When Royal Dutch Shell discovered Qatar’s offshore North Field in 1971, it was disappointed to find that it contained natural gas rather than oil. Today, however the field’s proven reserves of 936,000bn cubic feet of natural gas are viewed in a very different light.
Qatar may only be the third largest gas reserve owner after the Russian Federation and Iran – but its size and investment-friendly policies make it significantly more accessible to exploration than the frozen wastes of Siberia or the mountains and arid plateaus of Iran. What is more, at current exploration and production rates, the state’s gas income life span stretches forward about 250 years. That projection will doubtless drop as production volumes increase, but either way the small Gulf state stands to make a great deal of money.
Great attractions
Abdullah bin Hamad Al-Attiyah, second deputy prime minister and minister of energy and industry, makes no bones about the economic power wielded by his country on the basis of its energy assets, macroeconomic policies and A+ credit rating. “Premier lenders all over the world now quickly respond to Qatar’s funding requirements,” he said recently. “Our prudent fiscal management attracts financial institutions that do not hesitate to lend money for projects – mainly in the energy sector.”
This is no empty boast. According to research by Qatar National Bank (QNB), the emirate’s liquefied natural gas (LNG) production capacity should reach 62.7 million tonnes per annum (mtpa) by 2011, making it the world’s largest LNG exporter and a critical supplier to US, European and Asian markets. The willingness of global banks to buy into Qatari assets was illustrated by the landmark Qatar Liquefied Gas Company II (QatarGas II) deal launched last year.
Whereas Qatar’s previous record for the number of mandated lead arrangers in a consortium had been set at 24 by a Qatar Chemicals (Q-Chem) petrochemicals project, it was raised to 36 in 2004 by the upstream finance component of QatarGas II. More than 40 banks responded to a call for mandated lead arrangers (MLAs) willing to underwrite $3.6bn of 15-year risk. Sponsors Qatar Petroleum (QP) and ExxonMobil eventually selected 36 banks, 28 of them from outside the Gulf Co-operation Council (GCC). As Andrew Duff, group head of corporate banking and capital markets at Commercial Bank of Qatar, observes, the strength of the foreign response is “the best example of what the international markets think of Qatar”.
The largest commercial facility arranged in the Middle East to date, the financing is to be used to build a two-train plant at Ras Laffan as part of an integrated project to deliver 15.8mtpa of LNG to the UK from 2007. Financial adviser to the sponsors Royal Bank of Scotland helped bring in $100m commitments from each of the MLAs in a step-up structure starting at 50 basis points (bp) during the sponsor-guaranteed construction phase.
New and old names
The list of MLAs represented both a “who’s who” of familiar names in Gulf project finance and new entrants to the market, ranging from ABN AMRO and Arab Bank to Bank of Ireland and WestLB. Two domestic banks, Qatar National Bank and Commercial Bank of Qatar, were also part of the team.
Though the commercial debt facility was signed on December 16, rising steel prices encouraged the sponsors to include further cover beyond the $405m originally provided by the US Ex-Im Bank. This February Italy’s SACE agreed to provide an additional $400m of cover, causing the MLAs’ commitments to be scaled back from $100m each to about $87m, according to local bankers.
As a secondary and independent debt package within the project, QatarGas II’s sponsors also signed a $902m deal with 12 international MLAs in January this year to finance a regassification terminal at South Hook in Wales. ABN AMRO, Ahli United Bank, Bank of Ireland, Bayerische Landesbank, BBVA, BNP Paribas, Calyon, Fortis Bank, ING Bank, RBS, Société Générale and Sumitomo-Mitsui Banking Corporation each took $76m portions of the 25-year deal in a step-up structure starting at 40bp. Despite early suggestions the deal might be syndicated, the MLAs didn’t feel it necessary.
The main portion of QatarGas II finance has now reached the syndication stage, with international bookrunners ABN AMRO, RBS and Sumitomo-Mitsui joining regional bookrunners Gulf International Bank and Qatar National Bank to sell the deal. Presentations were made in London and Dubai in April, and tickets in blocks of $30m, $20m and $10m are understood to have been offered, with final signing scheduled for late May.
Apart from the international interest in the main finance package, what made the deal particularly significant in the Gulf was the inclusion of a $530m Islamic tranche at the same tenor and pricing as the conventional tranche but structured on a Shariah-compliant sale and leaseback structure. Kuwait Finance House led the pack with a $150m share, followed by Dubai Islamic Bank at $100m, Qatar National Bank at $80m and Qatar Islamic Bank, BNP Paribas, HSBC and Gulf International Bank (GIB) taking $50m each. Local and regional banks may not have the depth of liquidity available to the international MLAs, but the Islamic tranche and the conventional syndication now under way indicate a willingness by Qatari sponsors to include Arab banks in their projects.
