Unconventional Gas: You Can Bank On It

Offering the “perspective of a Russian finance banker,” Marc Partridge, Managing Director, Co Head of Project & Structured Finance, Gazprom Bank posed the question “How bankable is unconventional gas?” at the Unconventional Oil & Gas Summit in Warsaw, Poland.

“Unconventional gas is all around,” he noted, “and could have implications on the trade of gas in Europe.”

Mr. Partridge said he would take more global perspective on unconventional gas.

A slide he presented of the transaction value of oil & gas acquisitions showed that unconventional gas had surpassed 30% of all deals in 2008, at a value of over $150 billion.

“Unconventional is gas making up about 20% of transactions,” he stated of 2010. “It is affecting us, in terms of how to finance it, and how to handle the risk.”

He ran through the methods of finance. One was via equity: “This can be efficient. For companies that have good cash flows, it can be a good use of them.”

Corporate debt financing was the second method he mentioned; it assumed access to corporate debt, had simpler documentation and increased constraints on its borrower. His presentation listed that it could make future investments more difficult and could result in refinancing risk.

Then came project finance, about which he said, “It’s more complex, and means we’re relying more on the cash flow that the asset will generate in the future.”

His slide noted that it was better suited to investments that could generate identifiable cash flows, and could allow the financing of partners that did not have access to corporate debt.

Mr. Partridge’s presentation showed the relationship between partners in terms of contracts, putting together their resources, and showed how the money was going in and out.

He explained that it was based on a series of agreements.

“In the end it all boils down to the risks as they are perceived by the lenders,” he said, showing that risks perceived by lenders were different before and after completion. His slide had a red line delineating the drawdown and repayment phases.

Before completion, he said there were things that could go wrong, things like cost overruns, delays, geology risks, disagreements between sponsors, political and regulatory risk, something which could happen anywhere.

“Anything that may result in your asset not being able to deliver the cashflows needed for the repayment,” he explained.

Facing the project risks, he said, was a challenge.

“After completion, you have an asset that can replace cashflows,” explained Partridge. “This can depend on many factors, like gas prices, size of resource, and depends on market access – if you have pipeline or tankers, whatever it takes to access that market.”

He added that technology and the environmental issues were extremely important.

“Today, in order to have access to financing you have to meet certain standards, principles,” he said, adding that financing sources were the same and everyone needed to meet those standards.

Of unconventional gas, he noted there was lots of debate.  “There are all kinds of arguments as to whether it was acceptable or unacceptable. We are also concerned with the perception of that risk as well as the actual risk,” said Partridge.

He gave an example in which protests made banks hesitant to loan, but did not endanger the success of a project. “We know from experience that banks, financial institutions tend to look at what their neighbor is doing and if a few banks are hesitating, there’s a chance that the others will, too.”

Market access and price risk were also factors to take into consideration, according to him. “The old model for conventional has gas relied on long term ‘take-or-pay’ (ToP) contracts,” he recalled. “Now companies are asking whether it makes sense to pay for these in the context of spot prices, which are so much less.”

“If you don’t have long term take or pay contracts, where are you going to find lenders to take the risk that you’re going to have the cashflow to repay the debt for the asset?” he asked.

Mr. Partridge contended that the market would see actors that were present in conventional gas as well as unconventional who had a portfolio including LNG and pipeline gas, which could balance the risks of market access and technology.

He said that the risk needed to be measurable.

“Unconventional gas projects will get financed,” contended Marc Partridge. “Major integrated gas players will be part of the equation, and can provide a diversified portfolio.

“Environmental issues need to be addressed to convince lenders that this is something they can get into,” he concluded.