The oil and gas industry is expected to need financing of $1 trillion per year over the next 20 years, a steep requirement made more challenging by the complex exploration and production projects of today’s market, panellists said on Monday in Moscow.
An ever more diverse mix of financing models will be required from private equity to local banks, but demand is expected to be met as the industry rebounds from the worst financial crisis since the Great Depression, Peter Gaw of Standard Chartered Bank told panelists at the 21st World Petroleum Congress.
“The real question is, can the market provide $20 trillion in capital for the next 20 years?” said Gaw, who heads up the bank’s global oil, gas and chemicals business. “The answer is yes.”
Today’s risk profile is different than in the past, with financial institutions forced to evaluate political and fiscal regime risk as national oil companies take up nearly 90% of resource control.
Other challenges are presented by frontier projects and unconventional oil and gas development where project management can be the “major Achilles’ heel”, Gaw said.
Hybrid financing deals will become more common, Gaw predicted, as well as project-specific bonds that are attracting interest from hedge funds and pension funds.
Private equity players, which surged to help finance the US shale boom, are also seen as on the rise, the panelists agreed.
That market is showing an appetite for different scopes of projects such as offshore deep water, as well as regions outside North America, in particular Latin America and Asia Pacific, said Andy Brogan, EY’s global leader of oil and gas transactions.
The trend comes as energy majors have yielded “lacklustre” returns over time on public markets, Brogan added.
Despite the challenges, even complex and expensive projects can be successful, with Russia’s $6.7 billion, 10 million tonnes-per-annum multi-phase Sakhalin liquefied natural gas project held up as an example.
A range of players including Japan's JBIC and a consortium of other banks signed a 2009 deal to support the project, which also relied upon detailed production-sharing agreements and LNG purchase agreements, said Rob van Velden, finance director of the Sakhalin Energy Investment company.
Today the company brings in about $10 billion per year from LNG sales and reported full-cost recovery in 2012.
Today's financial institutions also look at factors such as environmental terms to protect grey whales in the region as well as close collaboration with the local government of Sakhalin island, where it is the largest taxpayer. Gas from the project also provided feedstock to convert a coal plant to cleaner natural gas.