Kerr-McGee outlines leveraged leasing plan for Gulf of Mexico spars

Operators financing long-term deepwater projects must build trust relationships with bankers just as they build relationships with contractors, R. Don Vardeman, Kerr-Gee Oil & Gas Co.'s director of marine facilities engineering, told an Offshore Technology Conference breakfast. He outlined the logistics of a leveraged leasing plan for two projects.


Paula Dittrick
OGJ Online

HOUSTON, May 1 -- Operators financing long-term deepwater projects must build trust relationships with bankers just as they build relationships with contractors, a Kerr-Gee Oil & Gas Co. official told an Offshore Technology Conference breakfast Tuesday.

R. Don Vardeman, Kerr-McGee director of marine facilities engineering, and Banc One Capital executives outlined the logistics of a leveraged leasing for two projects in the Gulf of Mexico.

Spars are planned for the Boomvang prospect in East Breaks Block 642 and the Nansen prospect in the East Breaks Block 602. The two prospects are 12 miles apart, and Kerr-McGee is operator of both.

Development of each project will cost $350 million, excluding the lease expenses and some of the exploration costs, Vardeman said. Each project was financed up to $275 million.

Vardeman said the project financing involved a meeting of the minds of bankers, accountants, lawyers, and engineers.

Kerr-McGee examined its long-term financing options and found that a leveraged lease was the least expensive alternative.

Ronald L. Dierker, first vice-president of energy finance for Banc One Capital Markets Inc., said terms of the leverage lease basically are that Banc One owns the assets for tax purposes while Kerr-McGee is paying rent.

"It's a corporate credit that has a lot of project finance elements," Dierker said, adding the equipment will last for more than 20 years.

The advantage to Kerr-McGee is that the leveraged lease makes capital available for other exploration opportunities.

"A lot of the benefit of this is where you want to spend your money based on your company's strategy," Vardeman said.

Federal accounting standards need to be considered in arranging such financing, Dierker said, adding different rules apply depending upon whether the spar is deemed real estate or equipment. Different accountants view it different ways, he said.

The financing arrangement took about 18 months, Vardeman said, adding that the joint operating agreement between project partners had to be amended to accommodate the financing arrangement.

Banc One requires certain reports and also required due diligence to determine the projects' fair market value, the reserve profile, and other elements. Vardeman said the bank's reporting requirements were similar to Kerr-McGee's own internal reviews and evaluations.

"We found it to be very manageable," Vardeman said. "It took mutual trust and mutual respect from both sides."

Contact Paula Dittrick at paulad@ogjonline.com

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