Cheap Oil Threatens Debt Squeeze for Smaller UK North Sea Producers

Small and mid-sized independent oil producers in the British North Sea could face a financing squeeze this year as banks cut lending linked to the value of oil reserves, following last year's oil price sell off.

LONDON, March 2 (Reuters) - Small and mid-sized independent oil producers in the British North Sea could face a financing squeeze this year as banks cut lending linked to the value of oil reserves, following last year's oil price sell off.

Unlike the oil majors, which can slash headcount and delay projects, smaller firms tend to be reliant on few fields, and those that are mid-project have little choice but to continue with their capital expenditure.

"Where companies have committed to projects when the oil price was $100-plus and their capital budget was set in advance, there's not much they can do to defer expenditure," James Hosie, director, energy research at Barclays Capital, said.

"Retaining access to debt headroom is critical to ensure they have the flexibility to weather the downturn."

But with oil prices tumbling from over $100 in June 2014 to around $60 today, banks are likely to reduce the amount of lending they are willing to make based on the valuation of reserves at the next round of assessments.

"There is a squeeze happening or going to happen," Brian Campbell, oil and gas capital projects director at PWC, said.

"If you've got a lot of reserve-based lending and a lot of debt, and you're already quite drawn on that, you're going to be in a world of pain," said Christopher Wheaton, manager of the Allianz Energy fund.