Advanced Financial Agency offers long-term financing solutions for refinery construction projects and their modernization.

To secure funding for the advancement of oil and gas production, transportation, and refining, it is crucial for applicants to grasp the fundamentals of the capital market, financial mechanisms, and the various options relevant to the hydrocarbon sector.

At present, project financing for refinery construction and long-term loans for equipment upgrades are crucial for the global advancement of the industry.

The recovery of the economy following the crisis necessitates substantial contributions from the oil and gas sector. This creates a strong motivation for funding the construction and expansion of oil refineries (downstream), along with investing further capital in the exploration and operation of oil fields (upstream) to guarantee consistent growth. These projects require significant capital, beginning with the development of oil fields and culminating in advanced oil refining and extensive logistics operations.

The duration from the initial investment in the oil and gas sector to the realization of consistent cash flows can extend up to a decade in certain instances. Stricter environmental regulations pose challenges for industry development, necessitating companies to implement new, expensive measures to reduce harmful emissions. These factors highlight the importance of selecting appropriate sources for long-term project financing as a key to success.

Capital is a crucial asset during periods of ample liquidity when interest rates are reduced. 

Oil and petroleum product exporters urgently require investment to sustain high productivity levels, supply national economies with fuel, and reduce reliance on imported petroleum products. The scarcity of funding options could negatively impact not just individual companies but entire sectors. Advanced Financial Agency is prepared to offer long-term loans for the construction and upgrading of oil refineries globally. Our firm has a history of financing significant investment projects across the United States, France, Japan, Saudi Arabia, Mexico, China, Brazil, Argentina, South Africa, and beyond.

We are consistently receptive to collaboration with major corporations that present promising investment opportunities. 

It is crucial for decision-makers to have a clear understanding of the challenges that hinder the attraction of financial resources for the advancement of the oil and gas sector and their effective utilization. These challenges are closely linked to the internal dynamics of corporate finance and capital markets. Our financial team is committed to offering expert support and guidance to clients throughout every phase of an investment project.

Oil and gas operations are typically divided into two main categories:

Upstream: refers to all operations conducted by oil and gas companies, encompassing the exploration of hydrocarbon reserves and their extraction to the surface.

Downstream: involves the processes associated with the production of hydrocarbons, including their transportation via pipelines, processing, and eventual sale.

A comprehensive economic evaluation of a specific oil and gas company’s investment project must consider both production and processing as a whole. In the industry, it is essential to analyze downstream activities to properly assess upstream operations.

The ultimate price of hydrocarbons is determined by the balance of supply and demand.

However, in the short term, various geopolitical events, such as military conflicts in oil-rich areas or significant financial shifts, can have a more pronounced impact on prices than purely economic factors.

For instance, the mere speculation of a potential armed conflict in the Middle East can lead to an immediate increase in oil prices due to consumer apprehension, even if production levels remain unchanged. Conversely, low interest rates can elevate oil prices as they foster expectations of a recovering global economy that will boost demand.

It is crucial to recognize that not all hydrocarbon reserves are readily available for extraction; a considerable portion of reported reserves consists of probable reserves, making it more accurate to consider actual production as a proposal rather than a certainty.

The cost of oil and its derivatives will be a key consideration, alongside the potential of oil reserves, when making investments in oil exploration, production, and refining. Additionally, the regulatory environment is crucial due to the extended payback period associated with such projects, which can take up to 5 years for refinery construction and as long as 10 years from exploration to market sale of oil or gas.

The hydrocarbon production and processing industry is a striking example of the economy of scarce non-renewable resources. The more oil and gas produced, the fewer hydrocarbons remain underground and the more difficult it becomes to extract them.

This compels oil and gas companies to explore for hydrocarbons in isolated and challenging locations, while simultaneously, refineries are enhancing the efficiency of crude oil processing and necessitating costly periodic upgrades, thereby escalating expenses.

This characteristic of the oil and gas sector involves price adjustments driven by demand, similar to many industries, while also considering the depletion of natural resources.

Clearly, sustaining a growing or at least stable supply necessitates significant capital investments over an extended period. In this regard, selecting the appropriate sources and methods for financing substantial investment projects is crucial for the economic sustainability of every company.

The process of oil refining transforms crude oil into valuable commercial products.

This production targets markets that utilize distilled products, including naphtha (a light product), kerosene, diesel, and fuel oil (intermediate products), as well as heavy products used in the manufacturing of asphalt and lubricants.

The refining process generates liquefied gases such as butane and propane.

