As a senior executive with a major European export credit agency (ECA) recently observed: “Global commercial markets are very liquid – there’s a lot of money around and a lot of banks happy to take on clean project funds.” And the example he used to illustrate his point? “QatarGas II shows the amount of appetite, with some ECA funding but huge commercial demand.” When it was concluded in 2004, the QatarGas II liquefied natural gas (LNG) project financing structure broke several records, receiving commitments worth more than $5bn for its upstream component.
Analysts noted the huge appetite for mandated lead arranger (MLA) roles shown by commercial banks across the globe; more than 40 responded to a request for lead arrangers willing to lend $100m each to the project with a 15-year tenor.
This performance was impressive but no real surprise: the previous record for a lead arranging group was set by 24 banks, which adopted MLA roles for a previous big Qatari project – the Q-Chem petrochemicals scheme.
World leader
Indeed, Qatar topped the world rankings for the country with the highest level of project finance in 2004, followed by Azerbaijan, according to UK-based capital markets research platform Dealogic.
QatarGas gives a flavour of what is to come. In February, Qatar again leaped onto the world stage with the signing of three mega-deals in two days between the state oil company, Qatar Petroleum (QP), and the oil giants Royal Dutch/Shell, Total and ExxonMobil.
Such is the peninsula’s pull that even the chief executive of a major firm that lost out this time round, BP’s Lord Browne, dropped into Doha during the same week to reaffirm the UK-based giant’s interest in doing business with the emirate.
The reason for this is Qatar’s huge North Field, which holds global-scale reserves of natural gas in a huge undersea structure shared with Iran. Iran’s portion, called the South Pars field, is also subject to a massive multi-phased development programme.
Where Qatar has been quicker off the mark than many other potential gas players is in creating the conditions by which majors can pile in to invest. It has secured markets – initially in the energy-hungry Asian growth markets but, more recently, in the fast-emerging transatlantic gas trade and liberalising European markets.
Thus when Royal Dutch/Shell signed its heads of agreement with QP on February 27 for the $6bn-$7bn, 7.8m tons per year (t/yr) QatarGas IV LNG project, the gas exports were aimed at North American and European markets, rather than Qatar’s traditional Asian markets.
The next day Total acquired a 16.7% equity stake in train two of QatarGas II, intended to supply an import terminal under construction at South Hook, Wales. This deal entitles the French company to up to 5.2 million t/yr of supply – coming from lead developer ExxonMobil’s expected 15.6 million t/yr supply to South Hook.
The fact that Britain is planning to take LNG from Qatar points to another important trend for Qatar and its partners: that North Sea reserves are running down and must be replaced. In years ahead, the UK is set, once more, to become a net importer, rather than an exporter of energy.
Industry analysts believe that neither ExxonMobil nor Total (with a long experience in Qatar and strong political support from old ally France) are happy with the equity split. “The fact that both gritted their teeth and signed showed just how much the Qataris hold the whip hand,” said one industry observer present at the signings.
Comparative advantage
Qatar’s ability to negotiate from a position of strength is a far cry from the dark days of two decades ago when Qatar was forced to cut back on LNG development due to lack of investment, and even from the belt-tightening days of 2001 when, following the most recent oil price crash, the emir, Sheikh Hamad bin Khalifa al-Thani, announced that due to a fall in state revenues, Qatar would concentrate on light industries that did not require such huge investments.
High oil prices and skilful management of the sector have reversed this situation – the Qataris have been quickest off the blocks when global energy markets started to rise again.
“When it comes to putting together project financings, the Qataris have been well advised and have been able to act quickly to take advantage of market conditions,” says one Paris-based project finance banker. He agrees with the ECA official that Doha has been among the most significant beneficiaries of the project financing market’s increased liquidity over the past year.
“The fact they have done so has helped to build momentum behind the Qatari project financing boom – banks know and like the market now.” Some of these specialists, he believes, “will move into the Qatar Financial Centre to consolidate their position in a lucrative market”.
Bankers say that Qatar is seen as a state that can get things done, not least due to a relatively low level of bureaucracy and governance woes. Under former-emir Sheikh Khalifa bin Hamad al-Thani, decreasing revenues in the mid-1980s meant that Doha’s overgrown bureaucracy was cut back substantially.
Qatar has a good record for implementing the numerous projects that feed off the North Field gas structure, in contrasts with many of its regional rivals. After years of trying, a grouping of Hunt and Total is only now getting an LNG scheme off the ground in Yemen. Iran’s exploitation of the South Pars field has not progressed so quickly, and the Islamic republic may have lost out on markets as a result.
QatarGas mix
QP’s $12bn QatarGas II deal with ExxonMobil was described by Energy minister Abdullah al-Attiyah as “the biggest in the history of the hydrocarbons industry”. QatarGas II chief executive Faisal al-Suwaidi said the money raised from various institutions was “the largest energy project financing ever and the first ever financing on a full LNG chain-integrated basis”.
Banks were very keen to provide loans, but as the European ECA official observed: “The Qataris have been quite shrewd about mixing up bank and export credit financings, so as not to frighten markets.” And, he added, at using the ECA tranche to help establish a competitive benchmark.
