It is extremely important for management to understand the principles of the capital market, financial mechanisms and available options applicable to the hydrocarbon industry prior to obtaining financial resources for the development of oil production, transportation and refining. Currently, project finance and loans for oil refinery construction and long-term financing for equipment modernization play an important role in the development of the industry around the world.
The exportation of oil and petroleum products are in dire need of investment to maintain high productivity in the sector, provide national economies with fuel and prevent imports of petroleum products. The lack of available funding sources in this situation can adversely affect the results of not only individual companies, but also entire sectors.
The lack of available funding sources in this situation can adversely affect the results of not only individual companies, but also entire sectors.
Viola Funding Limited is ready to provide long-term loans for oil refinery construction and modernization of oil refineries worldwide.
Financing the oil and gas industry; Principles and Problems
An economic analysis of the activities of a particular oil and gas company (investment project) should take into account production and processing in general. Industry-wide, upstream activities cannot be adequately assessed without analyzing downstream activities.
Oil and gas activities generally fall into two broad categories:
Downstream: activities related to the production of hydrocarbons and their subsequent transportation through pipelines, processing and sale.
Upstream: covers any activity of oil and gas companies, from exploration of hydrocarbon deposits to their production (lifting to the surface).
A distinctive feature of the oil and gas industry, which adjusts prices based on demand (as in most sectors), as well as on the basis of natural resource decline. Obviously, maintaining a growing or at least constant supply requires huge capital investments over many years.
In this context, the correct choice of sources and instruments for financing large investment projects becomes fundamental for the economic viability of each company.
Corporate loan for oil refinery construction
Corporate finance and loans refers to raising and managing the financial resources of a business.
A typical problem for any oil and gas company is to attract sufficient financial resources on acceptable terms at the right time to start and develop activities.
Solving this problem allows businesses to conquer markets, build competitive advantage and thrive in times of economic uncertainty and global transition to a green economy.
Our underwritten team helps clients choose and use bank loans, bonds, stocks and other debt financial instruments wisely, so that the planned projects generate as large a cash flow as possible. The financial statements of oil and gas companies and the construction of oil and gas storage facilities have a number of unique items, and financial management in this area is significantly different from other companies.
Long-term financing for oil and gas refinery
Long-term financing of large investment projects in the oil and gas industry is based on the issue of shares and long-term bank loans against the future cash flows of the projects. While the former financing instruments are more typical for private companies, the latter are widely attracting both state-owned oil refineries and private capital.
In corporate finance practice, there are different classes of shares that differ in voting rights. Shares provide shareholders with rights that depend on the share of a particular shareholder in the company (project).
The following rights are distinguished:
•Receiving part of the company’s profits in proportion to the number of shares. • Receipt of the corresponding part of the assets of the company after its liquidation.
•The right to vote on strategic issues such as mergers.
•Preemptive right to purchase new shares.
Long-term corporate debt
The amount of debt is strictly limited by the loan agreement, in contrast to dividends, which are determined only by the company’s profit and its financial strategy.
Debt does not give the creditor the right to manage or own the business; creditors are not allowed to vote or share in the profits of the company.
Debt is an obligation to the creditor that must be repaid with interest within a predetermined time frame.
When companies take out a loan, they agree to pay interest as scheduled and repay the principal. Unlike dividends, interest must be paid according to the schedule, so it refers to the company’s financial liabilities.
However, even if the company incurs losses, the loan will still have to be repaid.
Project finance (PF) for the construction of oil refineries
This is a kind of off-balance sheet financing, when the project debt is separated from the financial statements of the originator and does not affect its creditworthiness.
The concept of project finance refers to targeted financing and loans for oil refinery construction projects and other facilities, which is based on the ability of the project itself to generate sufficient cash flows to service debt.
Usually, financing of the construction of an oil and liquefied natural gas refinery is carried out using 70-80% of borrowed funds and, accordingly, 20-30% of the internal financial resources of the project initiators. Arranging project finance requires multilateral negotiations with stakeholders and the formation of a complex contractual structure. The cash flow of a specific project is seen as a guarantee of the return of funding.
Long-term corporate debt
When companies take out a loan, they agree to pay interest as scheduled and repay the principal. Unlike dividends, interest must be paid according to the schedule, so it refers to the company’s financial liabilities. The amount of debt is strictly limited by the loan agreement, in contrast to dividends, which are determined only by the company’s profit and its financial strategy.
Debt financing for the construction of an oil refinery can be obtained by issuing corporate bonds. These bonds can be secured by any asset (for example, structures, resources or equipment) or issued without collateral, which is possible only for the most attractive projects.
Finally, long-term bank loans are an important source of financing for the construction of refineries.
When it comes to large projects requiring investments of the order of hundreds of millions of dollars or even several billions, it is most appropriate to consider a syndicated loan. This is a loan provided by a group of banks joining financing efforts to minimize risk.
Loans for the modernization of refineries
In the modern sense, the modernization of refineries, first of all, consists in the organization of investment measures aimed at improving production through consistent constructive and organizational changes.
These changes must be comprehensive to ensure that the enterprise fully complies with the organizational, technical and environmental standards of the industry.
In other words, the attention of management is shifted to the implementation of sequential investment operations aimed at the practical use of new scientific and technological knowledge in order to achieve commercial success.
Benefits of long-term loans
Sources of financing for and loans for oil refinery construction modernization can be short-term and long-term lending, issue of shares, placement of bonds of various types, leasing, factoring and others. Practice shows that loans continue to play a decisive role in most of these projects.
Long-term bank loans provide an oil and gas company with the following advantages:
•Long term financing.
•Possibility to revise the terms of the loan through negotiations with the bank.
•Loans on better terms when purchasing equipment from a specific supplier.
•Relatively simple and fast process of obtaining borrowed funds.
•Simple contract structure with a minimum of participants.
•Possibility of obtaining large loans within the consortium.
Viola Funding Limited offers financing for large refinery modernization projects, including long-term loans from 10 million euros for up to 20 years.
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Website:https://viola-funding.com/