An Introduction to Reserve Based Lending and the UK Market

by King & Spalding
Contact

Reserve based lending (RBL) is a type of financing where a loan is secured by the undeveloped reserves of oil and gas of a borrower. The facility is repaid using the proceeds that derive from sales in the field or portfolio of fields in production.

RBL market standards contrast between different upstream markets in terms of the acceptability of asset categories, gearing, lending structures and security packages. Divergences in the aforementioned are dictated by the market in question, the history of the market (for example, the lenders which first entered the market and the model structure that was adopted), how advanced the legal framework is in the market, the nature of security and, for the purposes of syndication, the liquidity of the market.

This note considers the key basic structure of RBL and the features of the RBL market in the UK.

Basic Structure of RBL

In a basic RBL structure, assets are ring fenced to provide the lender with security for the facility. The lender advances the RBL facility when they have carried out legal, financial and technical due diligence. Technical due diligence is fundamental and it was US lenders that were among the first to recruit engineers to produce detailed forecasts, based on an estimated value of available reserves and other economic and technical factors.

In RBL, the term of a loan is typically shorter than the expected production life of the reserves and devised according to a production regime. Typically, financial ratios and models are made against certain base cases which are variable, meaning that if a cash surplus exists, there would be a provision to apply the surplus against the outstanding loan.

Although RBL has some similarities to traditional working capital asset-based lending facilities there are some key differences, including the unilateral discretion given lenders to revise commodity pricing assumptions and other assumptions in order to value the reserves and to set the credit limit.

Origins and development of the UK market

The RBL loan market in the North Sea has its origins in large project financings by majors and large independent oil companies in the 1970s. However, in recent decades UK banks have become increasingly prepared to lend to smaller sponsors.

Historically, lenders making loans to major and large independent oil companies have done so on a limited recourse basis whereby they benefitted from parent sponsor, investment grade guarantees which remained in place until a project had started producing. At this point the guarantee would fall away.

A key development in the RBL market in the UK has been the emergence of independents and their use of RBL to finance their portfolios. In these projects, due to the limited value of a sponsor company outside of the project, from day one of the loan a lender takes reservoir risk on undeveloped reserves.

The UK market in contrast

As opposed to the US regime, in the UK lenders are not able to directly take security over physical reserves in the ground and so must take security over contractual rights under an oil and gas license, a production sharing agreement, or a joint operating agreement.

The area of decommissioning cost management is another unique feature in the UK and is yet to be widely adopted in other markets. Decommissioning has grown in importance in the North Sea by virtue of the provisions of the Petroleum Act 1998 (as amended by the Energy Act 1998). To ensure effective decommissioning, the Secretary of State for Trade & Industry has the ability to require an oil and gas license applicant to provide evidence that it is able to fund its future decommissioning obligations. This may be achieved through evidence of the applicant's financial information, including management accounts and decommissioning cost estimates and future revenue predictions. Concerns over an applicant's ability to cover its potential obligations may require additional security to be provided, in the form of decommissioning guarantee insurance, letters of credit, or a sinking fund.

Legal factors worth considering

Whatever the market, there are a number of legal issues that must be considered as a sponsor or a prospective lender in a RBL setup. The issues include taxation, security, bankruptcy, environmental, and importantly the issues surrounding title, ownership and possession. The licensing regime is critical. Oil Prospecting Licenses, Oil Mining Licenses, Production Sharing Contracts, and Service Contracts all require different approaches and create unique issues that must be taken into consideration.


 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding
Contact
more
less

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.