The U.K. has a long-established position as a world financial center. Just as the country's maritime and industrial traditions fuelled the growth of banks in the 19th century, oil and gas development from the 1970s onwards has also driven the growth of financial services. Today, the U.K. oil and gas industry's second breath of life and the arrival of smaller independent players demand new financial tools and ample supplies of capital from the major banks. Compared with North America, Britain's financial institutions are relatively unfamiliar with the requirements of mid-tier and small independents. The U.S. and Canada have a wealth of "boutique" investment banks and financial institutions specifically dedicated to the oil and gas business. Meanwhile, the U.K. has only major banking institutions and is lacking the smaller operators that can offer finely tailored financial engineering to fit different phases of a project, and even small ones. But things are shaping up, and with the changes in the sector during the last decade, financial institutions are rethinking their approach to the industry, no longer characterized by an accumulation of mega-projects with financial needs passing the $1-billion mark. The first sign is the strengthening of the presence of venture capital and private equity funds in the industry. Leading British venture capitalist firm 3i, has, for instance, invested heavily in both the upstream and the service sector, with more than 30 capital and equity participations in the industry. In the U.K., it invested in the small Venture Production, helping the company finance its growth and become the largest holder of acreage amongst the independents. 3i also invested $40 million in service and facilities-management firm Petrofac, helping fuel the development of its North Sea and international businesses. Meanwhile, oil and gas investment banks like Houston-based Simmons & Co. International have moved in, with offices in Aberdeen and London. They have been busy scouting for technology-intensive companies in need of financial engineering, while being closely associated in other deals with E&P operators and service providers. Besides such cut-to-fit solution providers, the largest banking institutions have also been working hard to develop offers. A key operator is the Halifax Bank of Scotland (HBOS), which in the 1970s was the first British bank to establish a specialized oil and gas financing unit. For more than 10 years, the bank has been the top senior debt provider to the U.K. management buy-out market and one of the pillars of the oil and gas industry. Since participating in the development of the Forties Field, the bank has deepened and expanded its knowledge of the U.K. North Sea to become the recognized industry leader in financing the oil and gas sector in the U.K. and with interests ranging worldwide. In 2003 it was involved in arranging oil and gas deals worth more than $1.3 billion and participated in deals worth $1.4 billion. It currently has mandates to arrange further loans worth nearly $800 million, and has other well-advanced deals in the pipeline. Gerald Kenny, Bank of Scotland head of natural resources, says HBOS aims to remain the leading arranger of loans to independents in the U.K. "Our business is expanding in size, product range and geographical coverage and we believe we can provide a second-to-none service to the industry. "There are exciting opportunities for the independent sector in the North Sea and there is no bank better placed to assist those companies that wish to invest there. However we recognize that this is very much a global industry and we are happy to provide financing solutions for our clients operating in many regions around the world." Its rival to predominance in the British industry is the Royal Bank of Scotland (RBS). Fighting hard to quell the reputation for conservatism attached to the U.K. banking sector, RBS was involved in the North Sea since the beginning and a strong player in the U.S. through its Houston office. It has been a key partner for some new entrants and small independents as well as big E&P projects undertaken by the majors. For RBS, the North Sea is a core area. "We have been slightly more innovative than our competitors, notably investing equity in a few start-up companies, which was a big step for a commercial bank," says Peter Buchanan, director of the oil and gas division at RBS. "The thing that makes us different is that we are a truly oil and gas bank, with a long experience in the North Sea, including throughout the downward cycle." The conservatism of the banking sector is an element sometimes presented by E&P players as hampering the full development of the oil and gas sector because of a lack of significant underwriting capability and debt products. The limited availability of mezzanine debt is especially resented. "The lack of mezzanine here is simply due to the fact that there hasn't been the demand for it up to now. In the U.S., with thousands of oil companies against a handful here, the demand is much more important and filled by specialist providers of mezzanine. Over here, you see a much more traditional capital structure. Nevertheless, a number of smaller companies are now starting to get more interested in using the leverage to increase the equity return and this is now seen as an opportunity on both sides, the companies and ours." The influence of the North American financial sector is very noticeable, with U.K. oil and gas attracting equity and now mezzanine from the big banking operators. But a wider spread of innovative products and attitudes is required to make sure local players don't turn systematically to the U.S. or Canada for the financing of their North Sea activity, through equity, debt or private finance. Already, a number of new entrants are indicating they strongly believe they will find more receptive ears and understanding for their project financing and partnership quests on the western side of the Atlantic. Other financial operators are also working on tackling specific North Sea issues. With decommissioning luring on most of the early North Sea infrastructure, risk insurance leader Marsh has developed a financial product to address the issue in a cost-efficient way. "This issue is certainly a matter of concern for big companies although they can absorb it in their balance sheets, but for smaller companies that may have a nonoperating interest in an asset, the ultimate cost of decommissioning may eventually prohibit their ability to attract capital," says John J. Lapsley, chairman of the Marsh marine and energy practice, headquartered in London. "Our product is a way of paying for decommissioning now, in a very efficient financial transaction. This product is unique to the North Sea and has been well received by the sector." All those operators are working hard to adapt their services to the existing and upcoming challenges presented by the U.K. oil and gas industry. In a maturing basin, with smaller entrants and an increase in new deal flows, a strong, innovative and lateral-thinking financial community is a must. Looking at the way the sector is structured in the U.S. and Canada, a number of local E&P operators wish the U.K. were offering the same facilities. But with the increased interest in the basin by North American operators, and the larger presence of U.K. financial institutions in the oil and gas industry in the U.S. and Canada, one may expect a great deal of cross-fertilization to occur in the years ahead, for the benefit of the industry, in the U.K. and beyond.