Financing Offshore Projects: The Banker'S Approach To Risk
Authors: Beldam R.A. 
Published: October 2008

In considering the finance of offshore projects, I would like to do this by first considering how bank finance fits into a company's financial strategy and briefly describing the main characteristics of energy finance. I will then outline those risks companies generally wish to share with banks and those banks u currently willing to accept (and the two are not the same!), together with associated risk mitigation techniques in each case. Finally, I will also look at current trends in the energy market from a banker's perspective and try to draw some conclusions about the likely characteristics of future financing; including those for marginal field development.

To give you some idea of the importance of the sector to the UK, it currently accounts for over 1% of GNP and directly supports more than 100,000 jobs. Since the mid 1960's some E1OO billion has been invested in the UK sector of the North Sea and capital investment is currently running at over £5 billion a year -- some 20% of total investment in the UK. This is financed by a combination of internal funds, i.e., provided by the companies themselves, and external finance largely provided by banks.

Although there has been a recent resurgence of interest in bank funding for large infrastructure projects including, airports, bridges and motorways, the real impetus for the current boom in project financing has come from the new business segments of power generation and associated independent gas marketing. In the UK this is a new business area, in the middle of dramatic restructuring following privatisation, with considerable uncertainties regarding the overall supply/demand balance. Notwithstanding these risks, the response of the banking market has been generally extraordinarily enthusiastic. Large amounts and long tenors, up to twenty years, have been achieved, which is particularly impressive against a background of increasing capital constraints on banks. At the same time, it must be remembered that the oil side of the business has also been an enthusiastic user of bank finance. Activity in the North Sea in particular has benefited from a combination of new finds such as the Nelson and Scott Fields, the emergence of gas as a generating fuel as outlined above and the considerable capital expenditures associated with upgrading existing developments, with project financing capturing a considerable portion of this business. Here in the US, the Gulf of Mexico has consistently been a prolific area for developments and associated financing.

However, it is important to remember that bank finance is only one of the vast array of financing techniques available to companies. These range from inter-company loans, through to bank facilities based on the company's balance sheet, (corporate facilities) to other sources including the equity and capital markets. Of course, if it is available inter-company debt funded by the parent company is usually the cheapest and most flexible source of finance. However, this is not available to all companies, and even where it is there may be compelling tax or policy reasons for not using it.