Oil refinery construction: Loans and project finance viola-funding August 14, 2023

Oil refinery construction: Loans and project finance

The cost of constructing an oil refinery can vary based on several factors, including the capacity, engineering complexity, location, refining technology used, regulatory requirements, and market conditions. Due to the very large differences in these factors, the ratio of capital costs and productivity of the facility varies over a wide range. Despite green transition, the importance of oil refining remains significant due to its crucial role in meeting global energy demand and supporting various industries. Interest rates for long-term investment loans for for construction of oil refineries can be fixed or floating, depending on market conditions and the terms negotiated

Organization of reliable project finance schemes and attraction of large investment loans, including loans issued by private investors, are important tasks for companies planning the construction of a new refinery.

The Duqm Refinery in Oman had a total cost of approximately $7 billion, with a refining capacity of 230,000 barrels per day and the capability to process various types of crude oil.

Long-term investment loans for construction of oil refinery

Long-term investment loans for the construction of oil refineries have extended repayment periods, often ranging from 10 to 30 years. The extended tenure allows the borrower (refinery developer) to spread out the repayment over the project’s operational life, reducing the burden of debt repayment.

Oil refinery construction is highly capital-intensive due to the huge costs associated with land acquisition, engineering, procurement of equipment, construction, and commissioning.

These projections are based on refining margins, capacity utilization rates, market demand, and other relevant factors.

Long-term investment loans for oil refineries may be secured by the refinery’s assets, land, and other tangible collateral. Additionally, lenders may require guarantees or commitments from the sponsors or other parties involved in the particular project.

Lenders conduct professional comprehensive due diligence before extending long-term investment loans for refinery construction. They assess the project’s technical feasibility, environmental impact, regulatory compliance, and financial viability to manage potential risks.

Due to the substantial loan amount required for oil refinery construction, lenders might form a syndicate to share the financial risk. Syndication allows multiple financial institutions to participate in the financing of the project. Syndication provides essential funding for the construction of large refineries, enabling these crucial energy infrastructure projects to meet growing demands, enhance energy security, and contribute to economic development.

In some cases, long-term investment loans for oil refineries construction may receive support from governments or development agencies.

It relatively easier to secure long-term financing especially attractive for risky, technically complex and capital-intensive projects.

Project finance for refinery construction

PF involves securing funding for a specific project based on its future cash flow and assets, rather than relying on the creditworthiness of the project sponsors.

Successful project finance schemes in the construction cost of oil refineries requires a robust technical and economic feasibility study. The study should demonstrate the refinery’s viability, including the refining margins, feedstock availability, market demand, and competitive advantage.

 Financing options for construction oil refineries projects

Financing and loans for construction of an oil refinery is a capital-intensive undertaking due to the high costs and complexity involved in such investment projects. Generally, there are several options available for obtaining loans or financing for refinery construction.

Commercial banks: Most commercial banks offer investment loans or lines of credit for large-scale industrial projects like oil refinery construction. However, they often have stringent requirements, and you’ll need a solid business plan, liquid collateral, and a good credit history to qualify. Interest rates, loan terms, and eligibility criteria vary among different financial institutions and regions.

Development banks: Some countries closely cooperate with development banks, large financial institutions that specialize in funding major infrastructure projects. These banks may be more willing to take on long-term and higher-risk projects like oil refinery construction. They might offer more favorable terms and longer repayment periods compared to commercial banks. Examples include the Asian Development Bank (ADB), the African Development Bank (AfDB), and the Inter-American Development Bank (IDB).

Export Credit Agencies: ECAs usually provide large loans, guarantees, and insurance to support exports and international investments. If the refinery equipment or technology is being sourced from a particular country, its ECA might offer flexible and affordable financing options. The terms and conditions vary depending on the ECA and the country of origin of the equipment or technology.

Private equity and venture capital: Large private equity firms or venture institutions might invest in oil refinery projects if they see potential for significant returns. This option might require giving up some ownership stake in the investment project. Funding from private equity can be much more flexible but may come with higher expectations for overall project success.

Multilateral financial institutions: International organizations such as the World Bank or regional development banks may provide financial support for infrastructure projects in certain regions or developing countries. They offer long-term investment loans, grants, and technical assistance to support economic growth.

Public-Private Partnerships (PPP): Governments sometimes partner with private companies to develop large oil projects, including refineries.

loans for construction of oil refineries

  In some cases, long-term investment loans for oil refineries construction may receive support from governments or development agencies

Commercial banks in oil refinery financing

Large commercial banks play a crucial role in financing capital-intensive industrial projects, including oil refinery construction. They offer various financial products, such as project loans, lines of credit, and financial advisory services, to support infrastructure ventures. Several well-known commercial banks have been involved in financing oil refinery projects worldwide.

Some prominent ones include the following:

•Citigroup Inc. • Bank of America Corporation • JPMorgan Chase & Co.• HSBC Holdings PLC• Standard Chartered PLC • BNP Paribas S.A. • Barclays PLC • Deutsche Bank AG

These banks have extensive experience in infrastructure project financing and have been involved in funding various infrastructure projects globally.