Islamic financing has been added to the mix, giving extra options and reflecting the growing demand by regional investors – and the growing number of western banks with specialist Sharia-compliant financing arms – for Islamic financial products. The $530m Islamic tranche marked the longest long-term Islamic project financing yet put in place, and was a first for QP and ExxonMobil.
QatarGas II’s upstream element – which involves building two production trains at Ras Laffan with a combined capacity of 15 million t/yr – secured commitments of $530m in the shape of 15-year Islamic lending, and $1bn in export credit from Italy’s SACE and the Export-Import Bank of the US (Ex-Im Bank). Indeed, the bank, Islamic and ECA commitments brought the upstream element’s potential lending capacity up to $5.1bn – around $1bn more than required.
Prominent roles within the lead arranger group went to BNP Paribas (BNPP) (documentation agent); Citigroup (security trustee and offshore accounts bank); HSBC (SACE agent); Barclays Capital (Ex-Im Bank agent); ABN AMRO, Royal Bank of Scotland (RBS) and Sumitomo Mitsui Banking Corporation (international syndication banks); and Qatar National Bank (QNB) and Gulf International Bank (GIB) (regional syndication banks).
Besides other Western banks who are regulars on the Middle East project lending circuit – such as Société Générale, Standard Chartered Bank, WestLB, Bayerische Landesbank and Bank of Tokyo-Mitsubishi – the 36 MLAs include newcomers such as Spain’s BBVA, Bank of Scotland, Bank of Ireland and Lehman Brothers.
The Islamic financing, involving a sale and leaseback structure, was lead arranged by seven banks: Kuwait Finance House ($150m), Dubai Islamic Bank ($150m), QNB ($100m) and four others – BNPP, GIB, HSBC and Qatar Islamic Bank.
Integrated development
According to bankers, the integrated LNG chain put in place by the sponsors includes a downstream element in the shape of the regasification terminal now under construction at the old Milford Haven refinery site in Wales, which makes this the first debt package where the entire chain from wellhead to terminal has been developed by the same partners throughout and funded through integrated financing.
The South Hook terminal financing has emerged as the longest sterling-denominated energy transaction provided by commercial banks without government or monoline credit support.
Time for a breather?
But after drawing in record amounts of project finance over the past 12 months, and following years of rapid expansion plans, now Qatar looks set to sit back and concentrate on implementing projects. Some analysts have cautioned that its success may backfire in terms of logistics and the sheer quantity of manpower and materials needed.
In 2004 there were reports of severe shortages of cement in Doha. Energy Minister Mr al-Attiyah admitted that Qatar was under pressure to perform but came out fighting, saying: “This is a challenge, we accept this challenge and we will manage it.”
QatarGas’s Mr al-Suwaidi has acknowledged that there will be fewer major project signings in the next few years in order for the contracts already signed to be executed efficiently.
The number of world-scale LNG and gas-to-liquids (GTL) projects now under way or planned – such as the $6bn Shell-led GTL plant – could be sufficient to put a strain even on the huge North Field reservoir. Perhaps reflecting this, Mr al-Suwaidi has said that reservoir engineers need to be given time to evaluate the impact of ongoing schemes on the field.
There is also the question of how much more project financing Qatar can suck in from a finite market, with huge LNG projects coming up in Egypt, Nigeria and Russia this year. The Gulf region will remain a focus for project financiers: a recent forecast by ABN AMRO estimated that more than $34bn in project finance facilities will be required in the Middle East over the next two years to fund energy projects alone.
Of this, Saudi Arabia will need $13.8bn (mainly for refining and petrochemicals), while Qatari LNG and GTL will require $11.8bn. Two major Qatari petrochemical projects (Qatofin and Q-Chem II) and the RasGas II LNG expansion could require at least $3bn in project finance in 2005. If Qatargas III and Qatar Fuel Additives Company (Qafac) come to market, this year, the requirement will climb even higher.
QFC offer
Judging by the hugely positive response by lenders to Qatari requests for finance, project finance banks should be among those most attracted to the new Qatar Financial Centre (QFC) whose announcement showed that the government was determined not just to sit back and wait for finance to come to them, but would invest to create the kind of environment necessary to draw in investment.
Announcing the QFC move, economy and commerce minister Sheikh Mohammad bin Ahmad bin Jassim al-Thani in January said the government came “to this project from a position of strength: we don’t need it, but we think the diversification of our economy warrants something like this”.
Stuart Evans of QFC’s legal adviser Simmons & Simmons points to “a lot of political will” that has gone into the project from the Qatari authorities, who truly want to become more business-friendly and go beyond the “major energy player stereotype”.
The QFC’s aim is to attract the kind of debt and project financing and long-term investment Qatar needs, and a spokesman for the Ministry of Economy and Commerce notes Qatar’s status as a global focus for project financing, saying: “That’s where the honey is.”
He added that Qatar’s rulers believed there was not enough debt financing in the region, despite the huge investments under way.
The spokesman commented that, with the government so committed, and with a serious amount of wealth floating around Doha, the project would prove a serious hook for investors. As the QFC gears up for business under Philip Thorpe, that supposition will now be tested.
