When the International Finance Corp. financed its first coalbed methane project in China in late August, the venture involved much more than simply producing CBM instead of coal. The $15 million equity investment in Houston-based Far East Energy Corp.’s project in Shanxi and Yunnan provinces reflected IFC’s broader mission of minimizing adverse social and economic impacts while encouraging local development and investments.
“We exist to assist the private sector in emerging markets, but with a broader view of making sure countries and communities fully benefit. We always look for added value beyond a project-and each project is different,” explained Somit Varma, who recently became director and global head of IFC’s oil, gas, mining and chemicals department.
Consequently, the World Bank affiliate also uses environmental, community development, health, political, and other specialists in addition to finance experts as it considers possible projects, he told me. “We always ask what impacts we’ll have beyond supplying dollars,” he said.
While it still invests in oil development projects where they can help countries develop economically and alleviate poverty, the IFC department has focused increasingly on gas, which grew from 10% of its portfolio in fiscal 2004 to 60% in fiscal 2007. Oil projects had a 30% share in 2007, while the remaining 10% was for pipelines, gathering systems, and other infrastructure.
In all phases
IFC is one of the few financial institutions that invest in all phases of oil and gas from exploration and production through transmission to refining and retailing. It uses long-term debt and mezzanine financing as well as equity investment. It has an approximately $2 billion upstream portfolio, with Latin American projects representing 30%, the single largest share.
“We are long-term players. Our clients look at 25-year commitments. Emerging markets come with risks, but this is our only business. We have offices all over the world which provide intelligence on the ground,” Varma said.
National oil and gas companies may be partners in projects which IFC helps finance, but the agency normally works with smaller private firms, including privately held independent producers. It also works hard to head off corruption.
Due diligence
“For us, the issue of corruption is first and foremost. We always ask, as we invest, if we know our customer. That’s a critical issue of due diligence. There’s an anticorruption clause in our legal documents,” Varma said.
Other lenders have adopted aspects of IFC’s operating agreements. “Fifty banks follow environmental and social policies which we developed to mitigate their own risk-to a point that 85% of all new projects worldwide are covered by them,” said Varma.
But the object still is to produce profits as well as oil and gas. “Profits are important. The private sector has to provide good returns to its shareholders. Developers are ready to look at broader issues when projects are profitable,” Varma said.
