Russian Policy Stymies Oil Investors

By Tom Bergin

Small, foreign-owned oil and natural gas companies operating in Russia face a challenge financing projects, as tightening credit markets and persistent concerns about the Kremlin seizing fields prompt bankers to withhold lending.

Financing problems mean an uncertain future for some of these companies – typically worth less than $1 billion and often listed on the London Stock Exchange’s junior AIM market – and lower returns for investors in all.

Surging oil prices, which hit a record above $112 on Monday, have largely insulated companies with proven oil reserves, which they can use as collateral, from the credit crisis.

As lenders pulled back from troubled sectors like property and retail, chief financial officers at some oil and natural gas companies said they actually saw more banks pitching loans.

Yet earlier this month Imperial Energy, which is listed in London, was forced to turn to shareholders to raise up to $600 million to refinance a loan and finance development work after attempts to raise debt failed. Bankers were unimpressed by its almost billion barrels of Russian reserves.

The Imperial chairman, Peter Levine, said the move, which knocked almost 30 percent off the shares of the company, reflected a broader pullback in reserves-based lending.

But Imperial’s experience echoes the financing difficulties faced by Russia-focused Timan Oil & Gas, whose shares were suspended last month pending a financing deal, and Victoria Oil & Gas.

Ithaca Energy and Stratic Energy, small explorers focused on the North Sea, announced last week more than $200 million in lending facilities.

“The banks are still going to lend to oil companies,” said Peter Hitchens, an oil analyst at Seymour Piece, “but for some players in places like Russia, it’s going to be tougher.”

Some executives agreed that, after taking an optimistic view of Kremlin moves to retake control of the Russian oil and natural gas sector in recent years, bankers had grown worried about the security of energy assets in Russia.

“Some people think it’s very risky and would like to have their money in slightly more secure regions,” said George Donne, executive director of Victoria Oil & Gas, which sold a 29 percent stake to Gulf investors earlier this year to finance field development, after bankers were reluctant to do so.

Typically, explorers use investors’ cash to find oil as banks are unwilling to finance the often unsuccessful work of drilling wells. When commercial reserves are proven, the explorer would turn to banks to help develop the fields.

Now, however, investors and lenders believe that in Russia, the riskiest part of the cycle does not end with a gusher.

The acceptance of the extent of the risk oil companies faced in Russia was a long time coming.

When state-owned Rosneft snapped up the assets of the largest Russian oil company, Yukos, and state-controlled Gazprom muscled into Royal Dutch Shell’s Sakhalin-2 project – both at steep discounts – foreign oil executives said these were one-time events.

Even when projects controlled by Exxon Mobil and BP came under pressure, smaller oil companies thought they could exist safely below the Kremlin’s radar screen, said Andrew Neff, an energy analyst at Global Insight.

But in the past two years, Imperial, Lundin Petroleum, Urals Energy, Timan and Victoria have all faced threats to their oil and natural gas licenses from state bodies.

Neff said this showed the state wanted greater involvement in the energy sector than many thought. “They have been moving down the line from the most important to the least important,” he said.

Problems raising cash for developments could force some companies to seek to sell out, but Russian assets are no longer the draw they used to be, analysts said.

Rosneft and Gazprom’s acquisitions of previously privatized assets have led to debt levels that mean even they may not be eager buyers. Some foreign banks have lent the largest Russian oil and natural gas producers so much money, they are near lending limits to them, banking sources said.

Originally published by Reuters.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.