The Technical/Financial Interface In Bank Lending To Major International Petroleum Projects
Authors: Eschenlauer A.C. 
Published: December 2007

The agent bank's role in lending to major international petroleum projects requires the melding of technical and financial skills at every step of the way. Since such project lending is evolving rapidly, both engineers and bankers are facing together issues new to both. If they are to interface effectively, as is necessary to serve the interest of borrower and bank, the over-all bank environment must be right, and the bank must consciously organize, train, and manage to achieve that result.

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In discussing the technical/financial interface in bank lending to major petroleum projects, I propose first to discuss the objective of such propose first to discuss the objective of such lending, next to identify the elements of the task, third to discuss each of these elements sufficiently to identify their technical aspects and the consequent contribution required of technically trained people, then to distill out the essential interrelationships between people trained technically and those trained financially, and finally to describe those techniques of organization, leadership, and training that bring about the type of interaction required.

The objective of major petroleum project lending can be stated as follows: to compete against other banks to win the agent bank's role in a project financing on the basis of (1) the design of the over-all loan, (2) a pricing arrangement that best trades off the minimum net after tax cost to the client and maximum return to the lending banks, (3) confidence of the borrowing client and the host country in the ability of the agent bank to provide timely delivery of the financing while at the same time enhancing, rather than damaging, the political environment in the present and for the future, and (4) the conviction of the borrower that the agent will act over the full life of the loan in any other way useful to maximize the probability of timely payment of principal and interest on the loan without payment of principal and interest on the loan without disturbing the political relationships of the bank or the oil company in the host country.

Such a broad objective can be analyzed best by breaking it down into its essential underlying elements. These are (1) understand the realities of the over-all situation and how they interrelate to constitute the whole; (2) imagine a structure, selling concept, and implementation technique that gives promise of attaining the overriding objective; (3) present the proposal in such a way as to convince others of its feasibility. These others include senior bank management, the client petroleum company, any project participants in addition to the borrowing client, the relevant host government units, which might include the national oil company or oil ministry as well as central back or other monetary authority, and finally those banks who will participate in the syndicate. participate in the syndicate. Further elements are (4) manage the legal drafting, the preparation of the information memorandum to participating banks, and all the other documentation and communications required to complete the transaction; (5) follow the loan with the clients, host country, and bank participants over its life; (6) recognize early and respond constructively to any crisis that might arise over the life of the loan. For example, should problems be caused by actions of the host government, the agent bank's role is to sit as a third party in discussions about the project, joining the host government and the petroleum company principals. The bank is there to be sure the host principals. The bank is there to be sure the host government fully understands the economic effects of any change not only on the oil company sponsors, but also on bank lenders, and on the image of the country in worldwide financial as well as petroleum circles. That image, of course, will affect the ability of the country to borrow for purposes unrelated to petroleum.

Let us now focus on each of the elements of the task just enumerated in order to identify the technical content of each.

The over-all environment of major petroleum project lending is one of competitive effort. No project lending is one of competitive effort. No individual bank has a pre-ordained position as agent for such a financing.