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Abstract

Independent exploration and production companies have expanded into international operations in recent years, exposing them to new operating and financial risks. In addition, the capital expenditures required for large-scale international development can necessitate sourcing of new capital and expansion of a company’s balance sheet.

This chapter discusses a number of aspects of financing international exploration and production, including issues that will have to be addressed by both the sponsoring company and its financial partners, the various types of financing available, and the applicability of each type of financing to different phases of the project.

Assessment of the operating risk of a project is critical for investors. This assessment provides input for decisions concerning whether to participate in an investment and terms of that investment. Investors will require higher rates of return for higher-risk projects, within limits.

Different forms of capital provide different levels of security for investors, which also impacts rate-of-return requirements. Debt provides the most security, and is generally cheaper capital than equity; however, the amount of leverage used in the capital structure of a company or project can have a significant impact on the cost of each of the components of that capital. As the proportion of debt increases above certain levels, thereby increasing financial risk, the cost to the company of both debt and equity can be adversely affected.

Thus, the optimal capital structure of a project or company is a direct function of the operating risk of the entity. The combination of financial risk and operating risk will determine the cost of capital of the company. There is no single capital structure that is best for all companies. Similarly, the optimal capital structure for a given company or project may vary over time as the portfolio of assets and the industry environment changes.

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