Financing Energy Projects During The Project Lifecycle

Energy projects—be they oil and gas, mining, conventional hydro or renewable energy—are ­generally capital intensive, and financing is critical to success. Many resource undertakings share a similar ­trajectory, and many factors influence the type of financing available throughout the project’s lifecycle.

Early stage exploration entities are often the riskiest ventures, and commercial lenders are generally unwilling to lend into this space. As a result, early stage project proponents are often dependent for financing on issuing their own common equity. Depending upon the cost of entry into exploration, these entities finance themselves privately, often through investments from founders, high-net worth individuals, and other industry players.

Investment in early stage exploration is often driven by business ­considerations, such as the strength and track records of management, the geological potential of the area of ­exploration, and the potential for significant investment ­upside. At this stage, investor confidence in the legal entitlement to project rights, together with an understanding of the potential legal issues and business risks involved, are of paramount importance.

With the right market conditions, a proponent in the exploration and ­development stage can go public, offering common equity to a wider group of investors. As proponents burn funds to carry out exploration and development programs, they can continue to raise money through both public offerings and private placements of securities. In both the oil and gas and mining sectors, the issuance of shares to investors on a tax ­flow-through basis (allowing investors to use the proponent’s exploration expenses to reduce their own tax payable) can act as a sweetener, providing additional enticement to invest.

While exploration financing is primarily ­funded through issuance of equity, development stage financing may be comprised of a mix of ­common equity, convertible debt, and ­project ­financing. Additionally, throughout both the ­exploration and development stages, project proponents may ­enter into strategic partnerships, which can serve the purpose of financing and ­advancing the project, where the proponent does not have necessary funds or expertise. A ­strategic ­partnership can occur at the project or the parent-company level and can involve acquisition of minority or majority ownership. Off-take agreements for energy products from the project would be typical in this kind of ­business structure.

As a project moves into the late development stage and towards operations, project finance and corporate level debt become financing ­options. Project finance typically involves ­raising limited-recourse debt at the project or asset level, and this debt is generally serviced by the cash flows generated by the project itself. The security taken by a lender to secure the project finance debt is generally limited to the project’s assets, accounts, and contracts.

A proponent’s ability to obtain corporate level debt is driven by the parent company’s ­audited financials and depends on cash flows and ­reserves of the overall enterprise. ­Usually ­corporate debt is non-investment grade and ­unsecured, but the parent company will provide covenants and commitments with respect to the project’s ongoing operations.

Throughout the project’s lifecycle, diligence and documentation put in place will vary ­substantially and will need to be actively managed by the proponent to achieve the project’s success, as the proponent takes advantage of the available types of financing, and the business and legal considerations.

Special thanks for the contributions of Tauna Staniland, associate, Stewart McKelvey.