Innovative Project Financing For National Oil Companies Developing Countries
Authors: Schaff R.P. , Daehler D.J. 
Published: June 2014

This paper (SPE 53055) was revised for publication from paper SPE 49183, prepared for the 1998 SPE Annual Technical Conference and Exhibition, New Orleans, 27–30 September. Original manuscript received 1 April 1998. This paper has not been peer reviewed.

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 Because of the instability of the country's economy, credit is often reduced or withdrawn.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

While the concept seems simple in theory, application of potential components of this type of financing can prove to be quite complex. Various elements must be considered in the equation that determines 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 that the technique has not been widely developed and used.

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

Introduction

As energy demands grow around the world, the search for new sources of oil is expanding to new and more exotic locations. More investment is being targeted for projects in Asia, west Africa, South America, and the former Soviet republics. Regions, which over the past few decades were recipients of only moderate capital investment, are now expected to generate the lion's share of international oil companies' current earnings growth. This strategic shift is evidenced by the billions of capital investment dollars that have been earmarked for projects in developing countries.

Field-development projects in emerging nations often exhibit two common characteristics. The concession-granting country's NOC maintains an equity interest in the project, and the NOC can neither fund their share of the project nor obtain credit to finance their portion. Development in these situations is often delayed by efforts to secure such funding.

Ideally, enough proven oil reserves exist to support the collateral needs of a project's required debt. This allows for investment recovery by the lender through production from an estimable source. Many times, however, the collateral value of proven reserves is diminished by such factors as economic or political instability and the uncertainty of future oil prices.

As the number and scope of projects increases, the ability of an NOC to raise funds becomes increasingly difficult. As a greater percentage of proven reserves is committed to collateralizing debt, incremental sources of capital become difficult to find. This financing dilemma may be resolved by switching to a financing structure collateralized by the NOC's share of existing or proposed surface facilities.

Concept

Oilfield operations in developing countries are usually much larger in scope than the average U.S. effort. Extensive capital investments generating considerable production volumes are the norm, with large production platforms requiring between U.S. $250 million to U.S. $1 billion to construct and install. Once in operation these platforms perform such functions as hydrocarbon production, oil and gas processing, oil storage, gas-lift compression, electrical generation, and water injection. While responding to the needs of the original investment-group properties, they also provide services for neighboring operations in some instances.

While the net worth of oil properties always has been determined through estimates of recoverable oil still in place, the value of any platform is realistically derived from (1) the necessity of the services it provides and (2) the fact that replacing such services would be difficult as well as impractical. This "location-monopoly" position results in a large, stable value attributable to the platform complex against which developmental funding may be taken.

One reason this method has not been used previously is that, until now, the larger oil companies relied on internal funding for asset capitalization. Today, however, with the growing investment level in developing regions, traditional financing avenues of the NOC itself are being pushed to the limit. To ensure continued development, these entities must devise ancillary means of obtaining capital.

Although these concepts appear theoretically simple, development and application of this type of financing structure can prove to be a complex process. The basic elements that must be included in the analysis of debt capacity are reviewed next.

Facility Life and Alternative Uses

The primary issues that need to be addressed when mortgaging a surface asset are its expected life and potential alternative uses. With useful lives of large-scale production structures typically exceeding 20 years, life expectancy seldom proves to be an issue. Because financing agreements generally cover only a portion of the asset's remaining utility, the issue of remaining functional life needs to be a concern only in the severest operating conditions or in the financing of older equipment.