As Iran's oil minister estimates the country needs a $100 billion investment to revive the industry – following the lifting of long-standing economic sanctions – the industry's current financing problems have taken centerstage. Recently, at a conference, local expert and former banker Bahaeddin Hosseini called for the creation of a specialized bank for the oil industry.
Hosseini emphasized the fact that banks' focus on monetary policy leaves little room for funding oil and gas exploration and development in the current market. “The National Development Fund of Iran could also help resolve the issues, mainly by allocating resources to raise lenders’ capital,” Hosseini explained.
Iran's problem is not alien to Western producers, nor to Iran's Middle Eastern competitors. According to the International Energy Agency, the global energy investment in 2015 was down 8% from 2014. The IEA attributed the drop to “a sharp fall in upstream oil and gas investment.” While the largest energy investments last year were made in China, the majority of them were connected to the electricity sector.
In fact, oil accounted for 45% of global energy investments and electricity followed closely at 37%.
At low oil prices, companies all over the world are facing financing challenges, especially in the case of new exploration developments. As a consequence, we are seeing them resort to a wide range of financing solutions. Amid the negative stock market perception of the industry, many oil companies try to have access to a revolving credit facility, syndicated across different banks.
Small-cap explorers face some of the toughest conditions. Without a steady cash flow from regular operations or the flexibility of risk spread across different projects, small exploration companies find it very hard to fund their endeavors. On the other hand, larger companies which are capable of communicating commercial success enjoy easier access to funding.
Assessing risk in general terms, financial institutions find it hard to fund small exploration company projects in the current market. However, a specialized bank like Hosseini proposed, might be able to gauge risk using more specific parameters, enabling exploration that is now in standby mode. Particularly, environmentally efficient endeavors using new technology might greatly benefit from targeted and flexible funding.
For years, following the last economic recession and the plummeting of oil prices, financial institutions have been bracing themselves for the possibility that oil companies might not be able to pay back loans.
Earlier this year, the Federal Deposit Insurance Corporation issued a letter recommending “institutions with direct or indirect oil and gas (O&G) exposures to maintain sound underwriting standards, strong credit administration practices, and effective risk management strategies.”
As the price of crude has stabilized, banks are likely to maintain borrowing bases at the current level. After the borrowing base cuts seen in the Spring, I believe we will now see some stability there as well. Banks will likely look at each borrower individually and demand more assurances, but the price of oil is not expected to directly affect borrowing bases this Fall.
However, it will be harder for companies to take second-lien debt, and when banks agree to it, they will most likely reduce borrowing bases.
Whether by creating specialized banks or by increasingly diversifying financing sources, the oil and gas industry needs to secure the flexible funding that is going to facilitate the next phase of exploration, ambitious research and development projects, and the implementation of the latest environment-friendly technologies.
In an industry that heavily relies on an increasingly wider range of debt and equity providers, the Iranian concept of a specialized bank catering to oil and gas companies does not seem far-fetched at all.