While RBS enjoys a strong market position in the wake of QatarGas II, and Société Générale scooped the advisory mandate for the upcoming QatarGas III, other international banks are bolstering their capabilities to ensure continued involvement in Qatar’s significant deal flow. Standard Chartered recently bought the Gulf project and structured finance business from ANZ Investment Bank to add to its own mandates. Celebrating its 50th year in Qatar, HSBC is bringing a permanent investment banker to Doha who will be dedicated to developing corporate finance, project finance and private equity opportunities for the bank.
“There’s so much to do on the investment banking front here that doesn’t just revolve around project finance,” says Kevin Smorthwaite, CEO of HSBC Qatar. “Suitcase bankers flying in can do a reasonable job, but that’s not the same as relationships on the ground with state and local companies.”
Qatari spending up
Qatar National Bank, meanwhile, has been tracking a substantial increase in Qatari government spending over the past three years or so. Mohammed Moabi, QNB’s executive manager for economics and research, says that back in the 1990s, Qatar was criticised for borrowing to finance the construction of refineries and rigs.
“As has become clear,” he says, “it’s good borrowing if you use the funds to build export-oriented industry rather than to keep up with debt interest repayments as many governments do.” He also points out that the new investment pouring into Qatar is not coming from Qatari debt. So attracted are banks to Qatari LNG risk that they’ve been willing to commit their capital on a standalone non-recourse basis.
Mega-project boom
QNB and Commercial Bank of Qatar are both celebrating their involvement in QatarGas II as MLAs. Andrew Stevens, Commercial Bank of Qatar’s general manager, says it can be hard to keep up with the sheer scale of the deal flow as mega-projects are coming to market so fast there is often little time for prior warning.
“Qatar Petroleum may announce a string of projects but that doesn’t overwhelm us any more,” he observes. “We’ve gone from being a small player to a lead arranger in our own right.”
The challenge for the domestic banks is both to build their advisory capabilities and to manage the asset/liability mismatches for projects that can stretch more than 15 years into the future. QNB is used to dealing with analysts who constantly query the value of the 50%-state owned bank’s government portfolio on the basis that major projects swallow capital at ever-tighter spreads.
“The trick is to balance government and private business, maintaining our market share at a level where we feel comfortable with the risk and reward profile,” says Mr Moabi.
For banks with relatively small capital bases by international standards, the decision of how far to get involved in Qatar’s project finance industry is a tough one to make. In October, Doha Bank signed its debut $150m
17-member syndicated term loan lead arranged by the Arab Banking Corporation, Barclays Capital, Calyon and the National Bank of Abu Dhabi (NBAD).
R. Seetharaman, Doha Bank’s acting general manager, explains that the loan was not designed to raise capital for large-scale project commitments but to manage asset/liability mismatches.
“Excess capacity of too many bankers chasing the projects has undoubtedly pushed margins down,” he warns. “I’m not interested in size and I don’t maintain high levels of surplus capital that I’m obliged to pump into project deals. My objective is to optimise Doha Bank’s resources and deliver a high return on investment for both shareholders and customers.” Doha Bank therefore seeks project finance mandates and syndication participation only on a highly selective basis.
When they say they are being selective, what local bankers often mean is that they are looking for projects offering opportunities for cross-selling.
As Commercial Bank of Qatar’s Mr Stevens points out: “Evaluating a project finance deal is not as simple as making a risk and reward assessment on a price of say 40bp over Libor. They become attractive if you have the capacity and capability to develop downstream relations with the client. Acquiring their letters of credit, treasury, project guarantees and tender bonds business, for example, makes projects particularly worthwhile.”
Commercial Bank of Qatar also raised $150m in 2004 through a five-year loan lead managed by NBAD, GIB, Sumitomo-Mitsui and Bank of Tokyo-Mitsubishi, thus enabling it to increase participation in big ticket deals.
Bunch of five
Looking back over 2004, Qatar offered the financial services industry a bouquet of about five major projects: the three-tiered QatarGas II structure; the $665m Ras Laffan LNG bond; the $586m Ras Laffan tanker finance deal; the $223m Qatar Shipping deal with Calyon; and the $120m raised by QNB, Commercial Bank of Qatar, GIB and Standard Chartered to meet the Qatar National Cement Company’s expansion finance needs.
Exactly how many deals will come to market in 2005 is hard to define. QNB’s extensive files on anticipated projects include speculative assessments on deals as significant as the ConocoPhillips $9bn GTL production facility, QatarGas III, Q-Chem II, a QAFCO-5 fertiliser plant, and a $500m capacity expansion for Qatar Steel (QASCO).
What is clear is that upcoming Qatari projects – particularly those in the energy sector – are likely to be fiercely fought over by international, regional and domestic banks alike.