Commercial banks assess the feasibility, risks, and potential profitability of the refinery project before providing financing. They consider factors such as the facility location, current and future market demand, technology, environmental impact, and the borrower’s creditworthiness.

For large-scale oil refinery projects that require substantial funding, commercial banks often form syndicates to share the financial risk.

Another example is the Fujairah Oil Terminal in the United Arab Emirates. This project involved the construction of large oil storage and export facility in the strategic port of Fujairah. A syndicate of banks participated in providing the financing for this project, enabling its completion.

It’s important to note that the specific involvement of individual banks and the terms they offer vary widely based on factors such as the location of the project, the size of the financing required, political risks, prevailing economic conditions, and the bank’s own risk appetite.

Private equity and venture capital for oil refinery construction

Private investors acquire existing refineries to enhance operational efficiency and profitability. They might invest in modernizing the facilities or improving operational processes to increase output and reduce costs. Venture capital firms might invest in technology and innovation related to the industry, such as digitalization, energy efficiency, and alternative fuel technologies.

It’s important to note that while private equity and venture firms can bring significant funds and expertise to oil refinery projects, they also operate with a focus on maximizing returns for their investors. The involvement of private investors in oil refinery construction can vary significantly depending on the specific project, market conditions, and the investment strategies.

According to Preqin, a leading data provider in the alternative assets industry, private equity and venture capital firms invested over $50 billion in the energy sector in 2020. While not all of this investment went into oil refineries, it reflects the significant interest in the sector.

Some of the well-known private equity firms with investments in the energy sector, including oil refineries, include the Carlyle Group, KKR & Co., Blackstone Group Inc., Warburg Pincus LLC, Apollo Global Management LLC and other famous brands.

Private equity and venture capital firms have been increasingly active in the energy sector, including investing in oil refineries construction and related projects.

Export credit agencies in financing the construction of oil refineries

According to the Berne Union, an association of export credit and investment insurance providers, ECAs globally supported $2.3 trillion of exports and investments in 2019 (the last pre-pandemic year), spanning various industries, including energy and infrastructure projects like oil refineries.

Export Credit Agencies (ECAs) also play a crucial role in financing refinery construction projects worldwide, especially when equipment, technology, or services are sourced from their respective countries.

ECAs provide financial and risk-mitigation support to exporters, allowing them to offer competitive financing terms to buyers and investors in international projects.

In 2019, the UKEF provided $1.7 billion to the Duqm Refinery project in Oman. This mega-project involved the construction of a new refinery in partnership with a South Korean consortium.

However, financial criteria may not be decisive for this type of institution. Some agencies have introduced sustainability criteria for financing projects. These criteria might include environmental and social impact assessments to ensure adherence to responsible and sustainable practices. In certain cases, ECAs may require or encourage the inclusion of local content in refinery projects to promote economic development and capacity-building in the host country.

Public private partnership in financing the construction of refineries

PPPs involve collaboration between public sector entities (governments, state-owned enterprises) and private companies to jointly finance, develop, and operate refineries.

In PPPs, the government or public entity typically provides land, permits, and regulatory support, while the private partner contributes capital, technical expertise, and operational know-how. In some PPP agreements, special provisions may be included to ensure that local communities benefit from the project through job creation, training programs, and social initiatives.

The private sector’s expertise can lead to more efficient project management, construction, and operation of the refinery.

The success of PPPs in refinery projects depends on several factors, including professional project planning, a clear allocation of risks, and well-defined contract agreements between the public and private partners. PPP frameworks vary between countries, and the design of each PPP for a refinery project needs to consider the specific legal, regulatory, and economic conditions of the host country.

It’s essential to recognize that PPPs are complex arrangements that require thorough preparation, transparent governance, and long-term commitment from both public and private partners.

While PPPs offer several advantages, they also present challenges related to project complexity, political considerations, and ensuring a fair allocation of risks and rewards.

The role of development banks financing the construction of oil refineries

Development banks play a vital role in financing oil refinery construction projects, particularly in developing countries.

Regional development banks, such as the Asian Development Bank (ADB), the African Development Bank (AfDB), and the Inter-American Development Bank (IDB), are prominent examples. These institutions focus on financing projects within specific geographic regions and have supported numerous energy and infrastructure initiatives, including loans for construction of oil refineries.

Multilateral institutions like the World Bank provide financial and technical support to countries across the world. They support projects in various sectors, including energy, and collaborate with governments and other stakeholders to address development challenges.

The specific involvement of development banks in oil refinery construction may vary depending on the project’s location, the bank’s focus areas, and the country’s development priorities. Additionally, each bank has its own procedures and criteria for project financing.

If you are interested in long-term financing and loans for construction of oil refineries, including expansion or modernization of the plants in Europe and beyond, please contact our team for advice.

Viola Funding Limited provides comprehensive support for large projects in the oil and gas sector, including assistance in obtaining large loans from private investors and organizing project finance schemes.

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