The efficiency of a refinery is crucial for sustaining high profit margins. For instance, heavy fractions may represent 40-45% of total refined products. If residual oil is not utilized, such as in lubricant production, the overall economic efficiency of the process will suffer.

In the construction of a refinery, it is essential to design the process line to optimize raw material utilization and minimize waste generation. Currently, the most lucrative outputs from crude oil refining are high-octane gasoline, diesel, and, to a lesser degree, fuel oil.

Clearly, the economic success of an oil refinery is significantly affected by the composition and properties of light oil products like gasoline and diesel.

Naphtha and diesel primarily serve the land transport sector, significantly leading this market with minimal competition, as ethanol and other biofuels currently hold a minor share.

Aviation jet fuel is a lucrative commodity, while fuel oil finds extensive application in maritime transport and power generation. Historically, this fuel faced competition from coal, but the market dynamics shifted when developed nations moved away from coal usage. Nonetheless, heavy fuel oil continues to compete with natural gas, hydropower, and nuclear energy.

Historically, the refining sector has experienced significant volatility within the hydrocarbon industry. Refineries are bridging the divide between upstream and downstream operations while also addressing end-user demand. Furthermore, the industry must continuously adjust to swiftly evolving regulatory standards amid the global energy transition.

Refineries often face considerable challenges to their profitability when oil prices soar, making it difficult for companies to transfer cost hikes to consumers. The low profit margins experienced by refineries over the last ten years have resulted in a near halt in financing for new facility construction. In numerous nations, refineries are functioning at their lowest capacity. Conversely, investment in upgrading production lines persists, as enhancing efficiency and adhering to environmental regulations are crucial for the industry’s future.

Investments in oil refining primarily focus on implementing technological innovations and upgrading current refineries. 

There are limited initiatives focused on constructing new refineries. The challenge in this industry lies more in the management of working capital for financing intricate daily operations than in securing long-term funding, which is more relevant to oil exploration and production.

A common challenge faced by oil and gas companies is securing adequate financial resources under favorable conditions and at the appropriate time to initiate and expand their operations.

Addressing this challenge enables companies to penetrate markets, establish a competitive edge, and prosper during periods of economic instability and the global shift towards a sustainable economy. Corporate finance involves the acquisition and management of a company’s financial resources.

This sector of finance addresses three key questions designed to enhance value for business owners and shareholders:

– What are the company’s or project’s long-term financial requirements?

– How can a company secure funding for the construction or upgrade of a refinery?

– What is the amount needed to settle short-term obligations?

The aforementioned issues fall under the purview of the company’s CFO and are intricately linked to various facets of his professional responsibilities.

Specialists in this domain contribute to generating business value by leveraging the expertise of seasoned financial advisors and professionals from associated fields, both internal and external.

Our financial team assists clients in selecting and utilizing bank loans, bonds, stocks, and various debt instruments effectively, ensuring that their planned projects yield maximum cash flow. The financial statements of oil and gas companies contain several distinctive elements, and financial management in this sector differs considerably from that of other industries.

The effective management of professional capital in the daily and short-term operations of an oil and gas company, combined with strategic investment planning, guarantees sustained business success.

In general terms, an asset refers to any property that holds exchange value. Financial assets, also known as financial instruments, are intangible assets whose worth is represented by a future cash obligation. The issuer of a financial asset is an individual or entity that obtains funds from an investor by transferring ownership of the financial asset, with the commitment to make payments to the asset’s owner (the investor).

– A financial loan obtained from a bank or other lending institution.

– A bond released by a private corporation to support its activities. 

– A government-issued bond for funding key initiatives.

– And shares distributed by a publicly traded company.

The fundamental economic principle states that the value of any financial asset corresponds to the present value of anticipated cash flows, regardless of the uncertainty surrounding those future flows. The anticipated return on a financial asset is closely linked to its market price.

The nature of the financial asset, whether it is a debt security or equity, along with the financial metrics of the issuing entity, influences the investor’s (or lender’s) confidence in the expected cash flows. Greater uncertainty leads to increased risk.

The subsequent types of risks pertain to the financial assets of oil and gas firms:

– The risk of inflation is linked to a substantial reduction in the purchasing power of anticipated cash flows over time.

– The potential for default stemming from the issuer’s inability or reluctance to meet debt obligations or distribute dividends.

– And the risk of exchange rate fluctuations diverging from the previously established range.

The investment risks associated with constructing an oil refinery are closely linked to the anticipated profitability of the specific project.

The greater the risk associated with an asset, the higher the return an investor will demand to commit their funds to that financial asset. Financial assets fulfill two key economic roles. 

