represents the maximum amount a lender will make available to the borrower. It is determined by applying conservative price assumptions and a discount rate to the value of the borrower’s proven reserves, effectively functioning as a credit limit that is subject to periodic reassessment. During each redetermination (which takes place semi-annually), lenders reassess the borrowing base based on factors such as the remaining volume of proven reserves, projected production costs, prevailing oil and gas prices, and the overall commercial viability of the assets. Where the assessed value decreases due to price fluctuations or operational challenges, lenders may require mandatory prepayments or additional collateral, thereby ensuring that the outstanding loan does not exceed the value of the underlying assets.
• Repayment Structure:RBL facilities typically incorporate a structured repayment mechanism that links debt servicing to the borrower’s production and cash flow. In Nigeria, repayments are often made directly from oil and gas sales proceeds, with lenders having a priority claim over these revenues. The repayment profile may be volume-indexed (tied to actual or forecast production levels) or fixed (based on an agreed amortisation schedule). This approach allows debt repayments to adjust with changes in production levels and commodity prices, thereby reducing the risk of payment strain during periods of low output or falling prices, while ensuring that lenders are repaid gradually as the reserves are produced and monetised.
• Due Diligence:A defining feature of RBL facilities in Nigeria is the rigorous due diligence undertaken by lenders prior to and throughout the life of the facility. Given that repayment is tied to the borrower’s reserves and projected cash flows, lenders conduct detailed technical evaluations of the underlying oil and gas assets, including reserve reports, production profiles, and field development plans, often relying on independent reserve experts. This is complemented by legal due diligence on the obligors and their assets. This comprehensive due diligence enables lenders to accurately assess risk, structure appropriate covenants, and ensure that the facility remains adequately secured by viable, cash-generating petroleum assets.
• Focus on Local Content:In Nigeria, there is a growing involvement of local financial institutions alongside international banks in supporting indigenous E&P companies. This approach not only strengthens the role of Nigerian banks in financing the sector but also promotes local capacity development and technical expertise in complex project financing. Indeed, several indigenous E&P companies have successfully leveraged RBL to finance their operations. For instance, Heirs Energies¹ secured a landmark US$750 million RBL facility from Afreximbank in December 2025 to fund the development of its Oil Mining Lease (“OML”). In the same year, Chappal Energies² closed a US$430 million RBL package, consisting of a US$340 million senior facility provided by a syndicate of international and African banks and a US$90 million junior facility from a global commodities trader. This transaction enabled Chappal Energies to refinance bridge financing from its acquisition of Equinor’s Nigerian assets while simultaneously funding ongoing field development, illustrating how RBL structures can combine local and international capital to support both acquisitions and operational growth.

Legal and Regulatory Considerations in RBL Transactions in Nigeria

RBL transactions in Nigeria are subject to a number of recurring legal and regulatory considerations that lenders and borrowers must carefully navigate. Notably, under the PIA, ³ consent of the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC”) is required for the creation of a security interest over an interest in an oil licence or lease.  Failure to obtain this consent may expose lenders to significant credit risk. Thus, securing timely regulatory approvals is often a key condition precedent in RBL transactions.

Furthermore, the perfection of a security interest presents both procedural and timing challenges. Security created in favour of lenders must be duly perfected with the relevant Nigerian authorities, including the Corporate Affairs Commission (“CAC”) and the Nigeria Revenue Service (“NRS”). This process typically involves the payment of stamp duties and registration fees, and any delay, omission, or defect in perfection may adversely affect the priority and enforceability of the lender’s security, ⁴ particularly in an insolvency scenario.

Beyond these formal requirements, environmental liabilities remain a significant concern, particularly in the Nigerian upstream sector, where legacy issues such as oil spills, remediation obligations, and host community disputes are prevalent. These liabilities can materially diminish the value of the underlying asset and, by extension, the borrowing base that underpins the facility. As a result, lenders place considerable emphasis on comprehensive legal, technical, and environmental due diligence, often supplemented by indemnities and insurance protections, to identify and mitigate such risks before disbursing the loan.

Alternative Financing Structures Beyond RBL in Nigeria

In the Nigerian oil and gas sector, participants are increasingly moving away from conventional RBL structures toward more innovative financing models in a bid to generate capital, increase output, and maximise returns. These models are less reliant on reserves and instead leverage other aspects of the value chain. Such models include pre-export finance, where future export receivables are assigned to a financier in exchange for immediate liquidity; balance sheet lending, which involves a company leveraging its financial strength to raise capital; and public-private partnerships, which entail contractual arrangements between private investors and government entities for the financing of infrastructure projects.

In addition, alternative structures such as asset-backed securitisation and streaming arrangements are gaining increased relevance. Under the former, established and producing oil and gas assets are securitised and sold to investors, while under the latter, a financing counterparty provides upfront capital in exchange for the right to purchase a fixed percentage of future production at a predetermined price, thereby enabling the company to monetise future output for immediate liquidity.

Financing of Renewable Energy Projects in Nigeria

In Nigeria, there is a growing recognition of the need to diversify energy financing sources beyond traditional reserve-based models. In the renewable energy space, entities commonly utilise a range of alternative capital-raising structures, including:

• Green bonds:These are fixed-income instruments issued to raise capital specifically for environmental or climate-related projects, with proceeds strictly earmarked for such purposes as disclosed in the transaction documents.
• Sustainability-linked loans:These, on the other hand, are structured to incentivise compliance with predefined ESG targets. Unlike green bonds, the proceeds are not restricted to specific uses, but the pricing of the loan is linked to the borrower’s performance against agreed sustainability metrics, with interest rates adjusting accordingly.
• Blended finance structures:This combines concessional funding, typically from development finance institutions on favourable terms, with commercial capital. In such arrangements, the concessional lender often assumes a subordinated or higher-risk position, thereby de-risking the transaction and making it more attractive to commercial lenders.

Way Forward

The Nigerian energy financing landscape is shifting from traditional RBL structures toward sustainability-driven models, particularly those supporting renewable energy. While RBL remains relevant, its dominance is gradually declining as lenders prioritise projects aligned with ESG standards, long-term viability, and environmental impact. As a result, alternative financing structures are becoming central, rather than merely complementary, to energy project funding.

Going forward, RBL is expected to coexist with these emerging models, especially in Nigeria, where hydrocarbons remain significant. However, financing structures will continue to evolve alongside global energy transition trends, with greater reliance on sustainability-linked and blended finance solutions, requiring market participants to adapt to a more dynamic funding environment.

Footnotes

^{1.  Heirs Energies, ‘Heirs Energies Agrees $750m Afreximbank Financing to Drive Long-Term Growth’ available at https://heirsenergies.com/heirs-energies-agrees-750m-afreximbank-financing-to-drive-long-term-growth/} 

^{2.  Temitope Aina, ‘Chappal Energies secures $430m reserve lending facilities’ available at https://punchng.com/chappal-energies-secures-430m-reserve-lending-facilities/} 

^{3.  Section 95(5) of the PIA}

^{4.  See Section 127(1) of the Nigeria Tax Act, 2025, which provides that an unstamped dutiable instrument shall not be admissible in evidence in any court, judicial or arbitration proceedings, and in satisfying any evidentiary requirements unless otherwise stated by the Act.}

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