A common source of financing employed in the upstream sector is reserve-based lending (RBL), which enables the raising of debt across a number of assets at various development stages and retention of a degree of operational flexibility. Structures have developed differently between the longer standing North American markets and those financed internationally. This product is often used in a refinancing context.

The key features of RBL in an international project context are:

• Commercial banks make funds available to cover capital expenditure, operating expenditure and the development costs of a number of specified assets (in doing so they spread the risk) and for general corporate or working capital purposes. In addition, drawings may cover the refinancing of existing equity/debt (including bridge financing) or the finance of an acquisition.
• Available loan commitments usually fluctuate on a six monthly basis by reference to the “borrowing base amount”, calculated using the most recently delivered banking case that covers each of the included oil and gas fields and identifies:
  • the net present value (NPV) of future cashflows from each field, taking into account their current status (producing, non-producing or undeveloped);
  • availability of sponsor collateral
• As commodity prices fluctuate, so too does the available loan commitment. If key ratios are breached, the borrower must prepay a corresponding proportion of its loan.
• RBL lenders consider only proven, and proven and probable reserves (not possible and contingent reserves) and the extent to which projected production figures enable debt service. (“Proven reserves” means those with a 90% (known as a P90) chance of recovery and “proven and probable reserves” constitute those with a 50% (known as a P50) chance of recovery.)
• Banks typically require:
  • loan tenors to match production profiles as lenders seek full repayment by the earlier of Reserves Tail Date and a short-to-medium term maturity of five to seven years;
  • fixed amortization schedule and prepayment of cash (a cash sweep) to the extent that the outstandings of a loan facility exceed the borrowing base amount;
  • restrictions on further indebtedness;
  • security including over borrower shares, collection and collateral accounts, borrower and group assets (including licenses, JOAs, production sharing contracts, project documents), accounts, insurances, hedge agreements, cross-guarantees by the companies owning the relevant assets; and
  • an ability to add, or dispose of, the field assets on which the borrowing base is founded, subject to various conditions being met, including in relation to the provision of security and ability to service debt.
• Sponsor support may be required in the event that the offtake arrangements do not match the field’s production capacity and, in a gas field context, long term gas sale and purchase agreements are usually required.
• RBL pricing can be favorable if used in the later, less risky stages of an upstream project.

And yet similar arrangements can be negociated for exploration, whereby the proven and probable reserves (the assets) of the company play the role of collateral. And in the case of ALVERADA, which can manage the finances of several oil&gas E&P firms, we will negociate loans for a company by offering as collateral assets of other firms within our portfolio. This is a great way of transfering money across jurisdictions and opening up opportunities in places that don’t have access to capital, but poses world-class reservoirs.

Usually reserves are certified by other independent (and reputable) consulting firms that will issue a Competent Person Report.