Sadara Seeks Funding Amid Saudi Liquidity, International Lender Uncertainty
Saudi Arabia’s game-changing $20bn Sadara petrochemical project has, to all intents and purposes, been launched to the bank market. Lenders were asked to sign confidentiality agreements on 14 May, and as they return these, they will receive documents providing detailed information about the 3mn tons/year project. This procedure is expected to be wrapped up by the end of the month. Banks will then need to submit their pricing on the deal, which will require the single biggest investment ever made in the kingdom and need around $13bn worth of debt financing. Melanie Lovatt reports.
The project will be the largest chemical facility ever built. Made up of 26 units, it will produce an array of petrochemicals and at its heart is a dual-feed cracker with a capacity of 1.5mn t/y of ethylene and 400,000 t/y of propylene.Sadara is launching at a time when Saudi banks are enjoying good liquidity, while their international counterparts struggle to sell off risk-weighted assets in order to comply with the stringent Basel III regulations. This is likely to translate into two different appetites for the deal, with both Saudi and possibly some regional banks wanting a greater slice of the debt pie and undercutting the international players on price.
“International banks are out of the business,” one Saudi banker states bluntly. “They have no balance sheet for long term illiquid assets and the only exception outside their home market is when a vital relationship is at stake,” he adds. Sponsored by state-owned Saudi Aramco and the US’s Dow Chemical, Sadara will fall into this latter category for many potential lenders. But even if they want to participate for what they typically call ‘relationship reasons,’ the combined ill-effects of the regulatory pressures and the ongoing European sovereign debt crisis will curb their activities.
This is a sharp reversal of the conditions that characterized the boom years of Gulf project finance before the global financial crisis hit with full force in 2008. At the height of the boom in 2005-07, regional banks were struggling to compete with international banks on pricing and were often shut out of big energy transactions. Ultimately it meant that the bulk of Gulf energy project finance was provided by the international banks.
“Saudi banks, unlike those in Europe, remain well capitalized and highly liquid,” said one banker, but he hopes there will be “less propensity for the silly margins seen in times of past liquidity.” Banks are under tight supervision from the Saudi Arabian Monetary Agency (SAMA), the country’s central bank, so they are unlikely to step out of line, he added.
The bank funding for Sadara is being sought in both dollars and Saudi riyals. Saudi riyal portions of recent financings in the kingdom have attracted lower margins than the dollar tranches, due to the kingdom’s deep liquidity. But dollar funding is still needed in order to secure long term interest rate swaps. This is important for project finance, where tenors typically extend out 15-plus years. On Saudi riyals the interest rate swaps become illiquid further out and can only be used to a maximum of five-seven years. They become more expensive too, which means that in the final calculations of cost, pricing on Saudi riyals will probably only marginally undercut dollars. Saudi banks are expected still to have the edge on supplying dollar funding. On recent transactions such as Qatar’s 1.4bn cfd Barzan gas/NGL project, which is costing $10bn, one of the participating Saudi banks supplied the biggest single dollar commitment.
Despite Saudi liquidity, the pullback of the international banks has been met with some concern amongst all project sponsors, especially those with multi-billion dollar deals, and this is being addressed by sourcing funding from multiple sources. Like many others, Sadara’s sponsors are expecting to source a large portion of the debt from export credit agencies (ECAs) and as a result focused their initial attentions on this sector. The financing process for Sadara kicked off with the approach to ECAs just after the final investment decision was announced on 25 July last year (MEES, 8 August 2011). It was only once meetings were wrapped up with the ECAs – they finished in April – that banks were officially approached. Saudi institutional lenders, the Public Investment Fund (PIF) and Saudi Industrial Development Fund (SIDF), are also expected to contribute sizeable amounts of funding to the project. The two have become a mainstay in funding the kingdom’s projects.
Due to its size, the Sadara project will need to source financing from further pools, and could include bonds and sukuk, although this will depend on prevailing market conditions. The 400,000 b/d Satorp export refinery project sponsored by Saudi Aramco and France’s Total paved the way for Saudi sukuk issuers when it secured $1bn from investors for its issue of the Shari'a compliant paper in October last year. After Sadara’s project financing is completed, it will also do an initial public offering (IPO) in Saudi Arabia. It is difficult to estimate how long such a large financing will take to wrap up, although the sponsors appear to be targeting financial close well before the end of the year. Financial advisers on the deal are Royal Bank of Scotland and Riyad Bank.
Tasnee SR2Bn Sukuk Oversubscribed
National Industrialization Company (Tasnee), the largest privately owned petrochemical company traded on Saudi’s Tadawul stock market, saw strong appetite from investors for its SR2bn ($533mn) sukuk issuance. The response showed that investor liquidity remains high, as the issue came in several times oversubscribed, MEES understands. The sukuk issue was wrapped up last week and achieved attractive pricing for Tasnee at 105 basis points over Saudi base rates (the Saudi interbank offered rate or SIBOR). With a seven-year tenor it was offered domestically for private placement and while it can be settled and cleared on the Tadawul, it will not be publicly traded on the exchange. It attracted a diverse group of investors spread across banks and government institutions after a domestic ‘road show’ led by HSBC.
