31st Annual Review of Developments in Business Financing - Developments and Trends in Oil and Gas Financings 2013

04/11/2013

An oil and gas energy revolution is occurring in the United States, creating a “historic opportunity to reinvigorate the U.S. economy and greatly strengthen the nation’s global geopolitical position”.

Improvements in technology, primarily horizontal drilling and hydraulic fracturing (“fracing”), as well as deep water technology, have enabled us to access natural gas and oil reserves in the U.S. and offshore that were not previously recoverable on an economic basis, including vast shale formations deep underground across a dozen states. Just five years ago, the U.S. was increasingly focused on foreign production for meeting our demand for oil and natural gas, and U.S. oil production had been falling for nearly four decades. That has all turned around. The U.S. now has a surplus of natural gas supplies, oil production is rapidly rising, and federal regulators and legislators are debating whether to export natural gas.

This revolution is transforming the U.S. economy, creating the need for potentially trillions of dollars in investments, millions of new job and “a renaissance of American ingenuity and innovation”. In addition to capital investment and jobs in the oil and gas business, there has also been a profound impact on a wide range of other industries. The availability of lower cost natural gas as a source of energy, and the availability of lower cost natural gas liquids and hydrocarbon feedstocks, has transformed the electric energy generation business and has provided a boost to aid the revival of manufacturing in the U.S. and the competitive position of U.S. companies in the world. An additional consequence is that coal electricity plants are being replaced by natural gas-fired generating plants. Low natural gas prices have prompted new investments in manufacturing plants producing materials such as petrochemicals, steel, cement, fertilizer, glass, steel and petrochemicals.

An enormous amount of capital will be required to develop and produce shale oil and gas, and to develop the necessary infrastructure of pipelines, storage facilities, processing plants, refineries and related facilities. One recent estimate is that cumulative capital expenditures on unconventional oil and gas are expected to exceed $5.1 trillion by 2035 (an average of approximately $200 billion per year).

To satisfy these needs, capital is flowing into the oil and gas industry from both traditional and nontraditional sources. New types of partnerships and joint ventures are being formed and innovative financing structures are emerging. Some of the current trends are discussed below.

Presented at the American Bar Association Section of Business Law Spring Meeting, April 2013. To read the full paper, click on the PDF linked below.

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