Major European oil companies are increasingly offering corporate financing to small- and mid-cap oil producers, using the loans to effectively lock up supplies of crude.
Sources say oil giants like BP, Glencore and Vitol have filled the void left by eurozone commercial banks, which have pulled back from lending due to the debt crisis and new capital requirements.
While advancing capital in exchange for production volumes is nothing new in the energy sector, the majors are said to have become more aggressive of late, as the civil war in Libya and the threat of a conflict over Iran have roiled the supply chain and driven up prices.
Sources say the oil majors are specifically targeting light sweet crude, and are coming on board early in a project's development with the smaller companies, many of which have been struggling to obtain direct lending from banks.
“What we are seeing is a change in timing. Oil majors are offering capital pre-production, and sometimes even pre-drilling, because they have the technical expertise on board to assess the exploration and production risk,” one source said.
“Most importantly, a knowledge of both the physical and paper markets allows them to correctly price this risk.”
One recent example was a $50m 23-month unsecured corporate facility between Nigeria-focused oil independent Afren and the Azerbaijani state oil company Socar.
The facility, which pays Libor plus 450bp, was agreed as part of Socar's deal as offtaker for Afren's light sweet crude production from the Ebok field in Nigeria. The agreement was signed in March 2011, before the Ebok field began production.
In January 2010, BP procured US$20m of financing from a commercial bank for North Sea-focused independent Xcite Energy, as part of a supply and offtake agreement with BP Oil International.
As in the Xcite deal, commercial banks are often involved as lenders to the oil major in pre-export, pre-payment or prepaid forward financing. A bank lends money to a major, which the major then lends to an independent oil company, to be repaid in oil offtake.
This reduces the bank's risk of lending directly to the independent oil company. Societe Generale, Credit Agricole and ING are mentioned as banks active in this area in Africa.
The growing trend of independent oil companies being the first movers in exploration and production means that the smaller companies are often sitting on light sweet crude reserves - particularly in resource-rich West African countries such as Nigeria, where BP has no operations save a recently-opened trading office.
BP is said to have a specific budget for securing offtake volumes of light sweet crude over the coming year, and is willing to offer corporate finance at an early stage of the project to achieve this, sources say. The company declined to comment.
Demand for light sweet crude is so strong that non-European banks with oil marketing arms are also looking to lend at an earlier stage of the project in exchange for volume, sources say.
Standard Bank and JP Morgan, which is opening a full office in Lagos this year, are two names mentioned. - Reuters