– First, they channel financial resources from market participants with excess assets to those requiring them for investment purposes.

– Secondly, a strategically constructed portfolio of financial assets facilitates a logical allocation of risks among the involved parties.

The financial team at Advanced Financial Agency (AFA) is responsible for overseeing the funding of oil and gas initiatives, securing resources under optimal conditions. Our investment models are both effective and practical, making them suitable for large-scale projects such as factories, power plants, treatment facilities, and various infrastructure developments.

The financial market serves as a crucial center for the trading of financial assets for oil and gas firms.

Participation in this market enables stakeholders to engage in the trading of various financial assets, including both debt instruments (which represent obligations to repay corporate loans) and equity instruments (which consist of shares in a company).

Financial markets serve three key roles in the advancement of oil and gas projects: 

– Facilitating efficient communication between buyers and sellers, where the price of the asset being traded is determined. Concurrently, they assess the profitability of a financial asset in relation to current market conditions.

– Establishing a framework that allows investors to sell financial assets, thereby ensuring liquidity through a transparent market trading system.

– Lowered transaction expenses. In this scenario, the primary costs for companies include search costs (such as announcing the intent to buy or sell financial instruments or finding a counterparty) and information costs.

The primary financial market refers to the platform where new securities are issued, allowing governments and oil and gas companies to sell bonds and stocks for the first time.

The capital generated from these sales is directly allocated to the budgets of the issuing entities to support future investment initiatives.

Once securities are issued in the financial market, they are subsequently traded on the secondary market. The revenue generated from these transactions does not benefit the original issuers.

This market serves to enhance the liquidity of securities, facilitating their utilization. As markets become more globalized, a growing number of oil and gas companies are gaining access to funding for investment projects within the global financial market.

This can be primarily attributed to the following factors:

– Ongoing deregulation of markets.

– Coupled with the growing institutionalization of global financial markets.

– Complemented by significant technological advancements that enable participants to effectively monitor these markets.

In terms of classifying financial markets, the most significant for the oil and gas sector at present are the financial derivatives markets or capital markets where long-term financial assets are exchanged.

The distinctive feature of the financial derivatives market is that security holders have the option or obligation to buy or sell a financial asset at a future date, with the price of a derivative instrument being closely linked to the underlying financial asset.

Long-term funding for substantial investment initiatives in the oil and gas sector relies on equity issuance and long-term bank loans secured by the anticipated cash flows from these projects.

Although equity financing is more common among private enterprises, long-term loans are increasingly appealing to both state-owned oil refineries and private investors.

Numerous organizations utilize this financial tool by issuing various types of shares to secure funding for capital-intensive investment projects. A company’s choice to become publicly traded can significantly impact the long-term interests of its current owners.

Consequently, in certain situations, borrowing may be viewed as a more favorable, though costly, option. Common shares do not have priority for dividend distributions or debt recovery in the event of insolvency.

Shares represent portions of an oil and gas company’s capital, which are allocated to shareholders, granting them specific rights. In corporate finance, different classes of shares exist, each with distinct voting rights. Shareholders’ rights are contingent upon their ownership stake in the company or project.

– Entitlement to a share of the company’s profits based on the number of shares held.
– Receipt of a proportional share of the company’s assets upon liquidation.
– The ability to vote on key strategic matters like mergers.
– Preemptive right to acquire additional shares.

Dividends distributed to shareholders signify the returns on the capital invested in an oil and gas company.

These payments are not deemed a company obligation until the board of directors officially announces the decision to distribute them. Following standard financial practices, dividends are disbursed from the company’s post-tax profits, making them non-taxable in many jurisdictions.

However, shareholders are required to report these payments on their tax returns. Additionally, preferred shares take precedence in dividend distribution and asset claims during bankruptcy proceedings. Holders of preferred shares are entitled to receive a fixed dividend per share, which can lead to confusion with debt securities.

In contrast to bonds, this financial instrument does not require the company to repay its debt punctually, regardless of its financial status. If the company fails to generate profit during the reporting period, the board of directors may opt not to distribute dividends to shareholders, including those holding preferred shares.

In some cases, dividends on preferred shares may accumulate, meaning that if shareholders do not receive dividends in one year despite the company being profitable, the unpaid amount may be carried over to the following year.

Furthermore, dividends on preferred shares are not tax-deductible for the company, unlike loan servicing costs. Additionally, preferred shareholders do not have the right to initiate bankruptcy proceedings against the company for unpaid dividends, which is a privilege reserved for traditional creditors.

