International government chartered banks are playing an increasingly prominent role in lending for world oil and gas development projects. The main players are the World Bank's International Finance Corp. (IFC), European Bank for Reconstruction & Development (EBRD), U.S. Export-Import Bank, and Overseas Private Investment Corp. (OPIC).
Those institutions and similar ones are the catalysts for a large number of projects in the former Soviet Union (FSU) and in other nations that are seeking to develop oil and gas resources and build processing plants, pipelines, and distribution networks.
Some of those nations have privatized state energy operations and are encouraging private projects, using international funding, to conduct operations governments once funded. And more U.S. oil companies are seeking overseas projects.
Banks also are taking a greater degree of interest in the environmental aspects of projects.
James Crump, chairman of Price Waterhouse's world petroleum industry group, said, "Privatization of state owned petroleum operations, coupled with an increasing tendency for producing nations to enter the downstream market, promise to be principal driving forces in the petroleum industry during the remainder of this decade.
"There will be increasingly fierce competition for scarce private sector capital as reformist governments kick out the sagging props from under state run oil and gas enterprises and phase out unrealistic subsidies for petroleum products.
"In country after country, especially in the developing world, barriers to foreign investment in domestic petroleum sectors are falling. Oil and gas law reforms are under way on each continent."
Peter Adam, a Great Falls, Va., international oil and gas petroleum financial consultant, acknowledges that the role of multilateral financial institutions, development banks, and export credit agencies is growing.
"Generally these institutions provide or guarantee limited or nonrecourse international project finance. This is a type of private financing in which repayment is based on a project's cash flow rather than a sovereign commitment, and the partners or principals involved in the venture are usually--but not always--liable only to the extent of their share of the project's value.
"Demand for such financing in developing countries has soared in recent years, stemming from historic underinvestment in infrastructure, coupled with these countries' need to invest while avoiding an increase in government debt."
Adam said the banks provide project sponsors access to credit on favorable terms and significantly reduce financial risks in international projects.
"As the lending officer at one of these institutions, which is U.S.-based, once told me, 'Our job is to make a project in West Africa as risky for the U.S. investor as a project in West Texas.'"
Adam said the institutions work with small companies, they get involved only in private sector ventures that are economically viable on their own, and they do not lend or invest in pure exploration programs.
"There is ancillary value to their participation in any venture. Loans, equity, and guarantees from these institutions will help attract private equity capital and commercial bank involvement."
Often more than one lender is involved. For example, the 50-50 venture between Conoco Inc. and Russia's Arkhangelskgeolgia to develop Ardalin oil field in Siberia will cost an initial $375 million (OGJ, Sept. 5, p. 38). IFC is providing a $60 million loan, EBRD a $90 million loan, and OPIC a $50 million loan.
MAJOR PLAYERS
OPIC, a self-sustaining U.S. government agency, lends or guarantees loans to projects sponsored by U.S. companies in developing countries that have OPIC programs.
It insures investments by U.S. investors and loans made by U.S. financial institutions and a variety of different kinds of instruments made by U.S. companies in projects in developing countries against the risk of currency inconvertibility, expropriation, and political violence.
OPIC does not take equity interests. But is has started a family of venture capital firms that take equity positions in projects.
Ex-Im bank also guarantees and lends to projects worldwide, with the main goal of increasing exports of U.S. goods and services. Ex-Im bank facilitates U.S. exports only, while OPIC, although favoring U.S. exports, looks for a benefit to the U.S. economy.
World Bank's International Bank for Reconstruction & Development (IBRD) lends to governments. Some of the loans it makes can be lent by the host governments to private sector projects in their countries. The money can be lent to a private project.
IFC, also a member of the World Bank group, takes some small amounts of equity, generally 10-15% in projects in developing countries. It lends some of its own money to projects in developing countries, and it coordinates commercial banks for lending. It also provides project advisory services.
Another World Bank agency, Multilateral Investment Guarantee Corp, (MIGA), insures equity investments against the same political risks OPIC insures against, If MIGA insures equity, it also can insure loans against the same risks.
Equity investments and loans must be made by institutions in countries that are MIGA members. And the project must be in a MIGA member country.
World Bank has a cofinancing scheme called the ECO program in which the bank insures loans by financial institutions against political risk. IFC and MIGA will not accept government guarantees, but the ECO program requires them.
The 3 year old EBRD, London, focuses only on central and eastern Europe and the FSU.
It is a cross between the IFC and World Bank in that it lends to the private sector and takes equity the way IFC does, but it also has a public sector arm. At least 60% of its dealings are with the private sector. It has no political risk insurance program.
The European Community's European Investment Bank (EIB) makes public and private sector loans and does not take equity positions.
One of EIB's latest programs calls for a 200 million ($300 million) loan to help Hamilton Oil Co. Ltd. develop four oil and gas fields in the Liverpool Bay area of the Irish Sea off England (OGJ, Jan. 17, p. 28).
The Inter-American Development Bank, established in 1939, accelerates economic and social development in Latin America and the Caribbean region.
