Risk Management In Oil and Gas Project Financing

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Date

2000-06

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University of Ghana

Abstract

Securing adequate financing for oil and gas investments is a difficult task in the best of environments. In Africa, the task is more difficult on account of political, commercial and force majeure risks. These factors serve to limit the interest of international commercial banks, the main source of oil and gas finance in making long-term credit available for the region. This thesis examines the risk mitigation arrangements that can relief the fears of the international financial institutions. Issues of concern to potential lenders, such as completion risk, performance risk, market risk, economic risks, environmental risk and political risks are evaluated. Measures, which tend to minimize lenders risks, such as escrow accounts, political risk insurance, hedging programmes and standby fund facility, are examined. Security packages such as implementation agreement, land conveyance agreement, fuel supply and transportation agreement, and energy purchase agreement, ownership structure agreement and operation maintenance agreement are all examined. Also, the various ways of strengthening these security packages to attract private financial institutions to finance oil and gas, projects. The study is an evaluation of the roles played by the international financial institutions namely: International Finance Corporation (IFC), the World Bank, Multilateral Investment Guarantee Agency (MIGA), United States Agency for International Development (USAID) and NIB (Ghana) Limited. The findings of the study were gathered through structured personal interviews and questionnaires and are presented in tables and matrices. The study addressed the following research problems: (1) How are oil and gas project risks identified, how are they analysed how are they allocated and what measures are taken to mitigate the risks? (2) What is the quality of security package available for lenders, are how are these security packages be strengthened. (3) Does the involvement of the intonational financial institutions in oil and gas financing serve as an additional security for private financial institutions? The findings of the study have been analysed within the researchers conceptual framework on risk management. The conclusions of the study are: The financial institutions that finance oil and gas projects do not use any scientific method to identify and analyse risk for oil and gas projects, but rather they base the risk identification on the poor infrastructure, debt burdens, refuge problems, war and civil conflicts and perceived political, commercial and force majeure risks of African countries, instead of assessing oil and gas project risks on the performance of the projects profitability and viability, generally. The security packages exist in almost all oil and gas projects financed but the difficulty is about how they should be enforced or strengthened to make them workable in the less developed financial markets in African countries. The World Bank has therefore taken the task of improving the financial markets so as to cushion the financial markets. When the financial markets function very effectively with its legal systems, then security packages can work well. The involvement of the international financial institutions such Multilateral Investment Guarantee Agency (MIGA). the Work! Bank, International Finance Corporation (IFC), and United States Agency for International Development (USAID) serve as additional security package for private financial institutions since the risk is reduced by the surveillance of these corporations. MIGA's political insurance also serves as additional financial tool used to cover risks expected by these lenders. In view of the findings of the study, the researcher has recommended some extra work to be done by these international financial institutions to help attract private financial institutions to finance oil and gas projects in Africa.

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MBA

Keywords

Risk Management, Oil And Gas, Ghana

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