Abstract

It is not uncommon for the National Oil Company (NOC) of a developing country to encounter difficulties in obtaining project financing. Due to the instability of their economies, credit is often reduced or withdrawn. If granted, credit is typically underwritten by proven reserves. However, the funds flow problem becomes acute as a larger and larger portion of existing reserves is provided to collateralize debt. This dilemma might be circumvented by switching to financing structures derived through the use of the NOC's share of existing or proposed surface facilities as debt security.

While the concept seems simple in theory, the application of potential components of this type of financing can prove to be quite complex. Various elements must be considered in the equation determining the optimal borrowing terms. The inability to resolve or mitigate certain issues - political instability, facility life and alternative uses, operational hazards, existing production questions, taxes, and de facto partial ownership of assets by a financial institution - is the primary reason the technique has not been widely developed and utilized.

In order for favorably resolved issues to prove useful, they need to be presented in a manner acceptable to the financial institutions. Additionally, requests for financing must fit within the funding parameters of the chosen financing source. Therefore developing a loan package that is palatable to the large financing syndicates will often prove a rigorous and daunting task. However, executed properly, this effort can release previously unavailable funds.

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