The United Nation's department of technical cooperation and development helps developing countries design petroleum laws, attract exploration, and negotiate concessions with oil companies (OGJ, Dec. 31, 1990, p. 17).
Also notable are the U.S. Commerce Department's Trade & Development Agency (TDA) and the European Commission's Phare/Tacis programs. All three finance feasibility studies.
TDA finances such studies that promote U.S. exports. The Phare program for Central Europe and Tacis for the FSU fund feasibility studies and technical assistance programs for those countries.
WORLD BANK GROUP
World Bank's 1994 annual report said its IBRD, IFC, and MIGA generated about $25 billion of private investment in developing countries, or about 10% of all private investment in the developing world.
IBRD, the bank's main lending arm, had total commitments of $20.8 billion. China was its biggest borrower at $2.14 billion, followed by Mexico with $1.53 billion and Russia $1.52 billion.
IFC, which finances private sector projects and advises businesses and governments on investment issues, increased its investments 15% in fiscal 1994 to a record $2.5 billion, The number of projects increased 25% to 231 in 63 countries.
Equity and quasiequity investments made up $719 million or 29% of the total, while loan syndication approvals totaled $1.7 billion. On average, for every $1 that ICF invested, $5.43 came from other sources.
MIGA expanded its membership to 121 countries from 107 and issued a record 38 contracts for a combined maximum coverage of $373 million. The fiscal 1994 contracts cover investments in 13 host countries, facilitating total investments of $1.3 billion. Last fiscal year it issued five commitment letters involving prospective coverage of $167 million.
MIGA, formed in 1988, promotes foreign direct investment through political risk insurance. It offers guarantees, policy advice, and promotional services.
Adam said IFC, which finances private joint venture projects, is more private enterprise oriented than it was several years ago.
"There's been this tremendous push the last 6-7 years," he said. "The World Bank and International Monetary Fund have pushed privatization in some of these developing places, and as part of this they want to help finance joint ventures in oil and gas."
ROMANIAN EXAMPLE
Romania is a good example of a World Bank loan at work.
The bank is lending $175.6 million during 20 years to revitalize the Romanian oil and gas industry and encourage foreign investment. EIB has pledged $52 million in cofinancing.
Most of the funds will be used to strengthen the government's ability to develop a fuels policy and rehabilitate more than 300 km of pipeline and replace pumps.
Romania's new oil and gas program calls for establishment of an independent regulatory agency, the National Agency for Mineral Resources, to foster development of an efficient, commercially viable oil industry and implementation of environmental protection.
The nation plans to set a fuel policy, including a pricing policy for oil and gas transmission and distribution. There also will be restructuring to increase refinery output and upgrading of delivery services.
The program will restructure and streamline management of Romania's main petroleum organizations--the exploration and production firm Petrom, the gas company Romgaz, and the pipeline firm Conpet--as well as upgrade and modernize facilities and pipelines, including installation of a telecommunications network.
Goals of the program are to increase production and reduce the level of oil and gas imports by $395 million between 1995 and 2060, bring producer and consumer prices in line with international levels, and prepare the Romanian petroleum industry for privatization.
In neighboring Ukraine, World Bank plans to provide multimillion credits to support modernization of its energy sector. Credits will include $200 million to modernize the fuel distribution system, $150 million, to be contributed in association with EBRD, to upgrade compressor stations, and about $70 million to install gas meters and replace gas pipelines.
World Bank also is helping Ukraine fashion oil and gas legislation and devise a program of technical assistance for the coal industry.
SHIFT SEEN
World Bank's current 5 year plan proposes to lend about $9 billion to 60 energy projects by mid-1998. It lists about 160 such projects worldwide, about 20% of which involve oil and gas.
Hossein Razavi, chief of the bank's oil and gas division, said the bank wants to expand in two areas: helping nations privatize their national oil and gas industries and facilitating large, multinational gas projects (OGJ, July 25, p. 44).
Razavi said, "The bank will be shifting away from its role as strictly a lender in the next 2 years. We want to be more than just a lending agent. We want to be like an agent of assistance. "
The bank wants to play a key role in multinational gas trade projects, mostly long line export pipelines but possibly some LNG projects.
These projects are typically very large, very expensive, span several countries, and involve more than the normal number of industry partners. Formerly the borrower, usually a multinational oil company, put those projects together. Now, with segmented operations and an eye on near term profits, major oil companies are not investing in as many long term projects. Razavi said World Bank plans to investigate proposals, distinguish the good ones, and then help bring partners together. But he said, "The major players will still be the same private companies."
EX-IM BANK
Ex-Im bank has supported exports of U.S. goods and services so persistently it has been jokingly referred to "Boeing's Bank."
Rita Rodriguez, a bank director, told a Petroleum Equipment Suppliers Association meeting in Houston the bank is supporting more than $1 billion of business overseas for the oil industry this year "and we expect this rate to continue or increase because of growth in developing countries."
The bank has restructured its approach to international lending, splitting its loan specialists into a group for marketing and business development consulting and a group of financial officers who package deals.
Ex-Im bank also is placing more emphasis on small business exports. It is increasing incentives for financial institutions that work with small business.
