Financing upstream developments

4.3

where the lenders see the risks as having increased, they will want to charge
a commensurately higher margin and fees; and
the single-asset approach is not cost-effective for raising a relatively small
amount of debt, given the expense of putting together a quite complex and
extensive finance document package.

Borrowing base facilities with portfolio of producing assets

For the reasons described above, single-asset project financings have become
unattractive for lenders and borrowers in the UK continental shelf and other mature
basins around the world, with the borrowing base facility now prevalent. Key
features include the following:
There is a pooling of assets, perhaps some in development and some in
production. The borrower has the flexibility to bring new assets into the
portfolio (albeit subject to bank approval) and to dispose of assets from the
portfolio (again subject to bank approval and repayment of a portion of the
loan by reference to the net present value of the disposed asset).
Calculation of the loan amount and ratios is by reference to the net present
value of (probably) P50 reserves for producing assets and P90 reserves for
development assets until they have been in production for a certain period.
The maximum facility amount at any time is the lower of the lenders
commitments and the borrowing base amount (see Section 3.3).
There is usually no loan life cover ratio.
There is a relatively light security package, including only perhaps a charge
over accounts and share pledges and maybe, in jurisdictions which recognise
the concept, a floating charge over the assets of the borrower.
The portfolio approach of the borrowing base facility mitigates the risk of
problems with one asset affecting the ability of the borrower to service the loan and
permits a large enough loan to be raised with simple enough documentation, so as
to make the exercise economic. In essence, a borrowing base facility seeks to match
the amount of money lent to the net present value of future income from the
portfolio of assets. If, for example, a new projection is produced on the basis of a
lower oil price or the reserves are revised downwards, the borrowing base shrinks and
the borrower will be required to prepay the loans to the extent that the outstandings
exceed the revised borrowing base amount. In recent years, borrowing base facilities
have been made available to small and mid-sized independents acquiring assets
being divested by larger oil companies. As there is no strong parent company behind
such a borrower, these have been secured by way of a floating charge. Some
commentators regard borrowing base facilities as thinly disguised corporate loans to
sub-investment-grade companies, and the defensive security as a means to justify the
extra risk before credit committees. Whilst there may be some truth in this, in the
authors view the protection that the lenders receive through careful modelling and
controls over the borrowing base cash flows provides legitimate differentiation for
borrowing base facilities as against corporate facilities.

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