Funding challenges in the oil and gas sector

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The following is an excerpt from our accepted abstract “Oil and gas industry faces a major funding challenge,” by Andy Brogan, EY's Global Oil & Gas Transactions Advisory Leader.

Oil and gas industry faces a major funding challenge

The oil and gas industry has been experiencing a period of major investment, with upstream spending topping $700 billion in 2013. This record level of investment is set against a backdrop over the next 20 years to finance its contribution to the world’s future energy needs. Despite the industry’s immense appetite for capital, compared to other capital intensive industries, it has been relatively conservative when it comes to financial structuring.

Oil and gas fund raising

EY-Chart showing ThomsonONE data on oil and gas fund  raising
Source: ThomsonONE

In addition to traditional sources of capital, more creative financing techniques and new sources of finance will help to ensure that sufficient and efficient funding is available to finance projects in the future. In response to heightened political and economic instability, companies have begun to diversify their sources of funding. This has involved a shift from bank-led financing to non-bank and capital markets-based funding.

Banking sector appetite for oil and gas investments

The last few years can be broadly characterized by a scarcity of public equity financing, combined with corporate credit conditions that were initially tight but are now accommodative. Banks were forced to introduce tighter lending controls in response to new legislation. In many jurisdictions, the process of rebuilding their balance sheets is largely complete.

However, caution around risk management and the pressure to deliver an appropriate return has led banks to tighten lending standards, particularly for small-to-medium-sized borrowers. In response, companies have started to access alternative sources of finance, such as the bond market, project partners, private equity and export credit agencies. There is now both more competition for funding and also a wider range of debt and equity providers serving the market.