Project Finance for the International Petroleum Industry

414 Pages·2016·2.77 MB·English

by  Robert Clews

Project Finance for the
International Petroleum
Industry
R. J. Clews
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Table of Contents
Introduction ix
Part I
Introduction to Project Finance
1. The Characteristics of Project Finance 3
1.1 Introduction 3
1.2 Raising Finance for Large Projects 4
1.3 Using Project Finance to Raise Capital 5
1.4 Risk Analysis and Risk Mitigation 8
1.5 Project Economics, Capital Structure and Debt Capacity 12
1.6 The Project Finance Process 1 6
2. Project Finance Structures and Techniques 23
2.1 Introduction 23
2.2 Project Finance Structures 24
2.3 Project Finance Tools and Techniques 34
2.4 Security Structures, Sponsor Support and Other Features 39
3. Sources of Finance and the Global Project
Finance Markets 43
3.1 Introduction 43
3.2 Sources of Equity 44
3.3 Sources of Project Finance Debt 48
3.4 The Global Project Finance Market 60
4. Commercial Banks and Syndicated Lending 63
4.1 Introduction 63
4.2 The Role of Commercial Banks in Project Finance 64
4.3 Term Loans and Related Financing 68
4.4 Syndicated Lending 72
4.5 Loans Market Practice 79
v
v1 Table of Contents
Part II
The Petroleum Industry - Commercial Risks
and Contracts
5. Fundamentals of the Petroleum Industry 83
5.1 Introduction 83
5.2 The Business of Petroleum 84
5.3 The Industry Value Chain 88
5.4 Industry Structure, Markets and Economics 93
6. Upstream Oil and Gas 101
6.1 Introduction 1 01
6.2 Fundamentals of Upstream Oil and Gas 102
6.3 Upstream Project Risks 103
6.4 Commercial Structures and Upstream Contracts 109
7. Petroleum Refining 119
7.1 Introduction 119
7.2 The Fundamentals of Petroleum Refining 120
7.3 Refinery Project Risks 125
7.4 Commercial Structure and Contracts 129
8. Pipelines, Storage and Other Infrastructure 137
8.1 Introduction 137
8.2 Fundamentals of Pipelines and Storage 138
8.3 Pipelines, Storage and Infrastructure Risks 143
8.4 Commercial Structures and Contracts 146
8.5 Oil and Gas Infrastructure Tariffs and Economics 150
9. Petroleum Shipping and the Offshore Industry 153
9.1 Introduction 153
9.2 Fundamentals of the Shipping and Offshore Industries 154
9.3 Shipping and Offshore Risks 157
9.4 Commercial Structures and Contracts 161
9.5 Shipping and Offshore Economics and Finance 165
10. Natural Gas and LNG 169
10.1 Introduction 169
10.2 Fundamentals of the Industry - 'Natural Gas Chain' 170
10.3 Risks in the Natural Gas Industry 177
10.4 Commercial Structures and Contracts 179
Table of Contents vu
11. The Petrochemicals Industry 187
11.1 Introduction 187
11.2 Fundamentals of the Petrochemicals Industry 188
11.3 Risks in the Petrochemicals Industry 193
11.4 Commercial Structures and Contracts 196
12. Project Development in the Petroleum Industry 205
12.1 Introduction 205
12.2 Oil and Gas Project Development 206
12.3 The Project Development Process 207
12.4 Contractors and Contract Terms 217
12.5 Economics of Project Development 221
13. Political and Environmental Risks, Tax and Insurance 225
13.1 Introduction 225
13.2 Political and Country Risks 226
13.3 Environmental Risks 232
13.4 Taxation and the Petroleum Industry 235
13.5 Insurance 238
13.6 Unforeseen Events and Force Majeure 246
Part 111
Project Finance Applied to the Petroleum Industry
14. The Role of Project Finance in the Petroleum Industry 251
14.1 Introduction 251
14.2 Investment Requirements of the Petroleum Industry 252
14.3 Conventional Sources of Funding 255
14.4 The Role of Project Finance 259
14.5 Hybrid Finance Structures for the Petroleum Industry 263
15. Risk Analysis and Bankability for Oil and Gas Projects 267
15.1 Introduction 267
15.2 Lender Analysis of Oil and Gas Project Risks 268
15.3 Sponsor Risks in Oil and Gas Project Finance 273
15.4 Lender Approach to Project Risks 276
15.5 Risk Mitigation Techniques and Structures 284
16. Project Economics and Cashflow Forecasting 289
16.1 Introduction 289
