Financing Major Energy Projects

Abstract

Abstract The first oil and gas department in a bank was created in 1928 and the first oil and gas production loan was made in the 1930s by a Dallas-based bank. Its technical staff was brave enough to lend against established cash flows. Thus, an important principle had been established: lending against a security buried under the ground. Technical personnel were able La predict reserves and production rates because many of the Texas fields had been on stream for relatively lengthy periods and reliable production histories had been established. In addition, increasing government regulation controlled production making for more reliable loan collateral. As a result of Leduc in 1947, the then Canadian Bank of Commerce actively pursued the concept of forming its own oil and gas department. Senior officials toured Texas and Oklahoma and talked to industry personnel and banks and the first oil and gas department in a Canadian bank was formed by the Canadian Bank of Commerce. Right from the beginning, it was decided that banks would not lend for exploralion unless the loan could be secured by established production or some other form of collateral and this is still the case. After all, exploration is an extremely risky exercise. Traditionally, banks have only been interested in low-risk ventures, confining themselves to projects where it is possible to recover payment of the loan plus interest. Even if a field provesto be as big as Pembina, the banks will not share in the sudden wealth, but on the other hand if, the venture fails, it is possible to lose the entire loan. Oil and gas loans historically have had extremely low failure rates. This may sound too conservative, but remember that in an oil company an explorationist who achieves a 1 in 8 success ratio is treated as a genius, while in a bank a loans officer who makes one bad deal in one hundred may be regarded as a disaster. So it just depends which way one looks at things. Four main areas have evolved: equity financing balance sheet loans, conventional production loam and project loans. Equity Financing Generally speaking, the major banks have not taken an actual share in oil because they are normally prevented by legal constraints from doing so. Canadian and American banks have very strict regulations controlling their investments but banks can purchase shares it is to prevent a company from going into receivership. The major exception is in the U.K. North Sea where British chartered banks actively participated in the seventh round of licence awards in 1980. The UK government had let it be known that it wan Led British companies to become involved and as a result some of the most unlikely "oil finders" appeared in the list of successful bidders. Personally, I am not sure that it is a good idea for banks to enter into the industry as participants. even if they have not yet actually acted as Operators.