The Exploration&Production Financing Techniques for Oil&Gas
The objective of oil and gas operations is to find, extract, refine and sell oil and gas, refined products and related products. It requires substantial capital investment and long lead times to find and extract the hydrocarbons in challenging environmental conditions with uncertain outcomes. Exploration, development and production often takes place in joint ventures or joint activities to share the substantial capital costs. The outputs often need to be transported significant distances through pipelines and tankers; gas volumes are increasingly liquefed, transported by special carriers and then regasified on arrival at its destination.
Gas remains challenging to transport; thus many producers and utilities look for long-term contracts to support the infrastructure required to develop a major field, particularly off-shore. The industry is exposed significantly to macroeconomic factors such as commodity prices, currency fluctuations, interest rate risk and political developments.The assessment of commercial viability and technical feasibility to extract hydrocarbons is complex, and includes a number of significant variables. The industry can have a significant impact on the environment consequential to its operations and is often obligated to remediate any resulting damage.
Despite all of these challenges, taxation of oil and gas extractive activity and the resultant projects is a major source of revenue for many governments. Governments are also increasingly sophisticated and looking to secure a significant share of any oil and gas produced on their sovereign territory.
“Exploration and Evaluation of Mineral Resources”, starts when the legal rights to explore have been obtained. Expenditure incurred before obtaining the legal right to explore is generally expensed; an exception to this would be separately acquired intangible assets such as payment for an option to obtain legal rights.
The accounting treatment of exploration and evaluation (“E&E”) expenditures (capitalising or expensing) can have a significant impact on the financial statements and reported financial results, particularly for entities at the exploration stage with no production activities
The Upstream Oil & Gas Industry
- Exploration, development and exploitation/production
- Cost and value drivers; shareholder expectations
- The value chain: from wellhead to burner tip
- Players: Governments, NOCs, IOCs, banks and insurers,…
Why Commercial Aspects are so Important
-Overview of upstream commercial arrangements
-Project development: upstream to midstream to market
-Commercial structure in exploration, development and production
-Exploration & production licenses (farm out and unit agreement etc.)
-Who has an interest
Licences for exploration (and development) usually cover a specified period of time. They may also contain conditions relating to achieving certain milestones on agreed deadlines. Often, the terms of the license specify that if the entity does not meet these deadlines, the licence can be withdrawn. Sometimes, entities fail to achieve these deadlines, resulting in relinquishment of the licence. A relinquishment that occurs subsequent to the balance sheet date but before the issuance of the financial statements, must be assessed as an adjusting or non-adjusting event.
If the entity was continuing to evaluate the results of their exploration activity at the end of the reporting period and had not yet decided if they would meet the terms of the licence, the relinquishment is a nonadjusting event. The event did not confirm a condition that existed at the balance sheet date. The decision after the period end created the relinquishment event.
If the entity had made the decision before the end of the period that they would not meet the terms of the licence or the remaining term of the licence would not allow sufficient time to meet the requirements then the subsequent relinquishment is an adjusting event and the assets are impaired at the period end. Appropriate disclosures should be made in the financial statements under either scenario
Key Upstream Joint Venture & Licence Agreements
Upstream Fiscal & Licence Agreements
- Fiscal & legal regimes worldwide
- Production sharing arrangements
- The license agreement.
Upstream Joint Venture Agreements
- The joint venture agreement
- Shareholder agreements
- Confidentiality agreements.
Key Upstream Product Sales & Transportation Agreements
Product Sales – Oil, Gas Liquids, Gas / LNG
- The market for crude oil
- The market for gas; pipeline supplies; regional characteristics; regulatory considerations
- Heads of Agreements; MoUs; LoIs.
- The pipeline gas sales agreement
- LNG sales; the market for spot LNG
- Gas processing.
- Sale of LPG and condensates.
Oil, Gas and LNG Transportation
- Oil and gas transportation agreements
- Pipeline use agreements
- LNG import terminals
The Financial Aspects of Upstream Commercial
Key Project Value Identification
- Understanding the fundamental commercial drivers for project and company success
- Reserves definitions
- Reserves certification
Project Economic Evaluation
- Economic evaluation – conceptual, pre-feasibility and feasibility
- The economic model
- Financial structures in the upstream
- The key value drivers in upstream financing
- An overview of financing options: from the balance sheet to project financing
Mergers & Acquisitions
- Stock purchase and asset sales
- The data room
- The sale and purchase agreement
The Upstream Core Commercial Skills & Competencies
- Where and who is the market for oil, gas (incl. LNG) and condensates/NGLs
- Market opportunity: identification and evaluation
- Development, capture and management
- Growth and changes in markets
- The project life cycle, value optimisation, commercial operations, technical issues outside of the contract terms
- Contract management
- Operational crises and the contractual implications
Upstream Risk Management and Disputes
Risk Management in Upstream Developments
- Identification of key project risks and mitigation strategies
- The Risk Matrix
- Risk factors in upstream and midstream
- Spreading the risk through partners
- Analysing and managing risk in upstream developments
Price Risk Management
- Short and long term price risks in crude oil and gas
- Netback – retaining the value in the upstream
- Price re-openers
- Expert determination
- Reserves redeterminations