Commercial Loans Run Dry for Oil Companies
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UPDATED: Oct 22, 2012
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Commercial lending in the oil industry for Middle Eastern and North African companies has reached a nine-year low.
Commercial loans for refineries and power plans are expected to fall to $13 billion this year compared to $44 billion that was seen in 2010, according to Arab Petroleum Investments Corp. This is a result of European banks withdrawing investment exposure from the volatile region.
In desperation for financing, oil companies in 18 countries from Morocco to Oman have paid an average of 190 points above the LIBOR for commercial loans. This is a massive increase from the average of 157 points required from 2007 to 2011, according to Bloomberg.
As oil companies scramble to find financing, it is clear that their lack of options is a result of the Arab Spring, which recently saw the overturning of several Middle Eastern governments and greatly destabilized the region. Clearly, banks are wary of lending commercial loans for refineries and oil production that may end up belonging to a new government following a popular revolt.
Although many Middle Eastern-based oil companies have sought aid from their own national banks, they may still face difficulties.
“Local banks can help in bridging the financing gap for energy projects over the coming five years, but they can’t cover the whole gap alone,” said Ali Aissaoui, senior consultant of Arab Petroleum Investments, according to Businessweek.
Fortunately, companies are turning to export credit or financing abroad. Japanese and South Korean credit agencies have given $7.2 billion to Qatar Petroleum, the largest commercial loan made in the last year in the Middle East.
Another reason that oil companies may be finding it difficult to obtain financing is that the European Union, home to some of the most powerful and wealthiest banks in the world, is undergoing a currency crisis. It remains to be seen just how successful the oil companies will be in finding financing from the other wealthy regions of a world that are still struggling through a global economic slowdown.