As mentioned above, cross-border unitisation agreements need to deal with additional issues arising from the fact the unit operations are in effect being undertaken pursuant to two (or more) separate legal regimes, and supervised by at least two different government authorities. Some of the more complex issues may include the following:
• Governing law and dispute resolution – as in any international agreement, this may be a point of contention between the parties. Because national interests are also involved, the governing law and forum for determining disputes may be decided upon by the governments. One example of an international dispute resolution clause is for the dispute to be referred to the relevant government for determination, and if the governments decide that the dispute in question is not one which should be decided by them, the matter will then be referred to international arbitration.
• Work programmes – all work programmes are likely to need the approval of both governments.
• Decommissioning – decommissioning is an increasingly important issue and any decommissioning plan will need to comply with the regulatory regime of both countries.
• Redeterminations – in cross-border unitisations, the governments involved will want to maximise the amount of petroleum which can be attributed to their
group of licensees. Accordingly, they will take an interest in the initial calculation of the unit equities, as well as any redeterminations. In terms of the unitisation agreement this may mean that any redeterminations or adjustments cannot be made without close government involvement and approval. The unitisation agreement may also give the governments the right to call for a redetermination.
Ultimately, the terms of a cross-border unitisation agreement will reflect the commercial arrangements of the parties, in the same way that a standard unitisation agreement does. This will be superimposed with provisions that reflect the governments’ interests in preserving their fair share of the reserves, as provided for in the relevant intergovernmental agreement.
1. Introduction
The broad upward trend in petroleum prices over the last few years (with the notable exception of the last months of 2008) has made many marginal oil and gas discoveries commercially viable development projects and justified further development of producing fields. Smaller players look to international commercial banks with specialist project finance or reserve-based lending (RBL) teams to supply a significant part of the funding for such projects. The focus of this chapter is therefore on international commercial bank financing, the prominent form (for borrowers which cannot raise bank debt off the strength of their balance sheets) being the borrowing base facility (BBF). The chapter will focus further on oil and gas assets in the UK continental shelf (UKCS) which, together with the US Gulf Coast, has been one of the main basins where reserve-based financing techniques have been used to date, but it will also look to other locations where such techniques are being utilised, or are likely to be utilised in future.
2. Background
2.1 Strong appetite for debt
In recent years there has been a strong appetite among new-entrant independent oil and gas companies for debt financing to fund the development and acquisition of upstream assets. There have also been rapid developments in the types and locations of transactions financed, the choice of debt options and the terms on which the debt is made available. At the same time projects have become in some ways riskier from the point of view of lenders, which has probably led to an increase in pricing of senior debt and a lower limit on the amount of traditional senior debt which banks are able to provide. This has in turn led to the development of multi-source financing structures, including venture capital, convertible bonds and mezzanine debt.
2.2 Development of market from single asset financings to borrowing base facilities During the early years of the UK continental shelf industry in the 1970s and 1980s, the development of assets was either financed on balance sheet by the majors or, where debt was financed by smaller players, it involved financing a single asset on a project-finance basis. Projects were not, with the benefit of hindsight, particularly risky financing propositions because fields were large, loans were based on conservative reserves figures (leaving substantial cushions of reserves), sponsors were
developments
Nicholas Ross-McCall Huw Thomas Ashurst LLP
generally large companies and abandonment was a distant prospect. As the North Sea basin matured, that type of financing largely became inappropriate for the smaller fields which were then being developed. As long ago as the early 1990s financing a portfolio of assets by way of a borrowing base facility began to become established in the UK market as a more feasible and less cumbersome approach.
Funding a portfolio of assets is attractive to lenders as it de-risks the asset base; a deterioration in reserves at one field may be offset by upside from another.
2.3 Continued appeal of the classic borrowing base facility
The borrowing base facility remains popular with borrowers today primarily because of the flexibility and relatively favourable pricing that it provides. It enables borrowers to raise financing based on the value of their assets, generally in the United Kingdom on a P50 basis for producing assets and on a P90 basis for development assets (see Section 3.3). In the US market, account is generally only ever taken of P90 reserves. But that is at least partially balanced out as UK banks make their calculations based on post-tax cash flows, whereas the US market looks at pre-tax cash flows. Borrowing base facilities are also attractive in that the facility is revolving (ie repaid amounts can be re-borrowed) and will often permit expenditure for general corporate purposes, so that the funds do not always have to be spent on the assets supporting the financing. The net present value (NPV) of future cash flows projected to be generated by the assets being financed is of central importance in setting the amount of debt available. Assuming the net present value is adequate to support the financing, the rest of the representation and covenant package is relatively light compared to what would be found in a full-blown project financing.