The three multi-billion dollar energy projects currently seeking financing are still targeting completion by year-end, although it uncertain whether all of them will achieve this objective. Any lag is more likely to be a result of the difficulties inherent in financings of this size and complexity than any particular major problem, given that all three deals appear to be well subscribed, suggest MEESsoundings.

Talks to pin down debt prices are still ongoing for the Saudi Aramco Total Refining and Petrochemical Company (Satorp) 400,000 b/d export refinery in Jubail, and the Papua New Guinea LNG project, although the Nord Stream phase one pipeline linking Russia and European Union via the Baltic Sea is close to agreeing margins with lenders, MEESlearns. These are near to levels suggested by the financing model. The model carried margins of 275 bps over the London interbank offered rate (Libor) pre-completion, and 450 bps thereafter, while the margins on the export credit agency (ECA) component of the deal stretch from 175-195 bps.

While every project is different, making assumptions about the trajectory of margins somewhat complicated, Nord Stream, which is costing €5.5bn with €3.85bn of debt, provides further evidence that starting bank margins, post credit crunch, are coalescing around the 275 bps level. They were at this level for the Dolphin regional gas operation refinancing completed earlier this year (MEES, 3 August), and close, at 260 bps, for the Shuweihat S2 independent water and power project (MEES, 26 October). Barring a big shift in market conditions, Nord Stream is expected to provide a pricing benchmark for the Nabucco pipeline, which has started financing discussions with multi-lateral lenders and ECAs (page 14), while the Jubail refinery, which is costing $12bn (including financing charges) with $8bn from debt, will be a template for other forthcoming refinery projects in the Kingdom.

Jubail Price Discussions Continue

Since the Jubail project made its formal request for funding in July (MEES, 20 July), some amendments have been made to the term sheet, slightly altering cover ratios. Despite the changes, some bankers still complain that the project is over-leveraged, as they warily eye the recent fall in refinery margins which have slumped in tandem with the global economic downturn. However, one source close to the project rejects this notion, characterizing Jubail as a conservative project financing due to strong economics. He points out that it was put in the top 5% of refineries worldwide in a recent study (MEES, 21 September), and has eminent sponsors which are providing co-loans and a sponsor completion guarantee.

Even the banks grumbling about leverage, however, suggest that they will push the deal through due to the names attached to it. “People are coming in on a sponsor basis and presuming that if anything negative did happen, presumably Saudi Aramco would step up,” said one lender. While banks have made their pricing offers, sponsors have not yet returned with their consensus margins, MEESunderstands. They are expected to do so within the next few weeks. “The deal is taking a while because the sponsors and their advisers are trying to do a few things simultaneously, including sort out the ECA tranche, which depends on procurement, so we still don’t know the final composition of the funding,” comments one banker. Lenders suggest that similar issues are facing PNG LNG, which is the largest of the energy mega-deals in play, carrying a $17bn price tag with $11bn of debt. It is uncertain at present whether the Jubail project and PNG LNG will close by year-end, and generally speaking, in the post credit crunch environment, deals have taken longer to complete.

ECA Boost Raises Ceiling Issue

ECAs have been a growing component on project financings, as a result of the financial crisis which cut bank funding, and they are heavily featured, as providers of both direct funding and insurance cover on the Jubail project, as well as PLNG, and Nord Stream. However, there are concerns that for some ECAs that issue insurance cover and where banks provide the underlying funding, bank country ceilings are being reached. Bankers said that this applies in particular to the South Korean cover provider KEIC, which has been especially active in supporting exports of ships. However, one finance expert suggests that while this will not prove a problem for the Jubail project, it could become an issue for subsequent financings. A way around this is possibly to securitize this type of debt and sell it on in pools to banks and other financial institutions in order to provide balance sheet relief. However, securitization has not been in favor since the subprime mortgage crisis.

In addition to cover and direct loans from ECAs, and input from regional and international banks, the Jubail multi-tranche funding will also use domestic institutional lenders, the Public Investment Fund and the Saudi Industrial Development Fund, and sponsor co-loans. The project’s sponsors are still contemplating issuing bonds under 144a rules which would allow placement in the US, and possibly Sukuk. However, if debt markets are tapped, the financing may spill over into 2010. “I think Jubail will have the bank commitments signed by the end of the year, but they may want to do a bond issue and that may take longer,” commented one banker.

Recent successful bond market issues in the energy sector, from Dolphin and RasGas 2/3, increase the likelihood that others, like Jubail, will follow suit. However, for a greenfield project there are still bond issues to overcome, such as negative carry and the need for waivers from multiple lenders if there are changes to the project. Getting a waiver from a bank group for a change would be easy compared to securing one from myriad bond holders (MEES, 22 June). Also, if market conditions improve and margins fall, banks have the added advantage of being able to refinance debt.

The Jubail project financing is expected to provide a template for the west coast Yanbu' 400,000 b/d export refinery, which is a joint venture between Saudi Aramco and ConocoPhillips, and the $23-26bn Ras Tanura project (MEES, 12 October). The Yanbu' project is expected to seek financing next year, after delaying its tender for engineering procurement and construction contractors in order to replicate the improved pricing secured by Jubail. EPC prices have been in a downwards trajectory in step with the global economic downturn, after reaching all time highs in 2007.

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