Amir AZAR, Ph.D.: Reserve Base Lending and the Outlook for Shale Oil and Gas Finance

Posted on: November 4, 2019

AMIR AZAR, Ph. D.KMPG Corporate Finance, Fellow, Columbia University Center on Global Energy Policy

12—1 PM Thursday, November 7

RoomT-424, Steinman Hall, Grove School of Engineering, The City College of New York.

Abstract

Although the existence of a vast shale oil resource in the United States has been known for decades, it was the innovation of producing hydrocarbon from the source rock by combining hydraulic fracturing with horizontal drilling that made the oil in nonporous shale technically exploitable.The process, however, remains capital-intensive. The real catalyst of the shale revolution was, thus, the 2008 financial crisis and the era of unprecedentedly low interest rates it ushered in, driven by the US Federal Reserve Bank’s monetary policy. American entrepreneurship, coupled with low-cost debt, created the conditions for a surge in production that ranks among the biggest oil booms in history.

U.S. oil production rose 74 percent, from 5.4 million barrels per day in 2009 to 9.4 million barrels per day in 2015, with shale oil driving more than 92 percent of the growth.The rapid expansion of shale oil and gas production in the United States from 2009 to 2014 has been associated with a period of historically low interest rates and sustained high oil prices. Over that five-year period, easy access to low-cost debt helped fuel the shale revolution; North American exploration and production companies (E&Ps) funded their cash-flow deficits with billions in secured and unsecured debt. Since mid-2014, oil prices have dramatically declined, forcing companies to adjust. An extensive body of literature has examined their resilience in the face of lower oil and gas prices and their ingenuity in protecting profit margins through cost savings and productivity gains.Interest rates, however, have remained relatively depressed throughout the price decline, though they have recently started to creep up. Whether the industry, having learned to reduce operating costs in the face of low prices, could overcome the additional challenge of a significant further increase in interest rates remains an unexamined question.

This essay aims to assess the general outlook for U.S. shale oil and gas in a higher-interest-rate environment, a topic that has until now received surprisingly little attention compared with shale operational costs and efficiencies. To do so, the paper examines for the first time North American exploration and production (E&P) companies from a compiled financial perspective, with a focus on the impact of the collapse of oil prices to below $50 per barrel.

Presenter

Amir Azar Ph.D. is a registered investment banking and private placement representative with more than 12 years of experience in energy and infrastructure finance. He is currently with KPMG Corporate Finance, where he manages project structuring and strategical planning for corporations and government initiatives. A globally-recognized thought-leader, Dr. Azar is also a Fellow at the Center on Global Energy Policy of Columbia University. His analysis of shale oil financing, “Reserve-Based Lending and the Outlook for Shale Oil,” has become a case study used by business schools and referenced by mainstream media. Dr. Azar started his finance career in 2009 at XL Capital and has held positions with Sumitomo Mitsui Banking Corporation Nikko and TD Securities. He holds a Master’s degree in International Finance from School of International Affairs (SIPA) of Columbia University and a doctoral degree in engineering with a focus on satellite data analytics from the City University of New York.

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