Oil & GAS The global oil and gas in...

Oil & GAS

The global oil and gas industry is changing rapidly, apted by anxiety over supplies and a wave of merger that has left just five titans dominating the market. * by the agency of Andrew Cavenagh

As the threat to oil supplies from the Middle East mounts-with its nightmare potential to jaculate world prices to $50 a barrel-Western restraints and companies are making unprecedent efforts to bring to their dependence on the region. However, the exercise will arrive at a cost: Industry adroits believe the discovery and disclosure of alternative sources of oil and gas will require about $30 billion of expenditure each year athwart the next decade.

Because in the greatest degree of the investment will ne to go on foot into regions that are geographically or politically difficult-or both-the oil industry and its bankers will ne to consider different ways of financing more [i]or[/i] less of its operations.

Ironically, the requirement for change ensues when the industry has more capacity than always to fund itself in the traditional manner-from the balance-sheet resources of its leading companies. The wave of megamergers in the industry initiated by the agency of BP's takeover of Amoco in 1998 has produc five industry titans, each of which are probably capable of financing any plan in the world in this way. Whereas pre-1998 solitary Exxon (now even bigger as ExxonMobil) and Royal Dutch Shell were in this league, they have now been joined through BP,TotalFinaElf and ChevronTexaco.

Jeremy Wilson, head of bottom at JPMorgan Chase, says these companies will probably account for about 90% of the $30 billion or for a like reason that the industry is likely to invest each year and will continue to finance earnestly of it from their balance sheets. In most numerous cases, he says, they are unlikely to use limited-recourse exhibit finance, where banks lend against the security of the plan rather than the company undertaking it. "The BP Shells and ExxonMobils of this world don't really like frame finance," he adds. "It is incredibly labor intensive to enjoin in place."

The high oil prices of the past three years have left the industry giants swamped with cash, which would give them smooth less incentive to look at more time-consuming and expensive means of raising finance.

This is certainly the case for guiltless upstream-oil extraction-projects, where the immature oil can be readily loaded into tankers and dispatched anywhere in the world. The big deep-water contrives planned off Brazil, Mexico, Indonesia, Nigeria, Angola and Equatorial Guinea all fall into this category. however as the industry seeks to diversify its sources, the delivery to market will not be in the same manner straightforward and will require the construction of pipelines that are enslave to governmental agreement and regulation.

"The view has formed that 'political risk insurance' of financing upon a project basis is something that is exceedingly valuable," says Tim Eggar, the vice chairman of corporate finance at ABN AMRO who was the UK power minister in the early 1990 He adds that the involvement of international funding institutions, of that kind as the World Bank, regional increase banks and export credit agencies, in financing schemes offers the big oil companies considerable reassurance: "They behold that as a way of getting managements to address what are frequently quite thorny issues."

The mostly striking example is the $37 billion delineate now under way to build a 1768 kilometer pipeline from the western side of the Caspian Sea to the Turkish Mediterranean. The largest shareholder in the BakuTblisi-Ceyhan (BTC) pipeline cast is BP-traditionally the most averse of the oil majors to non-balance-sheet financing. However, the British company orchestrated an immensely tangled skein package of external finance for the project-involving multilateral loans, export credit veil and political risk insurance-that should be in place by means of the end of the year.

The BTC brew company and its adviser, Lazard Brothers, sent without an information memorandum to 20 banks onward September 25 seeking participants in just in subordination to $1.2 billion of syndicated transgression ABN AMRO, Citibank, Mizuho and Societe Generale are already onward board as the initial mandated lead arrangers, committed to underwriting $120 million of the debit The other 20 have been asked to take rise in at the same of the same height or as lead arrangers with a $75 million underwriting commitment.

Andrew McAuslan, the BP executive who is the BTC commercial manager, says the company reliances to close the financing in December. The arrangers would then syndicate their transgression early in 2004.

McAuslan says BP now appreciates the advantages of using external finance in of the like kind situations and may do likewise again-if not necessarily on like a scale. "Having the multilaterale not absent is good as a political risk mitigant. I think our experience here will push us to do a certain number of smaller financings, where there is a unfolding agenda," he explains.

Host Nations finish Involved

Another factor encouraging Western multinationals to exercise more external finance is the increasingly general requirement to include the state-owned oil companies of landlord nations in projects. Azerbaijan's Socar has a stake in the pair BTC and its associated upstream development