Debt can be extinguished prior to its maturity through the use of call options. Occasionally, creditors may be granted preferential status, enabling them to recover their funds ahead of other creditors.

The public issuance of bonds occurs on the stock market, where multiple investors can purchase them at face value. Subsequently, these bonds are traded in the secondary market based on supply and demand dynamics, as well as interest rate fluctuations.

Companies frequently engage rating agencies to evaluate their debt, which involves assessing the risk of default by the issuer and reviewing the protections available to bondholders in the event of bankruptcy.

The private placement of bonds by oil and gas firms, while subject to more stringent conditions, tends to be more cost-effective and is generally viewed as a more adaptable option. This private placement is conducted directly with one or more financial institutions.

Typically, the maturity period for these bonds extends to 15 years.

The primary lenders are often banks and insurance firms.

Additionally, long-term bank loans serve as a crucial funding source for refinery construction projects.

For substantial undertakings that necessitate investments in the range of hundreds of millions to several billion dollars, a syndicated loan is the most suitable option. This type of loan is offered by a consortium of banks collaborating to share the financial risk.

A notable instance of such financing is the syndicated loan sanctioned by the International Finance Corporation (IFC) in the 1990s, which supported the construction of the Star Petroleum Refining facility in the United States, amounting to $410 million. The overall expenditure for this project surpassed $1.98 billion.

Debt represents a commitment to repay a creditor, including interest, within a specified timeframe.
When businesses secure a loan, they commit to timely interest payments and the repayment of the principal amount.
Unlike dividends, which are contingent on a company’s profits and financial strategy, interest payments are mandatory and classified as financial liabilities.

The total debt amount is strictly defined by the loan agreement, whereas dividends are flexible based on profitability. Furthermore, debt does not grant creditors any rights to manage or own the business; they do not have voting rights or a share in the company’s profits. Regardless of the company’s financial performance, including potential losses, the obligation to repay the loan remains.

For financing the construction of an oil refinery, companies can issue corporate bonds, which may be secured by various assets or issued unsecured for highly attractive projects. Long-term financing typically refers to loans with maturities exceeding one year, often ranging from 5 to 10 years, which is generally sufficient for refinery construction and achieving operational capacity under optimal conditions.

Corporate debt is usually repaid in regular installments, calculated using specific methods such as the French, German, or American systems, which include both principal and interest payments.

Project finance is a specialized funding approach for large refinery projects and similar facilities, relying on the project’s capacity to generate adequate cash flows for debt repayment. This method is considered off-balance sheet financing, as the project debt is isolated from the originator’s financial statements, thereby not impacting its credit rating. In standard project finance, the collateral consists of the project’s assets rather than those of the initiator.

A key distinction between project finance and traditional financing is that in the former, the lender extends funds to a special-purpose vehicle (SPV) instead of directly to the originator, effectively creating a financial separation between the project and its creators.

Conventional corporate finance typically does not define the intended use of loans or other borrowed capital.

Project finance enables lenders to more effectively manage credit risk compared to direct lending to a company engaged in diverse business operations. Typically, the funding for constructing an oil refinery is sourced from 70-80% borrowed capital and 20-30% from the project initiators’ own financial resources. Organizing project finance necessitates extensive negotiations with various stakeholders and the establishment of a sophisticated contractual framework.

The cash flow generated by a particular project serves as security for the repayment of the funds. Additionally, structured finance techniques are integral to project finance, assisting banks in reducing their risks through securitization.

Essentially, project stakeholders are converting their loans into bonds (tradable securities) that they present in the capital markets, linked to the project’s revenue streams. In the oil and gas sector, project financing has consistently been sought after for executing major initiatives. Its rapid expansion commenced in the 1970s with the funding of oil extraction in the North Sea and Australia. Currently, project finance provides oil producers with cost-effective and adaptable funding options for extensive refinery development and upgrade projects.

Advanced Financial Agency provides project financing solutions for the oil and gas sector across the United States, Latin America, Europe, the Middle East, East Asia, and North Africa.

Reach out to us for further information.

In the past, it was thought that the primary objective of refinery modernization was to enhance specific equipment and refine certain processes. Typically, these efforts involve replacing or adding to existing machinery without altering the overall technological framework.

However, in contemporary terms, refinery modernization primarily focuses on implementing investment strategies designed to enhance production through systematic structural and organizational improvements.

These enhancements must be holistic to guarantee that the facility meets all organizational, technical, and environmental standards within the industry.

Management’s focus is redirected towards executing a series of investment initiatives that leverage new scientific and technological advancements to attain commercial success. In this regard, the emphasis on refinery modernization should prioritize future-oriented, sustainable development through extensive transformations.