16.2 The Role of Cashflow Forecasting and Modelling 290
VIII Table of Contents
16.3 Building the Project Forecasts 296
16.4 Debt Routines and Model Outputs 301
16.5 Debt Optimisation and the Base Case 307
16.6 Sensitivity Analysis and Debt Break-Even 308
17. Finance Structures and Terms 311
17.1 Introduction 311
17.2 Overview of Financial Structuring 312
17.3 Capital Structure and the Composition of Debt 313
17.4 Funding, Repayment and Maturity of Debt 315
17.5 Cost of Funds 323
17.6 Lender Controls 326
17.7 Sponsor Support and Other Forms of Credit Enhancement 331
17.8 Security 335
18. Finance Structures for Upstream, Midstream
and Downstream Projects 337
18.1 Introduction 337
18.2 Upstream Project Finance Structures 338
18.3 Midstream Project Finance Structures 350
18.4 Downstream Project Finance Structures 354
18.5 Risk Management and Derivative Contracts 360
19. Oil and Gas Project Finance Documentation 365
19.1 Introduction 365
19.2 Documenting the Project Finance Transaction 366
19.3 Lender Commitments and Term Sheets 372
19.4 Principal Terms of the Finance Documents 374
19.5 Project Finance Documentation Processes 383
19.6 Concluding Remarks 389
Bibliography 391
Subject Index 393
Introduction
This book is about raising finance for the international petroleum industry, an
industry that represents one of the most important sectors in the modern world’s
economy. The activities of the petroleum industry span the globe and many of
its products have become essential for modern society. At its core, the indus-
try is about providing energy in the form of fuels, especially for transportation
and electrical power generation. This is achieved by extracting and transport-
ing raw materials from underground reservoirs, processing these materials into
fuels and then delivering the final products to end-consumers in all parts of the
world. This industry is, however, about more than just fuels. The hydrocarbon
molecules that the industry extracts from the earth are also used to produce a
wide range of other important materials. The petrochemicals industry produces
the vast majority of synthetic materials including: plastics, polymers, synthetic
rubbers, detergents, solvents and so on. The refining industry produces waxes,
lubricants and bitumens. More specialist petroleum processes produce fertilis-
ers, pharmaceuticals and other essential chemicals.
Although many of the products from this industry are now taken for granted,
enormous investment has been made over many decades to enable the industry
to produce and deliver these products to customers around the world. Continuous
investment is essential to maintain the necessary production capacity and to
expand the range of industry operations. In addition, as the industry has matured,
the demands placed on it to operate in an environmentally and socially respon-
sible manner have increased significantly. The costs of complying with these
demands likewise requires enormous ongoing capital investment.
The goal of this book is to examine how the industry raises capital to grow
on a global scale. More specifically, this book will explore how and why the
industry uses project finance techniques to raise funding for its investment proj-
ects. Project finance is a method of funding whereby investors and lenders rely
on the cashflows of a particular project to provide investment returns and to
service debt. Project finance is used to fund projects in a variety of sectors and a
major aim of this book is to demonstrate the flexibility of this method of raising
capital and to show how this flexibility can be used to fund projects throughout
the petroleum industry value chain.
A defining feature of the petroleum industry is the wide range of activities
involved in the various sectors of this business. A key theme of the book is the
varied nature of project risks and economics that confront lenders and investors
in the industry. The success of project finance is largely the result of its ability to
ix