Singapore (Platts)--5Nov2008

Despite the turmoil of the financial crisis, clear signs of recession in
the OECD and slowing growth in the developing world, the fundamentals
underpinning current energy projects have not changed, delegates at the
two-day Asian Oil and Gas Investment Congress, which ended Wednesday, said.

Citing continued population growth through to 2050, the decline in easily
accessible oil and gas reserves and the need to reduce greenhouse gas
emissions, Greg Hill, Shell executive vice-president for exploration and
production, argued that demand growth for energy over the long-term would be
sustained.

Conor McCoole, head of Project Finance Asia, for Standard Chartered Bank
agreed, but said that while the value proposition for oil and gas companies in
Asia remained intact, for many small and medium-sized oil and gas companies,
the long-term outlook has had to take a back seat to the more immediate
problems of consolidating their balance sheets in order to survive the recent
decline in both the oil price and their share values.

The problem is not that the oil price has fallen close to break-even for
the majority of recent projects.

Cue Energy CEO Robert Coppin said that even developing a new satellite
field adjacent to the company's current production in New Zealand would return
a 10% or more rate of return on capital at an oil price of $30/barrel.

Rather the problem for small and mid-cap companies is financing current
debt and raising capital for new projects.

Although cuts in central bank rates have been implemented around the
world, project financing is based on LIBOR, the rate at which banks lend to
each other on the London money markets, and this has not fallen in line with
central bank rates.

According to Lance Crist, global head, Oil and Gas Investment Division
for IFC, the private sector arm of the World Bank, financial institutions are
asking for LIBOR, plus a spread, but then an additional 150 basis points as a
risk premium. "Certainly that would be a minimum," he said.

McCoole said that the cost of borrowing had soared as banks have hoarded
cash to meet existing obligations, while investors had redeemed investments to
get cash, causing share values to fall across the board.

He said that syndicated bank lending was moving towards a "cost of
lending" model, in which increases in borrowing costs are passed on to the
lender.

He said that raising capital of any kind was now very expensive, although
it was still comparable with borrowing costs 10-12 years ago, before financial
markets were flooded with liquidity that pushed the cost of borrowing down to
very low levels.

He said the financial crisis had engendered a structural shift in capital
and credit markets, in which lenders effectively want higher returns, which in
turn means that oil and gas projects need to achieve higher levels of
profitability.

He argued that oil and gas companies need to diversify their sources of
lending, looking in particular to local banks in Asia, to multilateral lenders
and to government-backed export-import banks.

InterOil CFO Colin Visaggio said that his company had consolidated its
balance sheet earlier in the year, securing the finance to sustain the
development of its Papua New Guinea LNG project.

Yet he noted that the company's share price was down 50% from September.

Nick Cooper, CFO for Salamander Energy, an Asia focused upstream oil and
gas company said that it had seen its share price plummet 60%.

Visaggio said that if a company's share price falls, its impacts its
debt-to-equity ratio and the ability to raise capital through new share
offerings.

Highlighting the importance of local Asian banks, InterOil successfully
raised $57 million from banks in Papua New Guinea on October 31 at very good
margins, Visaggio said.

The decline in its share value persuaded the company to return to the
debt market, where local bank relationships allowed it to secure a good deal.

Visaggio also said that reserves were a potential route to raising
finance and InterOil was looking at divesting a portion of its gas reserves as
a further means of financing its LNG project.

The fall in share prices means that many small oil and gas companies in
Australia with both production and reserves now look like good acquisition
opportunities.

Some, said Visaggio, were valued at little more than their balance sheet
cash.

Salamander's Cooper said that companies couldn't just rely on organic
growth and that "consolidation was inevitable."

He said that companies with a strong balance sheet were likely to become
"cyclical acquirers," although he noted that acquisitions could only be funded
through cash or equity, with the latter prospect currently looking bleak.

With debt and equity largely closed to small and mid-cap oil and gas
companies as means of raising capital, the only two other routes are through
asset sales or cash revenues.

For companies that have not yet reached production, the latter is not an
option, suggesting that asset values are likely to fall as more come to
market.

Other companies, like Cue Energy and Canada's Canoro Resources have taken
the latter option, choosing to reduce debt as far as possible and fund growth
through cash revenues.

As Canoro President and CEO said "cash flow is king."

But the fall in the value of crude to between $60 and $70 is limiting
even this resource.
--Ross McCracken, Ross_mccracken@platts.com