Influence of Environmental Risk on the Financial Structure of Oil and Gas Projects

Abstract

The risk profile of a Build-Operate-Transfer (BOT) project affects its debt service ability. In particular, the total risk profile of an oil and gas project is heavily influenced by its environmental risk exposure. However, this risk is often not given a considerable weight in risk analysis, resulting in underestimation of project's total riskiness and consequent overestimation of the debt capacity. This study is aimed at understanding the dependence of the capital structure of oil and gas BOT projects on environmental risk exposure and proposes a methodology for incorporating such important risk into the total risk rating process to determine the debt leverage. As a result, it is shown that integrating environmental risks into the risk score of a project yields higher values of risk exposure, which may lead to a lower debt-to-equity ratio.