This modernization must align with cutting-edge technologies while being closely tied to the company’s strategic development goals, taking into account its present condition—whether it is in a state of decline, relative stability, or rapid growth.

Investment planning is a crucial element of the economic model, shaped by the mission, strategic objectives, and the scientific, technical, and investment policies of the oil and gas company.

Our specialists outline key principles for effectively modernizing refineries.

• The management should develop a comprehensive modernization plan that aligns with the long-term business development strategy.
• Investment in modernization is justified only if it yields greater benefits than simply holding onto funds.
• Modernization projects should be executed only when they demonstrate cost-effectiveness, considering both time and inflation impacts.
• The ultimate decision to finance the refinery’s modernization will be based on whether the project offers economic advantages while factoring in potential risks.

Investment in the modernization of a refinery should be guided by a thorough analysis of the specific facility’s condition.

A program-targeted approach serves as the foundation for investment planning, emphasizing principles such as consistency, comprehensiveness, prioritization, and timeliness. Enhancing the management system and the production and technological aspects can significantly boost the effectiveness of actual investments.

This is largely due to the fact that, in today’s market, a business’s competitiveness hinges more on its ability to adapt flexibly to market demands rather than merely on its capacity to produce large quantities of goods.

Financing sources for modernization include both short-term and long-term loans, equity issuance, various types of bond placements, leasing, factoring, and more.

Evidence indicates that loans remain crucial for the majority of these initiatives. To illustrate the financial scope, consider the recent modernization project of the Refinería Talara in Peru.

This medium-sized facility, with a production capacity of 95,000 barrels of fuel daily, underwent extensive reconstruction and modernization, costing approximately 5.2 billion US dollars and spanning nearly 7 years (2013-2020).

 A substantial portion of the funding needed for the execution of these extensive projects is sourced from commercial banks and their partnerships, along with international financial organizations.

Specifically, the previously mentioned project was partially funded through a long-term syndicated bank loan. Implementing these financing methods in practice necessitates careful consideration of several factors.

Projects of this nature typically involve complex calculations. Investments are intended to cover expenses designated for a specific modernization period.

Additionally, investments in modernization initiatives frequently entail a predetermined series of payments spread over an extended timeframe, which adds an element of uncertainty to both the company’s future and the project itself.

Second, a company needs to consider a range of factors that hinder investment decisions. This includes the complexity of assessing the return on investment in modernization of the enterprise, the presence of discrepancies between estimates and actual information on the costs of modernization of the enterprise, as well as the complexity of assessing the effectiveness of the portfolio of modernization projects as a whole.

Extended bank loans offer several benefits to an oil and gas company. 

– Extended financing options
– Including the ability to negotiate loan terms with the bank
– Access to favorable loan conditions for equipment purchases from designated suppliers
– A streamlined and efficient process for securing funds
– Straightforward contract framework involving few parties
– And the opportunity to secure substantial loans through a consortium

Advanced Financial Agency provides funding solutions for significant refinery upgrade initiatives, offering long-term loans of up to 50 million euros with repayment terms extending to 15 years.

For further details, please reach out to our finance team.

The achievement of significant projects in the oil and gas sector relies on the capacity to produce consistent cash flows over an extended period.

Making informed decisions regarding long-term financing for the construction or upgrade of a refinery is essential for thriving in a competitive landscape.

The management’s objective is to optimize every investment decision and identify methods to execute investment projects that enhance the company’s value. The operational phase that follows will necessitate innovative financing solutions for working capital to support the refinery’s operations.

The presence of vast deposits and a growing market demanding more petroleum products are not the only factors for prosperity. It is important for oil and gas companies to find a source of long-term financing with flexible terms, since the long construction time of refineries and high initial investment costs increase the risk and uncertainty for potential investors.

Detailed study of all aspects of the project, professional financial modeling, and negotiations with a wide range of stakeholders are important in this context.

At all stages of the project, companies need reliable financial partners and professional consultants who are ready to attract the resources on favorable terms and support the company’s efforts.

We provide financial support for significant projects in oil production and refining, create sophisticated financial models for our clients, and deliver expert services from asset managers, technical consultants, and economists.

Advanced Financial Agency collaborates with a variety of esteemed partners, including major investment funds, banks, and other financial institutions; engineering firms; research institutes in the United States and abroad; and distinguished manufacturers and suppliers of oil refining equipment.

If you are seeking financing for the construction of oil refineries or require a long-term loan for equipment modernization, feel free to reach out to us at any time.