Oil Project Financing

Abstract

The level of participation of Nigerians as sponsors of oil projects is at best negligible when viewed from the size of the market and the level of participation of multinationals. This may not be unconnected with the nature of the market and the risk-averse nature of financiers, especially on the issue of completion. The ability of oil projects to generate adequate cash flows to service their project debt depends on the completion and performance of those projects according to specifications. Because lenders usually are not prepared to assume the risk of such completion, sponsors are often required to furnish some sort of guarantee, which commits the sponsors to input additional capital to the project in the event of cost over-run or to pay all or part of the project debt upon failure to attain completion. However, the hallmark of the adoption of project financing arrangements by the sponsors is the limitation of recourse and the sharing of risk. Such completion guarantees could turn non-recourse or limited-recourse into full-recourse financing from the sponsors' perspective. This article explores the prospects of options available to project sponsors to mitigate their obligations under completion guarantees in the context of oil project financing. In advancing this analysis, the article examines the nature of oil projects in relation to project financing, looks at the relevance of completion in the repayment of the project debt, and reviews lenders' aversion to assuming completion risk and their requirements from project sponsors in mitigation.

TOPICS: Project finance, emerging markets, credit risk management