This page includes analysis of up stream oil project finance with production sharing agreements and reserve based loans (RBL) for upstream oil and gas transactions. The first part of the page works through some fundamental allocation issues for oil fields with production curves and production sharing agreements including cost recovery, alternative profit sharing arrangements, revenue to cost ratio and sliding scale schemes. The second part of the the page works through reserve based lending agreements including computation of the borrowing base, covenants for remaining life and other elements of a term sheet. For the reserve based agreements you should understand how the borrowing base works from cash flow analysis and reserve reports. The first files that you can review are a couple of power point slides that I prepared when I tried to teach a course on this subject. The first power point slide works through how cost recovery, royalties, income taxes and other features in production sharing agreements.
The second power point slide works through aspects of reserve based loans. This set of slides works through a term sheet with calculation of the borrowing base and changes in the borrowing base that causes repayment. The slides also demonstrate how the loans are sized with the Field Life Coverage Ratio and the Loan Life Coverage Ratio. The Field Life Coverage ratio can be through of as the inverse of a loan to value ratio. If the Field Life Ratio is 1.5 then 1/1.5 = 66%. Then you compute the size of the loan from the reserve report which measures the present value of the reserves. The prepayment of the loan from the borrowing base is like a cash flow sweep with specific criteria.
I have made a couple of videos on reserve based loans. The first video works through allocations from production sharing agreements. If you want to get more information please send me and email at edwardbodmer.gmail.com.
This is a video about reserve based lending (RBL). It uses the upstream oil model discussed in the above video and then adds financing to the model. It works through a model with computation of borrowing base and how to construct a cash flow waterfall with cash flow sweeps.
Production Sharing Agreements and Modelling Upstream Oil Projects
When modelling the operation of oil and gas assets you should reflect all of the hedging agreements so that you can accurately model the effect of oil and gas prices.
The graph below illustrates the reserves over time and decline rates.
Reserve Based Loans
The first slide illustrates how you can illustrate the effects of different oil prices in the context of different oil prices.
The first excerpt illustrates the requirements for reserve reports with drive the size of the borrowing base.
Here are some examples of essential drivers of a reserved based loan. First here are the debt sizing drivers. To measure this, you need to have a discount rate which is the discount rate used in the reserve report. It is generally around 10% which undervalues the value of the reserves and it means that the FLCR is not like a typical PLCR.
The next screenshot illustrates the definition and the use of the borrowing base. This shows the borrowing base is used for the availability and also the repayment.
The next screenshot below illustrates the financing assumptions for the reserve based loans.
The slide below illustrates use of the borrowing base. It illustrates how to compute the basis for the cash flow sweep and then put the cash flow sweep in the loan balance.
The next screenshot illustrates a cash flow waterfall where the prepayment from decline in the borrowing base is shown. With the cash flow waterfall you can demonstrate the effects of changes in the oil price.