As part of that program, Ex-Im bank and the Small Business Program have just completed a series of seminars in 13 U.S. cities to explain their harmonized loan guarantee program designed to finance exports by small businesses.
The aim of the enhanced programs is to encourage commercial lenders to provide financing that small and medium size exporters need to take advantage of export opportunities.
Rodriguez said the bank is taking more risks, accepting more long term projects and more projects in countries the bank had written off.
Ex-Im bank has approved about $1.2 billion in loan guarantees under an oil and gas framework agreement with Russia. The loans, mostly for well workovers, involve a promise by the Russian government that incremental oil field revenues will be used to repay the principal.
OPIC
Since 1971, OPIC has been helping U.S. companies invest abroad by providing loans, loan guarantees, and risk insurance.
OPIC data show it has supported investments totaling $60 billion, generated about $27 billion in U.S. exports, and created nearly 100,000 American jobs. OPIC, which operates at no net cost to U.S. taxpayers, has reserves of more than $2 billion.
OPIC's capacity has increased sharply in the past few years. Project ceilings were $100 million of insurance and $50 million in loan guarantees a few years ago. Now they are $200 million and $200 million.
John Harper, an OPIC finance official, said big companies historically have not used external financing. So OPIC works mostly with smaller companies that are willing to take on debt.
Harper said, "We, like the IFC, do not finance exploration but instead finance development of existing reserves, with payoff from reserves."
IFC can take an equity investment, but OPIC does not. However, OPIC's insurance department insures U.S. entities against political risks.
Harper said for upstream projects, OPIC, IFC, EBRD, and most development banks will finance development of proved reserves, but 11 no one would finance exploration expenditures."
EMPHASIS ON FSU
Harper said large companies normally finance major overseas projects from general bonds or internal funds and go to international banks for operations only in nations where the risk is high--such as the FSU.
Thomas Mansbach, a counsel at the Dewey Balentine investment law firm in Washington, D.C., said, "International financial institutions are absolutely critical to private investment that is going into projects in countries with economies in transition like the FSU.
"In addition, organizations like OPIC are not only lending or guaranteeing money going into these projects, they also are making their political risk insurance available. Without the insurance, the loans simply would not have been made.
"For well conceived projects in developing countries, there are sources of funding to assure that projects get under way.
"These programs have been around for years. What is new is the extension of the programs to Central Europe and the FSU where the programs were not operative until just a few years ago.
"Now they are virtually the only sources of financing for oil and gas projects in those countries. I don't know of any private financing that's going on."
Mansbach said there has been a tremendous expansion in lending due to FSU projects.
Among the latest programs, Russia's Tatneft joint stock company is to receive a $280 million credit from Ex-Im bank for well workovers in Tatarstan. The program calls for 2,567 idle oil wells to be returned to production in 1995 and first half 1996. The credit is to be used in part to import U.S. oil field equipment.
Mansbach also said there will be more lending for projects in South Africa, Southeast Asia, and India.
"India is opening up tremendously. Part of it is due to tremendous expansion of the independent power industry and part due to privatization."
ENVIRONMENTAL ISSUES
To obtain international bank funding, companies have had to structure projects to meet environmental standards.
Mansbach said, "Development banks are being increasingly pushed that as a condition for using their funds, borrowers have to adhere to strict environmental standards because more and more countries are taking a tough line on environmental criteria.
"Each of the lending institutions has environmental criteria. Most tend to look at World Bank standards or standards of the country, whichever are higher. OPIC is required by legislation to consider environmental issues. IFC and MIGA do so as a matter of policy."
IFC reports it has strengthened its internal review procedure to improve the environmental performance of its projects. The revised procedure "ensures greater transparency an increases the level of public consultation and participation in IFC projects."
Environmental clearance requirements vary depending on the type of project, nature of its effects, and regulatory provisions of the country concerned. ,
An IFC report said, "In some countries, the experience of dealing with World Bank group environmental requirements has provided a model for upgrading local standards and developing institutional capabilities.
"At the same time, governments are recognizing that companies (and their financiers) need an indication of the liabilities that might be imposed via changing environmental standards before they will make large investments."
Ex-Im bank has an environmental exports program that gives extra support to exporters of environmentally beneficial goods and services and conducts environmental impact evaluations for major industrial projects.
It has proposed a process under which it will list projects under consideration, inviting objections on environmental grounds.
One observer said environmental issues are a lingering concern for oil companies involved in FSU projects. "A lot of those people are afraid that as soon as the projects show a profit, governments are going to make them use some of the money to clean up preexisting environmental damage."
NEW SOURCES
OPIC's Harper said money markets in developing countries will be sources of capital that will be tapped to a greater degree.
For example, he said, a U.S. exploration company doing business in a Latin American nation plans to make a private offering in that country as a means of raising funds to increase production.
"That never could have happened 5 years ago, but local markets are becoming more sophisticated," Harper said.
"This idea of raising domestic capital is most developed in Latin America. You're going to see it used increasingly in other countries, where it will be available to astute companies."
