Financing the U.K. North Sea

Abstract

The amount of financing required for developing the U.K. North Sea must be found from internal and external sources. This paper examines (1) major sources and reasons why some methods are preferable to others and (2) alternatives that are available depending on the size and financial strength of the developer and the relative risks of the projects. Introduction Although estimates vary, it is forecast reliably that spending on North Sea exploration and production will continue at a rate of $5 billion a year through 1985, and from that date at a rate more or less depending on U.K. government policy and exploration results. To quantify the costs in a different way, this is the equivalent of $10,000/bbl of peak daily production. When we balance this cost against the 5 to 10 years taken to develop North Sea fields, it is evident that there is a long lead time before any cash flow and, hopefully, profit pass back to the project owners. project owners. These vast sums of money have been and will continue to be raised from a number of sources. I will examine in this paper the types of financing available and cite various alternatives that companies already have used to raise funds for development. In view of the differing regulatory and tax regimes in each of the Norwegian, Danish, Dutch, French, and U.K. sectors of the North Sea, I will limit my paper to the biggest in terms of current expenditure--the U.K. sector. Financing Sources The major sources of financing for the North Sea to date have been the internal cash flow of the license holders, export credits and "interest relief grant" financing, and bank financing. Undoubtedly, for some of the large companies, internal financing will continue to be a major source of funding, and the long-term capital markets will provide another source, probably for those same companies. In many cases, however, the bank market will be a major source of funds, and given the quantitative ability of the market and its flexibility, bank financing is likely to continue providing a substantial portion of the funds required. In fact, one may even argue that, given the increasing investment needs of the oil industry and its increasing reliance on external financing, the banking community will be called upon to provide a larger proportion of the expenditures than it has to date. Types of Bank Financing Bank financing can be divided into two categories, the major distinction between them being the degree to which the lender looks directly to the general credit of a company as the source of repayment. The methods can be applied equally for the development of an oil or gas field and are basically the same for a single company as for a consortium.The first category can be called "balance sheet financing" and consists of borrowings based solely on the financial strength of the borrower. JPT P. 306