Reserve-based lending in the North Sea

Clarissa Dann Afternoon and welcome to Trade Finance TV, I’m your presenter, Clarissa Dann. And today we have in the studio tw France’s best, telling us all about what’s going on with the oil price, why bankers, traders and producers just love doing deals with it, and their overall impact on the economy. So Yann Ropers from Deutsche Bank,  and Boris Jaquet also from Deutsche Bank. Let’s hear it, what’s going on in the economy?

Yann Ropers Well, that’s a very vast subject. I’m more a petrol economist than an economist altogether. I think, you know, if we talk about oil, it’s a volatile commodity, very linked to macroeconomic factors. It also geopolitical issues.

Clarissa Dann Exactly what we’re hearing this morning.

Yann Ropers So, you know, I mean, what matters more for me as a banker is how we manage this volatility, and how our clients manage them. You know there was a very deep crisis in the oil sector in terms of the oil price going down sharply in 2014, and we saw all sorts of cost cutting, especially in the North Sea, in high cost bases. And we could see a lot of dynamism. The ability of clients to cut costs and come back to, let’s say, a more reasonable cost base. So that’s one way of managing all volatility, and also you need to have the right capital structure to buy instruments, be approved for this instrument for independent companies. And we saw that those companies that have used business lending and the right structure had, you know, lived through this crisis.

Clarissa Dann Boris, in terms of the interest of the secondary market in oil deals, there weren’t quite enough deals to go around, where there?

Boris Jaquet Yeah, the deals, first of all, it’s one of the oldest commodity markets also on the banking side, because if the banks started to come, they will start to do oil and look at oil. As Yann just said, there’s a lot of different products attached to it. You go from a short term to a very long term. So there is a vast diversity. And depending on which bank you’re talking about, all of them are more or less ready to go long term.

But the good thing with oil is that you can cater for any kind of tenure you can think of. And the third point, I think, is that, as you said on the secondary, if there is a secondary market on any of the commodity type deal, that would be on oil. So what oil does is very versatile in terms of structuring deal around it. And you can have a lot of different appetite from different banks, scattered by different products. So that makes it much easier either to sell or to buy or to trade and maybe some other commodity type deal that tends to be more static if you want to have less depth, both in primary syndication and also in secondary syndication.

Clarissa Dann Okay, thanks for that. Let’s keep on with the theme of geopolitics and a bit of the macroeconomics and turn ourselves to the North Sea. You mentioned reserve-based lending and the move away by some of the oil majors into divesting their assets to these independent producers. And if you look at Norway and the UK, they’ve done very different things with their assets, and economically and politically, they’ve become very different countries. Do you want to tell us a bit more about the relationship between those asset divestments and what has happened to the UK and what has happened to Norway with its vast sovereign wealth fund?

Yann Ropers That’s also a very vast subject, so let’s focus on the North Sea. Norway, the UK, but also Denmark are major drivers of divestment in the sector. First it was the utility groups of Europe has had historically upstream arm or business that they have gradually divested, so that the ENGIE or E.ON have divested their assets in the North Sea. Gas heavy, because they were looking at sourcing their own gas, because they want to focus on renewables, they want to be part of the construction of it. It doesn’t mean the assets were wrong or bad or not competitive. So that’s one main driver. And there has also been a major divestment problem from all measures like the share of the total and others which have huge, our industry, our lending industry with new independent producers, and create a new opportunity each time, well, almost this time. So, you know, there was a lot of M&A and risk-based lending. So, you know, this was a major reshaping of the North Sea. Nobody comes to UK and Norway. These are two, you know, historically large players. They have two different tax regimes.

I think back in 2008, Norway decided that they want to make something, reviving the industry, making sure they get the last drop of oil. To make sure they prepare for the future and they put in place a tax regime allowing new investors to come in which were very favorable, I’m not going to go into the details. But then there was an influx of investment in the sector and there was a major discovery made for the benefit of Norway but also for the benefits of the independant producers. So we have like a real revival of new oil production. And you have world class assets in Norway when in the UK the situation has been slightly different, because in the UK the fiscal regime, and maybe the basin is less, you know, promising. But clearly there was an impact of the way the Norwegian government approached the depletion of the oil production in the North Sea, compared to the UK. However the UK is becoming a respected in the field as well, and there are plenty of opportunities there. So, you know, let’s see what’s going to happen, but I can see a lot of business to be made in the UK.

Clarissa Dann They’ve just done a prize winning deal, Neptune Energy, it’s got a TXF Perfect 10 prize, so that’s going pretty well for us.

Yann Ropers Neptune is a good example of what I’ve just said, because Neptune was created through the divestment of ENGIE assets, and basically they have assets in the UK, in Norway and elsewhere in the North Sea, they also have assets elsewhere in emerging markets. But it’s a clear example of what has happened in the market.

Clarissa Dann Boris, in terms of the interest of the banks and syndicating these deals with these new kids on the block. Tell me about the appetite there?

Boris Jaquet The appetite is there. I think there are three issues to keep in mind. That’s why the appetite is very strong and sustainable. First of all, some of those assets are known, so the traditional bank knows the assets. So whomever actually is looking at them, there is an interest because actually they know the underlying.

You also see the interest driven by those new players being put in place. So there’s a lot of potential for business to be driven. So if you want to actually grow with new companies, you need to be there at the beginning. So you also see a series of banks coming in and maybe not necessarily coming with a commodity finance background, but knowing that actually they need to be there when the next type of deals would come through.

And then, of course, you have the locals. If you look at the Nordics specifically, you have a very strong local, driven banks are very interested to actually maintain the relationships, so you have based on three worlds, and if I look at all those deals and they are usually very well structured and they have all been oversubscribed. And we’ve seen a lot of deals where there’s a lot of fights to get at the arranged level and there’s not enough seeds, so there is a strong appetite for these kind of assets.

Clarissa Dann And more where that came from,eh? What do you think? Will there be more deals where that one came from? How is the pipeline, as it were?

Yann Ropers There are more deals already in the pipeline and we see in the near to medium term, near future. However, I have to say that the market is becoming more competitive. Pricing is getting tighter. You can see the structure being more relaxed, and so it’s also linked to the fact that the oil price is sort of stabilizing around a higher price and the long term view on oil is relatively good. I mean, maybe it’s interesting to note that despite all the news about, you know, electric cars, oil and natural gas will remain.

I think from what I’ve read and what I understand, an important energy, you know, in the energy mix in the future. Over the next 10 years, we will still see oil and natural gas used in the energy mix, although the proportion will go down, most likely. Of the energy consumption, it is increased year on year in the world, and you have more and more people to feed and conserve energy. So oil will carry on.

Clarissa Dann Boris, Yann, thank you very much for talking to Trade Finance TV.

Boris Jaquet Thank you.

Yann Ropers Thank you.

Published on September 24, 2019