ENGINEERS AND BANKS: THEIR ROLES IN ENERGY FINANCING

Abstract

Since 1928, banks in North America have been providing funds for oil, gas and other energy projects, secured by income from future production. Over the years, the types of lending and the limits set have changed as legislation has changed and technical knowledge has expanded.

Banks can only lend money if there is a high degree of certainty that both the principles and interest can be repaid over the loan period. Engineers are required to prepare objective opinions of future cash flows, which are then used by the banks' engineers to establish loan limits. As technical capability has expanded, the banks have increased the risks they would accept when lending against future energy production. No longer must proven reserves be producing—but they must still be proven.

With the emergence of major capital-intensive projects requiring massive front-end investments before developing any cash flows, innovative new financing methods were required to provide debt capital. These methods evolved in financing projects in Alaska and the North Sea and are now available for energy financing around the world.

As lenders have accepted higher levels of risk for these major projects, they have come to depend more and more on the engineering assessment of the project, as opposed to the balance sheet strength of the borrower.