Financing upstream developments

Lenders, larger co-venturers and BERR/DECC all take a cautious approach on the
level of security to be provided in respect of decommissioning costs. Purchasers and
smaller co-venturers take the opposite view, as the costs of providing security result
in a substantial liability on their balance sheets, limiting their ability to borrow
funds. This conflict has led to development of a standard-form template
decommissioning security agreement or decommissioning cost provision deed
(DCPD) as a fair starting point for negotiation. Options for security include cash,
letters of credit (LCs), bonds and guarantees. The level of security needed is typically
the net present value of estimated decommissioning costs multiplied by a risk factor
(minimum 1.5), all divided by the net present value of revenues from the field
(typically post tax) to the end of its economic life.
Issuing letters of credit is becoming riskier for lenders because acquiring
companies tend to be less financially robust, the letters of credit are being used to
cover increasingly mature or smaller fields, and the average value of the letters of
credit is increasing in line with abandonment costs.
A problem is that due to the potential annual redetermination process by
BERR/DECC as to decommissioning costs for a particular field, lenders may be
requested to post a letter of credit greater than that for which they have approval if
the size of the abandonment liability under the decommissioning cost provision
deed goes up. Conversely, if the redetermined commissioning cost goes down, the
borrower may be over collateralising. A partial solution is to document a base case
cash collateralisation build-up requirement based on agreed ratios. If the borrower
generates cash flow in excess of that required in any period to cash-collateralise the
letter of credit, it may borrow the excess as a loan subject to the facilitys other
requirements. If, conversely, cash flow reduces in any period to below that required,
repayment of the loan is accelerated to achieve the target ratios. This structure,
whilst a solution, is inefficient as it requires a large cash build-up over time to ensure
there is full cash collateralisation of the letter of credit.
Getting the balance right between the lenders, borrowers and BERR/DECCs
interest is crucial as acquisition deals are being done, or potentially done, on more
marginal fields where costs are finely balanced.
7.

Security

7.1

Lenders asset-level security concerns

The main objectives when considering a security package are to trump unsecured
creditors, protect assets from actions by unsecured creditors and confer control of the
company on a default. Often security is only taken defensively as enforcement in
practice may be unrealistic, particularly over oil and gas fields where governmental
consents to any sales or transfer will invariably be required.
In a classic project financing, lenders concerns include ensuring that effective
security can be taken over project contracts and that the key project contracts remain
in place in one form or another if and when lenders enforce their security. To meet
the first concern the contracts should be capable of being charged or assigned by way
of security and any necessary consents obtained. In a borrowing base facility

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