The Seagull Field: case study 

Richmond Bank has recently been approached by its good independent, upstream oil and gas client, Zenith Oil & Gas, with a view to RICHMOND providing a limitedrecourse facility to part-fund the development of one of Zenith's gas field interest. Zenith and two multinational oil company partners are licensees in respect of the development of the 'Seagull' gas field offshore the Arcadian Republic. 

The Project 

Seagull is situated in shallow water some 30km offshore the Arcadian Republic and was discovered by the partners in 2005. It is to be developed by means of 5 production wells, 3 of which will be highly-deviated. The drilling will be undertaken by Global Drill Inc. of Houston. There is to be a single platform, which will be built under a fixed-price turnkey contract in a local yard. 

Seagull is a high-pressure, high-temperature field. One of Zenith's partners (Multinational A, which operates) is highly-experienced in developing HPHT fields. No third-party reservoir report has been commissioned. Reserves evaluations, production profiles and capital/operating costs have been provided by the Operator. 

The field's gas is wet and has a relatively high 'mercaptan' (sulphur compounds) content. It will be shipped by means of a new pipeline to the existing Snowbird gas field, where it will enter Snowbird's existing pipeline to shore. Snowbird is operated by Multinational B. 

Capital Costs are estimated at US$400 million, which incorporates a 10% contingency. Zenith has a 20% interest and therefore its share of 'capex' will be US$80 million. 

The gasfield life is estimated at 10 years. Reserve tail analysis indicates that a 30% reserve tail will be reached after 7 years on the Base Case production profile. 

The gas to be produced will be sold to the State Power Company of the Arcadian Republic. The gas price (per million BTU) will be set in Arcadian Dollars and will be adjusted by reference to a basket of factors - principally the price of Low Sulphur Fuel Oil and the Arcadian producer Price Index. The State Power Company of Arcadia, like the Republic itself, is rated 'A' by Standard and Poors and Moodys. The country has an established borrowing programme in the syndicated loan and capital markets. The contract of the purchase of gas is on a life-of-field basis. There is a take-or-pay commitment for 80% of the maximum potential delivery volume. 

The Borrower 

Zenith is a well established independent, whose activities have mainly centred on the North Sea up to now. The company has been a regular user of project-based debt 2 to develop its existing production portfolio. It has 3 producing assets in the North Sea, generating around 20,000 (boepd), together with 2 assets in late appraisal and a number of interesting discoveries/prospects. Richmond led one of the earlier project deals. Richmond is keen to develop its relationship with Zenith - and ideally to win the position of lead bank (currently held by Richmond's main competitor). 

Zenith's management team is well-respected in the sector for its experience of the industry and its financial acumen. It is privately-owned at present, but a listing is a distinct possibility. Richmond's equity arm is keen to take Zenith to the equity markets. 

The Facility

 Zenith seeks a $50 million facility. The Borrower will be a single-purpose company - Zenith Arcadia Limited - 100% owned by the top company in the Zenith Group. The group is not prepared to provide a pre-completion guarantee, but is willing to inject its equity first. 

Richmond's country risk committee has confirmed that $50 million of medium-term country limit is available for the Arcadian Republic. Richmond's modelling group has developed a Base Case/Sensitivity analysis to provide an initial assessment of the robustness of the project. 

Case                                      Minimum     Average      Minimum 

                                               ADSCR       ADSCR        LLCR 

Base case                                1.40          1.85              1.65 

15% cost overrun                     1.22          1.43.             1.33 

10% production cut                 1.30          1.64              1.55 

15% oil price cut                       1.28          1.60              1.50

Inflation 1% < base case          1.29          1.62              1.53 

15% increase in op costs         1.27          1.58              1.48

2% increase in interest rate     1.20.        1.40             1.30 

Task 

You are a member of Richmond's "One-Pager" Committee, which meets weekly to review loan opportunities before they proceed to formal Credit Committee submission. You are expected to:

 • Give a view on the attractiveness of financing this project. 

• State whether the project may should proceed to full approval. 

• Provide guidance to the project/bid feasibility team on the key areas which they should give particular attention.