Financing Shale Investment in Europe
“Show me the money” was on the agenda for the final roundtable speakers at Shale Gas Eastern Europe 2011 in Warsaw, Poland.
More specifically, they were to address how to attract funding to unconventional projects in Europe. Some of their questions included how to get financiers to view shale gas projects as a solid investment and what were the basic criteria that a producer needed to have in place before approaching investors for financial support.
Head of Oil & Gas Investment at Barclays Natural Resource Investments, Meb Somani dug into the topic.
“Shale gas has obviously been successful in the US,” he said. “It’s a great sector in the world and the issue is at what stage do you come in and how to best add value to the play and investors.”
“Private equity teams are keen on backing proven track records,” said Palladian Energy Director James Elston, “So it’s probably going to be challenging in shale outside North America.”
Mr. Somani replied: “That’s one area that applies to everybody, from looking for experience in America and paying high prices for it and transfering the knowledge elsewhere. It’s quite hard to drag them from the US, because there’s a lot going on there. One company was interested in going to Europe and ended up going back, here in Poland. They saw too many surface issues compared to what they were used to.”
Mr. Elston queried, that with the nearly endless stream of plays in North America, whether it would run out of plays to license.
“It’s really just getting going in terms of tight oil plays, you’re at the beginning,” said Daniel Rathan, Director, A&D at Tudor, Pickering Holt & Co. LLC. “And there are new opportunities cropping up because you look at old wells drilled in the 70-80s that had low rates, and little water influx - they are prime candidates, so there’s no end of places to try out.”
Then speakers addressed the question “When does shale become debt financeable?”
Andrew Moorfield, Managing Director and Head of Oil & Gas at Lloyds Banking Group replied: “It is imminently financeable in the US. Shale gas financing in Europe is some ways away; Europe is not the US which has its own unique characteristics making them financeable. That doesn’t mean it’s not going to happen. Whether it is environmental or other factors, this is not the US.”
Elston commented that it was almost impossible to attract private equity.
“We had a number of inquiries from a small startup listed on the ASX, a marketplace where they will back speculative ventures,” reported Mr. Somani. “There are three ASX funded enterprises in the Eagle Ford. Those niche markets are good places to seek equity investment.”
“If you look at the genetic background of most of the successful players in the North Sea, the TSX is a source of capital,” said Moorfield.
“The land game is over, and you need deep pockets to prove things up,” commented Elston. “These things run in cycles and certain plays will have attempts by supermajors who will get discouraged, then smaller players might come back in and make a monkey out of all of us.”
“There’s been specific focus from private equity groups that will back those teams in the US,” said Mr. Rathan. “And also from hedge funds, and those companies may take a little more of speculation in emerging opportunities, and may have more international experience in the conventional area and could be a source of funding for the emerging shales.
“If you look at the US market there are something like 15-20 private equity funds that specialize in natural resources. Most of those are very comfortable on their home territory, have their own track records, and lots of repeat business that they have worked with before,” explained Somani, who said some were happy to come to Europe. “Because there’s a theoretical competitive advantage of US firms bringing it to Europe in a high gas price environment – the jury is out on that.
“For hedge fund players, they don’t like locking up their money. In theory this is good for private equity because they tie up their money for 10 years. Many US private equity funds de-risk exploration by having a portfolio; you need about 12 exploration wells – it’s easy to see the stats and you choose your risk profile.”
Regarding the returns investors are looking for on drilling in shale plays, Daniel Rathan said: “In North America I find that the very wide range of financial instruments to oil and gas ranging from private equity investments to convertible preferred structured loans, to joint ventures, which tend to give a before tax rate of return to the joining party, to debt markets and equity financing. It’s important to have the wide range and each company has to choose what works best for them. Initially the returns are high and can change as we de-risk the play.”
“We often get presented with overly complicated capital structures,” added Andrew Moorfield. “We don’t like seeing ones that are too cute; equity or private equity are the ultimate source. We’re a lender. While searching for other sources, keep in mind it can come back and burn you. We’ve turned down companies with capital profiles that are Enron-esque.”
“Will our shop take exploration risk?” asked Meb Somani. “We’re bringing in outside investors. When we get to a point where we’ve reached independence, banks like security, that’s when we might be able to finance exploration.”
“Gas is not Brent crude,” noted Moorfield. “The US may become gas exporter, as shale gas is becoming more economic in the US, reducing it’s imports, but what are the effects on Europe? Relatively depressive? Will Germany turn off nuclear and go with gas? Qatar’s gas intends to go to Europe. It’s not as bearish as in the past.”
He added: “For shale gas, is it about economics or about diversifying away from Gazprom? That’s politics. The political question makes it difficult to finance. In the case of Eastern Euruope, it’s not straightforward.”
Moorfield noted another challenge faced by lenders in Europe, considering that North America had pipeline infrastructure, something which was lacking in Central Europe.
Mr. Elston conjectured the possibility of utilities getting into shale gas.
“You have to believe in utilities if your model is where you intend to sell to somebody,” said Mr. Somani. “There’s every indication that they want to increase their upstream exposure. It has to be sufficiently de-risked and has to have sufficient scale. If those have been ticked off, we see no reason why they wouldn’t.”