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Good news for energy
markets as the price of oil and gas continue to
rise.
Anyone with half an eye on
the energy markets cannot fail to have noticed the red line
tracking oil prices climb and climb over recent years.
Other than a dramatic dip at
the end of 2008, the price of crude oil on the Brent Index has
climbed steadily from $18.60 (€13.43) per barrel at the end of 2001
to around $110 as 2011 draws to a close, reaching $133.90 in July
2008.
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By GlobalDataThe rise in prices has driven
further investment from the extraction companies in an
equipment-heavy industry and while the commodity companies are keen
to keep the oil flowing, banks, in straitened times, are keen to be
funding assets secured on rising commodity prices.
Alan Cunningham, partner and
asset finance specialist with global law firm DLA Piper, says that
in the midst of economic turmoil, financing assets for the oil and
gas industry is good business.
“With tighter credit terms,
banks are increasingly looking at a strong receivable behind an
asset deal,” he says.
Cunningham says banks will
look at a deal on an industry asset, such as a bitumen vessel or
engineering platform, and, although the asset will be leased to a
charter company independent of the oil or gas firm, behind that
deal is the profitability of the commodity business.
“You
are looking at companies like BP, Shell, Exxon – all these
companies, they are doing really well; they’ve got a lot of money
and great credit because what they produce is really valuable, has
stayed really valuable and production has actually increased,” says
Cunningham.
“The bank’s customer is in
the oil and gas industry, is selling oil and gas and making a
fortune out of it and that commodity price makes up the receivable
which backs the asset which pays the debt.
“The banks can see how they
are going to get paid for it.”
As well as a clear line of
credit, there are additional benefits to an asset funder linked to
the same high prices such as strong demand and long charter
contracts.
With oil prices having grown
six-fold in a decade, extraction firms are keen to get more black
gold out the ground in locations across the globe – which means
more vessels are needed over longer periods of time.
Vessel charters in the
Kazakhstani Caspian Sea, to give one example of a resource-rich
area where, according to Cunningham, more banks are looking to fund
into, are around three years and the lease to the charter company
between five and eight years which means the majority of the deal’s
term is taken care of.
Barclays Corporate is one
asset funder involved in the energy sector across the globe, and
the bank’s head of strategic asset finance Alastair Tyler told
Leasing Life that, along with other areas of asset finance
and the wider bank market, there has actually been a shortening of
tenor on lending although most deals that are being written by
Barclays are for five, sometimes up to seven, years.
“There is no
one-size-fits-all in terms of deal amount. We have been involved in
a mix of bilateral, syndicated and club deals,” he said.
The tussle for extraction
rights in oil and gas-rich areas like the Caspian Sea, the Middle
East, the North Sea, Venezuela and the Arctic, says Cunningham, is
also good for the asset-funding banks.
“More oil companies need more
kit so the value of these assets increases because it is not
certain the production of new equipment will keep pace with the
discovery of further sources of oil.
“When you have kit where
there is limited capacity it is a great sign for an asset funder
because it is in demand.”
Barclays Corporate has oil
and gas teams in Aberdeen, London and New York but, said Tyler,
given the global nature of this industry, the bank will lend into
any geographical region where the commercial and risk terms make
sense to clients and shareholders.
The bank funds a broad range
of assets, both to the major energy corporations and to the supply
companies, from floating production vessels to the commercial
helicopters used to fly crew to and from the offshore
rigs.
Tyler said the
bank is also actively engaged in structured deals such as borrowing
base loans against proved and probable oil reserves.
Tyler said Barclays’ oil and
gas team has provided commitments, including asset finance, for
global energy deals amounting to $1.26bn so far this year and said
the business is showing year-on-year growth of more than
20%.
“There are significant
opportunities in oil and gas – demand for energy remains high and
the sheer size and economic significance of the sector means that
it is an important area for us to support,” he says.
“In spite of the current weak
economic outlook there continues to be insatiable appetite for
energy on a global scale.
“The good news is that this
is being matched by expanding supply; a good example of this was a
major announcement last week by BP that it has been given the go
ahead to proceed with a new £4.5bn (€5.2bn) oil project west of the
Shetland Islands.”
Tyler said it is anticipated
that existing North Sea production levels will be maintained for
the next 20 years and there has been a significant expansion in
production in a number of key geographies including Brazil and West
Africa.
Asset finance in this
specialist sector may benefit from the high commodity prices but it
is also tied to them, especially the oil price, says
Cunningham.
“The future [of the industry]
depends on the future of oil. It is that straight forward,” says
Cunningham.
However, Cunningham does not
think banks will be worried because the price of oil would have to
fall so far for extraction companies to stop being profitable and
therefore be unable to pay their debts.
“We are so far away from that
point it is not really high on the agenda of the banks,” says
Cunningham, although he admits the credit view of the sector will
be constantly under review nonetheless.
Tyler added that while the
price of oil and gas does provide significant opportunities and
advantages, asset security it is not the primary driver which
determines whether or not Barclays will provide funding.
“There are other variables
which need to be considered to ensure the commercial and risk terms
make sense for everyone involved,” he says.
“Short-term price volatility
can be managed by clients by implementing a robust hedging
strategy.”
Cunningham also pointed to
OPEC (the Organisation of Petroleum Exporting Countries) as having
the power to mitigate a reduction in the global oil prices by
controlling the supply.
The high price of fuel and
high profits of the energy companies, especially during tough
economic times, as well as the fallout from the Deepwater Horizon
disaster and the political and environmental clash for exploration
rights under the Artic ice cap has ensured significant public
attention to the oil and gas industry of late.
Whatever the long-term future
may hold for the energy industry, Tyler is confident asset finance
will be playing its part.
“Oil and gas remains an
important sector for Barclays Corporate and provides significant
opportunities for asset finance,” he says.
“With a number of recent major announcements of new oil
and gas field discoveries, we see lot of significant opportunities
both in the near term and beyond.”
