China’s Private Fund – A New Financing Option For Small Oil And Gas Operators? (Part 1)

China's Private Funds - A New Option For Financing Oil and Gas Development?
China’s Private Funds – A New Option For Financing Oil and Gas Development?

The global oil market is still struggling with low prices and an oil glut.

Currently, attracting capital for the purpose of acquisition and development of oil and gas assets is still difficult.

To make the matter worse, the investors have started to shift their focus from financing fossil fuels to renewables.

Smaller oil and gas operators may find it difficult to access the finance required to develop the assets once assigned.

New investors that are still interested in investing in oil and gas assets will set high investment criteria that can only be met with the best assets of the highest quality managed by a strong management team.

The financial exposure of existing investors in oil and gas leads to a reduced appetite to fund the acquisition and development of oil and gas fields in order to spread risks among different asset classes.

Nigeria's new marginal fields Source
Nigeria’s new marginal fields Source
Nigeria’s new marginal fields Source: DPR

Take Nigeria’s marginal field licensing round as an example, most of the winners of the 57 marginal fields are characterized by their low debt capacity and are struggling to raise the finance required. As laid out in the upcoming Petroleum Industry Bill (PIB), the winners are required to pay 2.5% to a local endowment fund, 30% for corporate tax, and 20-50% asset-type-dependant profit tax.

The lack of proven reserves and cash flow means that debt funding options will not be immediately available until such fields have been thoroughly appraised.

Due to the prevailing financial crisis in the western countries, the Marginal Field winners will find it yet more difficult to access financing from the traditional capital markets, such as Wall Street and London, to cover the cost for field appraisals. China –  the world’s second-largest economy and its private funds are currently becoming important financing options for small oil and gas operators all around the world.

End of the Part 1