Nicholas Ross-McCall, Huw Thomas

pass. Under an agreed cash waterfall, withdrawals may only be permitted to meet
expenditures set out in the latest cash-flow projection (or to a set percentage over
and above such figures, say 10%) and, subject to additional restrictions, surpluses
after payment of finance costs and funding of any other relevant project accounts
can be paid out as dividends and used for general corporate purposes.
Additional accounts might include cash lock-up accounts, to which all free cash
must be transferred in the event of certain cover ratios being breached, and a debt
service reserve account to which funds representing a certain period of debt service
(typically two to six months) must be kept at all times.
4.

Types of facility

4.1

Sources of funds
International commercial banks are by far the largest providers of project and
reserve-based finance. Other sources include the bond market, specialist investment
institutions providing high-yield subordinated finance, and multilateral institutions
such as the International Finance Corporation or the European Investment Bank.

4.2

Single-asset financing
As we have seen, originally independent oil and gas companies commonly used a
single-asset project financing structure to fund their share of capital expenditure in
respect of a field. The approach of lenders was conservative in that:
when calculating the net present value of the borrowers share of production
for the purposes of determining the loan amount and the cover ratios, they
would look only at P90 reserves, even for producing assets;
in addition to a project life cover ratio, the loan agreement would include a
loan life cover ratio and a reserve tail date; and
they required a full security package, including specific fixed security over the
borrowers interest in the relevant licence, the joint operating agreement
(JOA), EPC contracts, marketing agreements, transportation agreements and
other project documents, possibly also with lender direct agreements.
This approach is still appropriate for financing large, single assets outside the UK
continental shelf. A number of factors drove a move in the United Kingdom from
these single-asset project financings to a portfolio or borrowing base structure,
including:
the assets under development in the UK continental shelf are smaller now
(originally perhaps 100 million barrels or greater but now more like 10 to 30
million barrels);
technology risk has increased, with a greater reliance on enhanced recovery
techniques to extract petroleum and yet also reliance on ageing
infrastructure;
the field life remaining of the assets being financed has become shorter
(down to perhaps five years now as against 20 years at the high point of UK
continental shelf discoveries), with decommissioning now a key issue;

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