Small Oil and Gas Firms Face Funding Problems

LONDON -- Small, foreign-owned oil and gas firms operating in Russia face a challenge financing projects, as tightening credit markets and persistent concerns about Kremlin field seizures prompt bankers to withhold lending.

Funding problems mean an uncertain future for some of these companies -- typically worth less than $1 billion and often listed on the London Stock Exchange's junior AIM market -- and lower returns for investors in all.

Surging oil prices, which hit a record above $112 on Monday, have largely insulated companies with proven oil reserves, which they can use as collateral, from the credit crisis.

As lenders pulled back from troubled sectors such as property and retail, chief financial officers at some oil and gas companies said they actually saw more banks pitching loans.

Yet earlier this month London-listed Imperial Energy was forced to turn to shareholders to raise up to $600 million to refinance a loan and fund development work, after attempts to raise debt failed. Bankers were unimpressed by its almost 1 billion barrels of Russian reserves.

Imperial chairman Peter Levine said the move, which knocked almost 30 percent off the firm's shares, reflected a broader pullback in reserves-based lending.

But Imperial's experience echoes the funding difficulties faced by Russia-focused Timan Oil & Gas, whose shares were suspended last month pending a financing deal, and Victoria Oil & Gas.

Meanwhile last week Ithaca Energy and Stratic Energy, small explorers focused on the North Sea, announced over $200 million in lending facilities.

"The banks are still going to lend to oil companies but for some players, in places like Russia ... it's going to be tougher," said Peter Hitchens, oil analyst at Seymour Piece.

Some industry executives agreed that, after taking an optimistic view of Kremlin moves to retake control of the country's oil and gas sector, bankers had grown worried about the security of energy assets in the country.

Typically, explorers use investors' cash to find oil as banks are unwilling to finance the often unsuccessful work of drilling wells. When commercial reserves are proven, the explorer will turn to banks to help develop the field.

Investors and lenders, however, now reckon that in Russia, the riskiest part of the cycle does not end with a gusher. The acceptance of the extent of the risk oil companies face was a long time coming.

When state-owned Rosneft snapped up the assets of the country's largest oil company, Yukos, and state-controlled Gazprom muscled into Royal Dutch Shell's Sakhalin-2 project -- both at knockdown prices -- foreign oil executives said these were one-off events.

Even when projects controlled by oil majors ExxonMobil and BP came under pressure, smaller oil companies thought they could exist safely below the Kremlin's radar screen, said Andrew Neff, energy analyst at Global Insight.

But in the past two years, Imperial, Lundin Petroleum, Urals Energy, Timan and Victoria have all faced threats to their oil and gas licenses from the state.

Neff said this showed the state wanted greater involvement in the sector than many thought. "They have been moving down the line from the most important to the least important," he said.