Financing in a rapidly changing world: How can oil and gas companies continue to attract investment
With the unending quest for resources to meet the demands for energy, capital injections and investment is critical for oil and gas operators to deliver positive returns.
The International Energy Agency (IEA) estimates that over the 2012-2035 period, a cumulative investment of almost US$20 trillion is needed in the world’s oil and gas supply system ($825 billion per year on average).
It is apparent to all that the oil and gas industry is undergoing a transformation as it grapples with some fundamental challenges and obstacles in attracting new investors.
Despite these pressures, oil and gas demand remains high and the oil and gas industry isn’t going away anytime soon. However, in order to attract investors, exploration and production companies need to promise and show attractive returns, design more flexible and innovative financing packages and communicate a compelling business case.
One of the most significant changes is the dramatic reduction in lending from the banking side which particularly impacts smaller players.
However, there are signs of diversification of financing options in the sector with investment coming from the bond market, project partners, private equity and export credit agencies. According to private capital tracker Prequin, energy-focused funds (oil and gas investments) accounted for almost all the year’s activity (2018) as 77 funds raised $89 billion.
In Africa for example where GPB Global Resources operates, several oil and gas projects in are financed by international oil companies. This type of financing can take the form of a carry loan. Other methods include corporate loans and bonds, though the most common option is a joint venture with a larger international/national oil company.
Government fiscal policy – a key driver for investment
is considerable scope for governments to increase investment, reduce overall costs and mitigate risk factors (whether commercial or political).
Given the cyclical nature of the oil and gas market, Governments can further facilitate investment in the oil and gas sector by establishing clear regulatory and fiscal regimes and offer significant incentives in order to reduce the risks of exploration.
This could come in the form of licencing exploration blocks (onshore/offshore), agreeing on favourable development rights, or offering public-private partnerships (PPPs).
New financial era
As the energy system evolves, so will the business and the finance sources available. As a result, many oil and gas companies are emerging leaner and more competitive. The industry outlook is positive if companies can develop a value proposition that is consistent, favourable and trustworthy.