The Exploration&Production Financing Techniques for Oil&Gas.

Upstream/Downstream Operations

The objective of oil and gas operations is to find, extract, refine and sell oil and gas, refined products and related products. It requires substantial capital investment and long lead times to find and extract the hydrocarbons in challenging environmental conditions with uncertain outcomes. Exploration, development and production often takes place in joint ventures or joint activities to share the substantial capital costs. The outputs often need to be transported significant distances through pipelines and tankers; gas volumes are increasingly liquefed, transported by special carriers and then regasified on arrival at its destination. Gas remains challenging to transport; thus many producers and utilities look for long-term contracts to support the infrastructure required to develop a major field, particularly off-shore.

The industry is exposed significantly to macroeconomic factors such as commodity prices, currency fluctuations, interest rate risk and political developments. The assessment of commercial viability and technical feasibility to extract hydrocarbons is complex, and includes a number of significant variables. The industry can have a significant impact on the environment consequential to its operations and is often obligated to remediate any resulting damage. Despite all of these challenges, taxation of oil and gas extractive activity and the resultant projects is a major source of revenue for many governments. Governments are also increasingly sophisticated and looking to secure a significant share of any oil and gas produced on their sovereign territory.

“Exploration and Evaluation of Mineral Resources”, starts when the legal rights to explore have been obtained. Expenditure incurred before obtaining the legal right to explore is generally expensed; an exception to this would be separately acquired intangible assets such as payment for an option to obtain legal rights.

The accounting treatment of exploration and evaluation (“E&E”) expenditures (capitalising or expensing) can have a significant impact on the financial statements and reported financial results, particularly for entities at the exploration stage with no production activities.
 
The Upstream Oil & Gas Industry

  • Exploration, development and exploitation/production
  • Cost and value drivers; shareholder expectations
  • The value chain: from wellhead to burner tip
  • Players: Governments, NOCs, IOCs, banks and insurers,…

 
Why Commercial Aspects are so Important

  • Overview of upstream commercial arrangements
  • Project development: upstream to midstream to market
  • Commercial structure in exploration, development and production
  • Exploration & production licenses (farm out and unit agreement etc.)
  • Who has an interest