This paper is written for the independent operator considering project financing in his operations. What the operator can expect in making these financial arrangements and how project financing compares to other financing methods is discussed.

Within the past decade, large amounts of capital have been needed by the petroleum industry to finance projects worldwide, especially in the North Sea area. In this area project financing has been used by companies having different objectives which include at least one of the following: raising capital, reducing financial exposure, or reducing capital costs1. In project financing the source of repayment is limited to the cash flow stream provided by a particular project. It can be used alone or in conjunction with other types of financing to provide a desired result relative to the corporate balance sheet and to the relative assumption of risks in the project between the borrower and the lender2,3 .

Historically, financing for the small, independent company active in exploration and production involves oil production loans from commercial banks when the company has proved producing reserves to provide collateral for these loans. When such reserves are not available or the capital requirements outstrip the collateral value for conventional bank financing, the operator will resort to equity financing. Equity financing for the independent operator can include public and private limited partnerships, farmouts, and/or sale of a portion of the independent's interest at a promoted price. These types of equity financing are used by both public and private independent companies. Equity financing provides for spreading the risk and sharing the available capital within the industry, and also provides an important source of capital from outside the industry.

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