Abstract

Project financing can be of great benefit to oil and gas projects because by separately identifying and securing assets and cashflows it can provide large sums not otherwise accessible to whole projects or to individual companies. Project financing is of interest to members of the SPE because it routinely requires the expertise of petroleum engineers and other professionals to vouch for the viability of petroleum projects and the recoverability of reserves. Its essential attraction is that risk analysis and the application of precise professional criteria enable large projects and amounts to be financed, which otherwise might not occur. This is particularly the case when there are a number of participants in a large project, none of which is on its own able to support the finance. The growth in the average size of projects means that an increasing number of projects must be financed in this way or not be able to go forward.

Oil and Gas Expertise

Professionals associated with the oil and gas industry tend increasingly to be involved in providing professional expertise in the context of project financings. Whether for lender or borrower they are called upon to analyse in detail and to certify hydrocarbon reserves, the timing and amount of their production, and the technology, cost and timing of development.

Financing Trends

Recent trends have conspired to make project financing more significant in the oil and gas industry. These are the declining profitability and increasing leverage of oil companies during the 1980s. The equity of the four hundred largest US oil companies stood at over $230 billion at its peak in 1983 but in 1989 was slightly over $160 billion in money of the day terms. One has only to dwell lightly upon the monumental capital demands which have been calculated for the CIS (USSR that was) and Eastern Europe, and to note Sheik Yamani's calculation that $70 billion needs to be borrowed to add five million barrels a day to crude oil capacity in the Gulf, to realise that the capital demands of the oil and gas industry are undiminished.

However the sources of finance have diminished under the dual influence of the massive loan losses and increased reserve requirements of commercial banks in USA, Europe and Japan. This means a decline in general purpose lending and an increasing refinement in the focus of bank lending, which is to say that project financing will take a greater proportion of available funds. Nonetheless there has been a significant decline in the number of banks which seriously engage in project financing because of the overheads this implies. A recent estimate is that there are now twenty such banks active in the UK market.

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