Financing of Energy-Related Projects

Abstract

Summary The concentrated effort exhibited by governments, energy and natural resource industries, and financial institutions as they attempt to conclude viable feasibility studies regarding energy-related projects focuses increasing attention on the unique problems associated with financing these large and extremely complex projects. Not only has competition for funds intensified throughout the petroleum, chemical, and mining industries, but it has become critically important to develop specialized financial techniques that are soundly based and adaptable to varied national environments and project economics.The major projects being developed today often require unprecedented large capital commitments for successful completion and continued operation, but it is important for project sponsors to direct funding at the widest possible range of attractive sources. This requires more cooperation throughout the financial community, whereby commercial and merchant banks together with governmental banking agencies work closely in developing innovative financing techniques and identifying and tapping a more sophisticated mixture of funding sources. A great amount of effort already has been exerted in this endeavor and progress is, if anything, accelerating. The variety of guarantees, risk-bearing arrangements, bartering, and other undertakings that are being assumed by the banks, sponsoring companies, and governments to establish sufficient credit support before any financing is negotiated has never been greater. This paper discusses types of previously used and recently developed financing techniques in conjunction with the variety of new funding sources available to companies concerned in these energy-related development projects. Introduction Since the mid-1970's one financial technique constantly is being discussed today among project sponsors and financial officers of lending institutions whenever an energy-related project is proposed for development. There are perhaps multiple reasons for the sudden resurgence of this so-called financial concept, but the principal catalyst has been the continual capital intensity growth, immense physical size, and complex nature of energy and natural resource developments throughout the world. Therefore, because corporations and governments have experienced increased difficulty in successfully identifying sources of finance in sufficient quantities, a specific concept has evolved that now is established firmly and generally is recognized and referred to as project financing.During the development of the natural resource and energy-related industries, which started at the beginning of this century, creative financing techniques and tax-efficient financial concepts have been used in the U.S. Therefore, it was a natural transition from traditional financing to specialized lending that led to the adaptation of the sophisticated idea of project finance when the world's natural resources began to decline simultaneously with increased world population, industrial growth, and the quadrupling of oil prices in 1973. With the sudden reality that world crude oil prices had escalated to such magnitudes, it was only a matter of time before alternative sources of energy were considered for development. Subsequently, the prices of alternative fuels began increasing parallel with oil prices. The world encountered sudden inflationary pressures that also contributed to the additional cost of capital investments relating to every natural resource development. JPT P. 1877＾