Financing petroleum projects and the impact of uncertainty

Abstract

Financial institutions provide funding to the upstream oil and gas industry for a variety of projects including assisting with asset purchases, field appraisals and developments. Various uncertainties including reservoir, macro-economic and political variables are major considerations for financial institutions and have a considerable impact upon the type of finance offered for a project.

The primary considerations for exploration and production (E&P) companies requiring capital are the quality and stage of development of their resources. The level of resource uncertainty may be considered on a spectrum from proved developed producing reserves to contingent or prospective resources. Financial structures are designed to balance resource uncertainty with a commensurate level of return to the investor. This paper presents a brief overview of the forms of finance available, highlights how uncertainties and risks affect the type of finance provided and explores the assessment of reservoir risk through petroleum engineering and geology and geophysics.

In addition to resource uncertainty, this paper also discusses other risks including project execution, commodity prices, project costs, security coverage, the political environment and country risk, and the impact of these factors on project financing.

The paper will also touch upon various risk mitigation factors, including product hedging and political risk insurance.