Project Finance in the Oil and Gas Industry

What is project finance in the oil and gas industry?

Project finance in the oil and gas industry includes exploration and production activities, the construction of pipelines and refineries, as well as the development of liquefied natural gas (LNG) and regasification facilities to transport and distribute natural gas around the world.​

Project finance is a financing type used to finance large infrastructure and industrial projects. In the oil and gas industry, project finance is used to finance large projects, including upstream and midstream projects.

It involves creating a special purpose vehicle (SPV) to hold the assets used in the project. This SPV then borrows money from lenders to fund the project. The project’s cash flow is used to repay the loan over a specific period of time.¹

What are the benefits of project finance in the oil and gas industry?

Project finance has a number of benefits for the oil and gas industry.​

Firstly, it enables companies to undertake and finance large projects that may not be possible otherwise. It allows companies to borrow a significant amount of capital for long-term periods.​

Since the project risks are transferred from the borrower to the lenders, project financing provides more certainty to the borrowers in terms of the availability of funds and cash flow planning.​

Lastly, the terms of the loans are often more attractive than standard financing arrangements, which makes it more attractive for borrowers.

What are the risks involved in project finance in the oil and gas industry?

Project finance involves a significant amount of risk, particularly in the oil and gas industry where commodity prices are often very volatile.​

Lenders are exposed to a range of risks, including project risks, credit risks, and market risks. The success of the project and the cash flow generated by the project are critical to the repayment of the loan.​

To mitigate these risks, lenders perform extensive due diligence before lending any money to ensure that the project is viable and can be completed on time and within budget.

How is project finance structured for oil and gas projects?

What are the different types of project finance structures used in the oil and gas industry?

There are different types of project finance structures that can be used in the oil and gas industry.​²

The most common structures include limited recourse financing, non-recourse financing, and full recourse financing.​

Limited recourse financing is the most common type of financing used, where the lender only has recourse to the assets of the SPV, and the borrower does not guarantee the loan.​

Non-recourse financing is where the lender only has recourse to the project and its revenues.

Full recourse financing is where the borrower is liable for all the debts in case of default.³

What are the key components of a project finance agreement for an oil and gas project?

The key components of a project finance agreement for an oil and gas project include the project scope, construction timeline, key milestones, expected cash flows, and financial projections.​

The agreement also contains terms outlining the responsibilities of both the borrower and the lenders, guarantees, securities and pledge agreements, and covenants to ensure that the project is completed on time and within budget.

How do lenders and borrowers negotiate project finance agreements in the oil and gas industry?

Lenders and borrowers negotiate the terms of project finance agreements in the oil and gas industry through a process of extensive due diligence.​

Lenders will typically demand a range of guarantees, securities and pledge agreements to mitigate the risks of their investment.​

Borrowers will be required to provide extensive documentation outlining the project scope, expected outcomes, and cash flow projections to secure funding.

What are some case studies of successful project finance in the oil and gas industry?

How was project finance used in the development of the Ecuador oil and gas field?

In 2021, the development of the heavy oil reserves of the Ishpingo, Tambococha, and Tiputini (ITT) fields or Yasuni ITT bloc in the Ecuadorian Amazon was secured through a project finance agreement with an estimated $6 billion funding requirement.​

The development of the ITT fields was necessary to stop further oil exploration in the unspoiled parts of the Amazon forest.

A consortium of 14 banks contributed to the project financing. This project financing deal helped achieve significant environmental benefits and supported the commercial viability of the Ecuadorian oil and gas sector.

What project finance structures have been used in LNG and regasification projects?

In the LNG and regasification sectors, project finance structures have been used to fund the construction and expansion of terminals and the associated infrastructure.​

These structures have included both limited and non-recourse financing, as well as financing supported by export credit agencies.​

One notable example is the financing package for the LNG terminal at Sabine Pass, which was developed by Cheniere Energy Partners LP through a combination of debt and equity financing.

How has project finance helped to finance field development in the oil and gas sector?

Project finance has played a critical role in financing field development in the oil and gas sector.​

Large projects like the development of oil and gas fields require a significant upfront investment that typically needs to be financed through project finance.​

For example, in the Norwegian North Sea, a consortium of international banks provided a $5 billion financing package for Statoil’s Johan Sverdrup oil field.

How does project finance in the oil and gas industry compare to other sectors?

What are the similarities and differences between project finance in the oil and gas and renewable energy sectors?

Project finance in the oil and gas and renewable energy sectors shares a number of similarities.

For example the use of limited recourse financing structures and the reliance on credit support from export credit agencies and multilateral development banks.​

However, the renewable energy sector also has certain distinct features, such as revenue streams that stem mainly from long-term power purchase agreements with off-takers, and renewable energy credits that help make the projects more attractive to lenders and equity investors.

How do commercial banks and financial institutions assess risk in project finance for the energy sector?

Commercial banks and financial institutions assess risk in project finance transactions based on a range of factors such as the project’s technology, location, regulatory framework, and risks associated with the construction, operation, and maintenance of the facility.

Risk is assessed using various analytical tools such as feasibility studies, financial and market analysis, sensitivity analysis, and Monte Carlo simulations.

What role do oil and gas companies play in project finance?

Oil and gas companies play a critical role in project finance as project participants and borrowers.​

In most cases, oil companies are involved in upstream and midstream oil and gas activities, while gas companies focus on exploiting gas resources.​

These companies are required to provide extensive documentation to ensure the bankability of the project structure.​

They also carry out detailed work to estimate expected cash flows, the revenues and expenses associated with exploration, drilling, and production activities, and help structure the project.

Conclusion

Project finance plays a pivotal role in the oil and gas industry, facilitating the development of significant projects by mitigating risks and unlocking the potential of untapped fields.

Through structured financing, the industry can navigate the complexities of large-scale exploration and production activities, ensuring the viability and sustainability of projects.