Yemen LNG Pipeline Hit Again As Hadi Steps Up AQAP Offensive
A key gas pipeline transporting gas to the 6.7mn tons/year Total-operated Yemen LNG liquefaction plant was blown up by suspected al-Qa'ida militants on 14 May, forcing the company to further delay plans to restart production which was halted late last month. This is the third such attack on the pipeline this year and comes as Yemen’s newly elected President 'Abd Rabbu Mansur Hadi has stepped up the offensive against the al-Qa'ida insurgency which has strengthened its grip on the south of the country since the start of protests against former president Ali 'Abd Allah Salih in February last year. Nader Itayim writes.
“The blast happened at four o’clock in the morning around 35km from the terminal,” a source close to the company tells MEES, referring to the Balhaf liquefaction terminal on the Gulf of Aden. “Repair work was being carried out, but this will cause further delays in restarting production; maybe a few weeks.” This latest attack was the third of its kind this year, after militants with links to al-Qa'ida in the Arabian Peninsula (AQAP) bombed the same 38-inch pipeline carrying gas from Block 18 in the Marib region to the terminal on 30 March and 26 April (MEES, 7 May, 9 April) in retaliation for the rising number of government-backed US drone strikes being carried out on alleged militant strongholds. AQAP is again alleged to be responsible. “We immediately suspect al-Qa'ida as they claimed responsibility for the last two attacks on the pipeline,” a Yemen LNG employee told Reuters
Two train Yemen LNG is the largest industrial project ever to be carried out in the volatile state. The project consortium is led by Total (39.62%), with partners Hunt Oil (17.22%), Yemen Gas Company (16.73%), South Korean firms SK (9.55%), Kogas (6%) and Hyundai (5.88%), and the General Authority for Social Security and Pensions of Yemen (5%).
Total’s Yemeni E&P Interests
Prior to this attack, both Total and Yemen LNG had reaffirmed their commitments to make up for the lost output while production was shut in (MEES, 30 April). This latest setback however is expected only to make matters worse, with analysts suggesting the project’s two main customers, namely the South Korean and US markets, could soon suffer if Yemeni LNG supplies continue to be interrupted. “It appears LNG supply concerns have resurfaced,” New York-based energy consultants PIRA Energy said on 16 May. “Boston-area power consumers could feel the pinch until alternate supplies can be secured. However, the biggest potential problems will be for Korean winter buyers in the months to come if Yemeni sabotage continues to curb flows through the end of the year.”
Yemen has endured a turbulent year or so, as parts of Marib, Shabwa and other southern provinces have gradually fallen under the control of AQAP militants who have looked to capitalize on the turmoil stemming from the unrest that ultimately toppled the country’s long-time leader Ali 'Abd Allah Salih. And it has been during this time that the security situation for foreign oil and gas companies in Yemen had become extremely delicate and complex, with both their infrastructure and personnel coming under attack. Since October last year there have been five separate incidents of oil pipelines being bombed, three of gas pipelines being attacked and one of a Yemeni Total employee being killed by an AQAP-linked gunman (MEES, 7 May).
For a country whose oil revenues make up more than 70% of its state budget, and for whom oil and gas account for more than 90% of its exports, these incidents have proven disastrous, worsening Yemen’s already precarious economic situation. Speaking in a meeting with the French foreign minister’s Middle East advisor for economic affairs, Yemen’s Minister of Oil and Minerals Hisham Sharaf 'Abd Allah said his country had suffered big financial losses as a consequence of these acts, the al-Hayat
daily reported. The minister revealed that the losses incurred as a result of the several-month closure of the Marib-Ras Issa pipeline (see map on page 7) had been estimated at more than $2.5bn and that Yemen had been forced to spend $500mn per month since the pipeline’s closure in October to buy fuel from Saudi Arabia to make up for the shortfall. Three quick-fire attacks in October last year halted all oil flow through the key pipeline, which to this day has not yet been repaired (MEES, 24 October 2011).
International oil companies (IOCs) meanwhile are remaining very cautious with regard to their short term plans in Yemen, with most admitting a return of foreign staff to the Gulf state is still far off. “There are no more foreign staff in San'a,” DNO tells MEES. “We are monitoring the situation, but we have no immediate plans for a decision to go back,” the Norwegian company added. Austria’s OMV too has chosen not to send back any of its international staff, and would only consider a low-level return in the event of a “radical” improvement in the overall security situation, MEES learns.
Pursuit Of Terrorists
This most recent attack comes as the Yemeni president announced he was stepping up a new US-backed offensive against the Yemeni wing of al-Qa'ida. Speaking at the Yemeni Military Academy, the president vowed to retake the South from the AQAP insurgents to allow the thousands of displaced Yemenis to return to their homes. “The real war against al-Qa'ida has yet to begin, and it will not succeed until we have eradicated their presence from every town,” he said. “The fight with al-Qa'ida will not end until each district, village and position is cleared, and displaced persons can return to the safety of their homes,” the president continued. He vowed to do everything in his power to encourage the “elements of the terror organization to surrender their weapons and rid themselves of the ideas that contradicted the sacred values of Islam.”
© Copyright MEES 2012.