Low oil prices will not hurt project financing

The recent slump in energy prices may benefit transportation projects, aviation and renewables, an S&P study finds.

The current low oil and gas prices are not expected to affect the credit quality of global project finance debt in the medium-term, Standard & Poor’s said in a report released on Monday.

The agency reckons that the situation may become more problematic for projects with refinancing risk, market exposure or input prices, should the price of oil stay at or below $50 a barrel for more than 18 months.

On the contrary, low energy prices may “make transportation project financing more attractive, as lower fuel prices encourage more highway and air travel and, indirectly, more train travel through the effect on power prices,” according to the report.

Dubai-based S&P credit analyst Karim Nassif cited specific toll road projects that can expect to see an increase in traffic volume, including Highway 407 in Ontario, Canada; Virginia’s I-95 managed lanes; and the North Tarrant Expressway (NTE) in Houston, although the benefit for NTE may be offset if lower energy sector activity results in higher unemployment.

In the Middle East and Africa, countries are planning $300 billion worth of transportation projects over the next 20 years.

“We also see one of the key beneficiaries of the oil price decline as being aviation-related project financing,” Nassif wrote in the report. “Large government-backed airlines, including Emirate Airlines, are entering into a period of expansion and further capital raising amid the cheaper fuel environment.”

Another, perhaps unexpected, beneficiary of low oil prices is the renewables sector.

“We think that in certain jurisdictions the oil price decline could lead to an increased focus on renewables and other means of securing energy supplies that are less dependent on the cyclicality and volatility of oil prices,” Nassif stated. “An example would be the fiscal pressures Gulf sovereigns are facing as a result of recent commodity price declines, and the consequent potential for energy subsidy reform that could pave the way for more renewable projects in Gulf Cooperation Council (GCC) markets.”

S&P also noted that while most of the wind and solar projects it rates have fixed-rate offtakes for all energy generated, the small number of renewables projects that are exposed to market prices could be negatively affected, generating lower revenues when natural gas plants are the marginal generator at the local price hub.

The agency’s benchmark assumptions for 2015 are $55 per barrel for Brent and $55 per barrel for West Texas Intermediate, with prices rising $10 per barrel for each in 2016 and again in 2017.

In late March, S&P also lowered its revisions on Henry Hub natural gas “to reflect the continued shift in gas production to lower-cost and highly productive reserve basins such as the Marcellus and Utica shales in North America,” according to the report.