Domestic U.S. banks have been slow to engage in upstream financing despite the North American reserve based finance market being the largest in the world. So says Kevin Price, global head of reserved based finance at French multinational Societe Generale. Price has found that only a small sub set of the domestic U.S. banking market has been comfortable with financing in the offshore, and believes this can be attributed to the fact that the size of the market means there is plenty of opportunity to lend to onshore companies with lower perceived risks. In addition, the unique nature of the Gulf of Mexico and Gulf Coast reservoirs, frequently found with rapid decline water drive mechanisms, made prediction of even Proved Developed Producing reserves less reliable than for more established onshore conventional plays.
Historically the offshore upstream industry itself has been dominated by bigger companies capable of financing their activities with forms of capital other than secured bank debt, Price said. Even where loans have been provided to companies with offshore assets, they have been based in the onshore markets, primarily on proved developed producing reserves available only after the cost intensive development drilling and platform infrastructure has been put in place.
Price said this was in stark contrast to the global upstream finance environment. Although younger than the U.S. reserve based market, the international market started by financing capital-intensive offshore upstream projects in their construction development phase. Finance markets, like any other kind of market, react to forces of supply and demand. Outside of the US, the trend for reserve based finance banks has been to follow the oil company demand (and success) starting first in the North Sea and then gradually expanding into emerging markets as independent oil companies found and exploited reserves there.Over time, field discoveries have become larger, the water and rock depths in which the reserves are located have become deeper and the associated cost of development even greater.
However, Price believed it was inevitable that there will be increased demand for offshore development capital from U.S. banks in the coming years. Gulf of Mexico drilling has recommenced particularly in the deep water/deep rock tertiary and Miocene plays. This has resulted in a series of apparently very large discoveries. Secondly and at the same time, the regulatory oversight framework for safety and environmental aspects has had a major overhaul and has now been tightened in many respects. It now has a similar framework to that observed in many other highly regulated developed markets like the UK, and Norway.
However he believed it is the demographic changes of the oil company discoverers and developers who will most drive the financing markets response. He said the fact that a significant portion of the exploration was being undertaken by independents meant that they found it difficult to finance the appraisal and ultimately the subsequent development, with gross costs well over $100-million. With no asset base other than a large discovery, the only source of potential bank debt such companies can turn to is Upstream Project Debt Market, a market dominated not by North American banks but by international ones. That said, Price believed the U.S. domestic banks would not find it difficult to enter the offshore finance market. There is no magic in this; it is simply sophisticated project lending applied to upstream projects, a type of finance with a successful 50 year history in the UK and close to a couple of decades in Africa he said.
The first Gulf of Mexico development transactions are already being mandated and over the coming months and years we will see this market develop fully as has been the case in the North Sea and offshore West African markets. The US Gulf of Mexico may therefore be the last frontier for this kind of finance but it is one that we will soon see tamed.
Funding the future of oil and gas development is one of the key topics on the agenda at this year’s Oil Council World Assembly (http://www.oilcouncil.com/event/weca/agenda), taking place at the Lancaster Hotel in London, from November 17 to 18. Every year, the World Assembly welcomes more than 1000 oil and gas companies, financiers and investors who are looking to invest billions of dollars. As the world’s largest business network for oil and gas, leaders from the upstream, midstream, downstream, finance, investment and petroleum services sectors attend the World Assembly.