International Project Finance and Procurement Industries

1. International Project Finance

1. The need for project finance

1. Major projects typically require payments in the early stages that cannot be met by internal cash flow.
2. Money may be borrowed against the value of the asset in order to meet these early payments
3. Due Diligence is required by the lenders to ascertain the size of the asset which will serve as collateral for the loan
4. Repayment of these borrowed funds will take precedence over other payments such as dividends during the life of the bonds
5. Project risk is also transferred from operator to lenders.

1. Sources of project finance

. The problem of capital formation in lesser developed countries

1. International banks

1. Prefer lower technical risk projects undertaken by established corporations
2. Prefer to work in countries where they already have a presence

1. Know the political environment of the country
2. Know the business environment of the country and the specific industry in which the loan is to be made

1. Originating bank will sell the project bonds to other institutions and thereby collect loan origination fees

                2. The World Bank

1. Will make loans at a very low rate over a very long time
2. Seems to prefer loans for infrastructure, such as pipelines, that will facilitate development of many resource projects over a long time

            C. Note that if a commodity project comes on stream during a period of low prices, then much of the generated cash flow may go to paying debt maintenance or royalties, leaving no profit to the operating company or taxes to the host country. These debt service payments typically are paid to institutions located outside of the host country.

II. Financing of US oil industry
     Super-Major companies
        Exxon-Mobil, British Petroleum, Royal Dutch Shell, Chevron, Total
        Take on very large projects only
        Funding is similar to international project
                       
 Major US companies-
   Marathon, Anadarko, etc
    Take on larger projects
    Funding is similar to many international projects

Independent companies-
   Prefer to work in the US
    Many companies: Pioneer, Tom Brown Inc, Harken, etc
    Exploration funding from internal cash flow and consortia of investors
    Investors are very sensitive to project risk and marginal tax rates

1. International Procurement Industries

1. Business-to-Business industries, Business-to-Government industries
2. Often manufacture industrial goods in response to contracts rather than in response to consumer demand.
3. Exploration services for wildcat drilling

1. Site survey
2. Rig charter
3. Drill pipe requisition
4. Drilling supply requisition

1. Bits, collars, "hardware"
2. Drill mud supplies

1. Drilling services requisition

1. Standby vessal
2. Catering
3. Well testing service
4. Helicopter support
5. Shore base support

1. Oil field services for oil/gas field development

1. 1. Field delineation following discovery
2. 2. Platform design following declaration of commerciality
3. 3. Platform tender
4. 4. Coeval platform construction and development well drilling
5. 5. Possible pipeline construction or tanker charter
6. 6. Placement of platform over field and development well completion

1. At any time or any location in the world, one or more elements in an exploration well program or a field development program may be in short supply. This may lead to longer lead times between project commitment and completion, as well as possible cost over-runs.
2. Note that these schematic lists do not include the full range of permitting activities for an operation, which fall outside the scope of procurement.