OT22064 - Interest and Financing

Lending Practice. Field Development.

Although exploration must be financed wholly by equity, it may be possible to finance the development of a field by heavy borrowing where the value of the future cash flow from the field is very much more than the cost of the infrastructure and plant needed to develop and exploit it. Similarly, where the company already has a field generating substantial and reasonably predictable cash flow, in principle it may be able to borrow to finance exploration if the security for that borrowing is not the exploration itself but other existing production interests. However, lenders will traditionally be very cautious in dealing, even indirectly, with exploration and in an arm's length situation there may also be questions as to how far a company itself would wish to pledge existing production interest as security for unpredictable exploration activity.