Sea Lion: Premier and Rockhopper take a different approach

Rockhopper and Premier Oil, the independent operators of the Sea Lion oil field offshore the Falkland Islands, have approached UKEF for a direct loan. Why don’t more independents turn to ECAs?

The consortium developing the Sea Lion oil field offshore the Falkland Islands has started discussions with UK Export Finance (UKEF) about an $800 million export financing. Rockhopper Exploration, which is listed on the UK’s AIM stock exchange, confirmed the news on 7 September.

Rockhopper discovered oil at the field, which is located in the North Falkland Basin in licence area PL032, in 2010. It now owns a 40% working interest in the field, while Premier Oil, which is also UK-listed, owns the remaining 60%.

The decision of the two operators to work with an export credit agency (ECA) is surprising given independent oil and gas operators usually do not work with ECAs, preferring to use purely commercial lenders to develop fields.

There are a variety of reasons for independents’ aversion to using ECAs. The most obvious is historical. The North Sea, the cradle of the upstream independents, would not have been eligible for ECA support, since all of the countries on its shores are members of the OECD.

Then there are the organisational reasons. As William Breeze, a partner at Herbert Smith Freehills specialising in oil and gas explains, “not all independents have the bureaucratic capacity to deal with the reporting and monitoring requirements – for instance for environmental and social risk management – that ECAs have. They’re good at managing these risks, but may be unable to meet ECAs’ logistical requirements.”

The independents have typically been able to close reserves-based loans with commercial banks, which have been eager to work with independents, if only because RBLs carry better pricing than loans to larger borrowers in the hydrocarbons sector. Breeze provides the example of Tullow Oil, a large independent with a large RBL in place, with little need to raise funding from new sources.

There are some factors working in favour of ECAs gaining more of a foothold. The first is that there have been some high-profile departures from the ranks of banks offering RBLs. BNP Paribas has gone from a top-ranked player to a very sparing provider.

With companies delaying final investment decisions on fields in the face of low oil prices, exporters are having to do everything they can to win business. Sticking to the cosy – and profitable – business of supplying national and international oil companies is no longer viable. Low-cost ECA debt is one of the ways they can stand out from the competition.

But ECAs are unlikely to offer more lenient terms in most other respects. Low oil prices are forcing banks to reduce availability under RBLs as part of their borrowing base redetermination. While banks may grant breathing space to struggling – if favoured – borrowers, ECAs are likely to take a more conservative position, suggests Breeze.

And other sources of capital are emerging. Large commodity players like Vitol and Trafigura are willing to offer prepayment financing to field developers. There are signs that royalty streaming, by which operators exchange a share of oil revenues for an upfront cash payment, may be moving from the mining industry into oil & gas.

UKEF has moved aggressively into oil and gas, and has highlighted its support for GE’s exports from the UK to Eni and Vitol’s Offshore Cape Three Points in Ghana with a $400 million direct loan. It is likely to account for $600 million of the $800 million Sea Lion package, with other European ECAs supporting the deal for smaller suppliers.

The Sea Lion export financing, if it materialises, may end up being something of a one-off. Premier, after completing a hard-fought $2.75 billion refinancing in June that required it to be generous in issuing warrants for new shares to lenders, needs to be cautious over the price of any added debt to its existing obligations. And cheap UKEF debt would also provide some top-level protection against any potential Argentinean interference in the field’s operation – although relations between the UK and Argentina have somewhat improved since the Falklands war in 1982, Argentina still places restrictions on exploration around the Falklands.

Premier recently made a large discovery at Zama in the Gulf of Mexico, one of a number of licences that the government has auctioned off after reforming its energy sector. Analysts covering Premier’s shares have already questioned whether it has the managerial capacity to develop two major discoveries at one.

Still, signs that an ECA and independent can work together fruitfully can only give other operators confidence that they could access the market in the future – if circumstances demand it.

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