If bankers needed reminding of the importance of Iran’s role in the oil and gas sector, November’s signing of a huge liquefied natural gas (LNG) deal between Beijing and Tehran served this purpose.
Worth at least $100bn and billed already as the “deal of the century” by various commentators, the agreement is likely to increase by another $50bn-100bn when a similar oil agreement, currently being negotiated, is inked.
Iranian officials have expressed hope that the deal can lead to a fundamental rethink of the risks involved in doing business with their country. Iran is seeking to develop its gas reserves – the second largest in the world after Russia – by exporting more LNG to emerging markets such as China, South Korea and India.
Market anticipation
On a medium to long-term time horizon, billions of dollars’ worth of debt will be required for these and other developments to transform the source of the gas, Iran’s giant South Pars field, into a huge production hub. The National Iranian Oil Corporation (NIOC) has arranged for South Pars to be developed in at least 20 phases, 16 of which have begun. Each of these involves the production of 1bn cubic feet per day of natural gas, some of which will be transformed into LNG and gas-to-liquids schemes.
Markets are also looking with considerable anticipation at Iran’s other major parastatal, the National Petrochemical Company, which has 23 projects lined up over the next five years requiring billions of dollars. The National Petrochemical Company has already established itself as a major borrower of debt, guaranteed by leading export credit agencies such as the UK’s Export Credits Guarantee Department (ECGD), Italy’s SACE and Japan’s NEXI.
Looking further ahead, big investments will be required for build-operate-transfer contracts that will be used to construct Iranian power plants.
However, project financiers who are eyeing the market remain unsure as to how and when their expertise will be called upon.
South Pars’ phases 15 and 16 – which are aimed at producing refined gas for internal use, as well as for export – are on the horizon. However, according to the head of project finance at a large French bank:
“There are no large Iranian projects which are definitively seeking finance in the near term. Everyone would like them to come fairly quickly but quite often they don’t.”
He underlines that although market sentiment is generally positive – based on Iran’s considerable liquidity, its healthy economy and its steady repayment of past-trade debt – “banking appetite for long-term Iranian assets is no more than cautiously favourable”.
He observes: “We have just finalised our country lines for 2005 and it is not as if there is a limitless amount of capacity.”
Words of caution
A London-based banker with experience in Qatar’s booming project finance market, just across the Gulf from Iran, also expresses caution. He emphasises that although the South Pars field provides many compelling financial attractions, it is not just the US blacklisting of the country that makes Iran a challenging market for banks. “My personal feeling is that Iran may not turn out to be a joint venture culture,” he suggests.
Project finance templates in Iran have been talked about for a decade or more but have so far proved difficult to lay down because of Iranian law.
The London-based banker explains: “The Iranian law reserves all oil gas assets for the ownership of the state, so conventional pure project financing is essentially impossible, unless financiers can find another security structure.”
To date, the two financing structures that have proved most suitable for Iranian projects are buyback and structured export finance. Under the traditional buyback option, suppliers of capital plant or equipment agree to be paid from the future output of the investment concerned. Therefore, exporters of equipment to Iranian oil facilities have sometimes been repaid with part of the resulting output.
However, as larger projects have moved on to the scanner, this option has run into problems. Iran’s still considerable political risks necessitate the use by lenders of long-term political risk insurance and the primary providers – national export credit agencies – “generally prefer not to plug into a buyback” structure, as another banker put it.
He explains: “Buybacks are really a form of service contract, and mean that payments to a contractor are limited to project performance. Although the Iranians can sometimes be very flexible with their structures, export credit agencies, for their part, prefer an unconditional repayment obligation.”
Some export credit agencies – including Atradius in the Netherlands and SACE – have worked with buyback. However, the export credit agency-backed model for larger, longer-term loans that looks set to predominate is the “structured finance” template. In this model the lending facilities are secured against the revenue streams of NIOC or the National Petrochemical Company.
Giant South Pars deal
The National Petrochemical Company has borrowed regularly on a structured finance basis but the first Iranian mega-project to push ahead of this basis – which took many months to finalise during 2004 – is a giant 10-year $1745m structured financing for NIOC to fund the development of phases nine and 10 at South Pars. The project comprises four onshore gas-processing trains and 100 km of offshore pipeline, which will produce condensate and liquid petroleum gas from the gas feedstock.
Deutsche Bank arranged the deal, in which the Export-Import Bank of Korea directly financed $880m of the transaction, linked to imports from a sponsoring consortium led by South Korea’s LG Group. Atradius, SACE and ECGD absorbed a further $340m of lenders’ risks. Commercial banks including BNP Paribas, Commerzbank, ING, Kreditanstalt fuer Wiederaufbau, Natexis Banques Populaires and Société Générale took $525m of naked NIOC risk.
Keen to do business
The financing model – expected to be replicated eventually for further integrated gas projects planned by NIOC – “involved collateralised offshore structures, as well as straight export credits”, says Klaus Michalak, the global head of structured trade and export finance at Deutsche Bank in Frankfurt.
“Banks that are familiar with Iran are keen to do structured lending, especially on the oil and gas development programme. There is not a colossally deep appetite – but reasonable amounts can be raised with export credit agency support,” a London-based export financier observes.
He highlights that even though European export credit agencies are already considerably exposed to Iran – SACE, for example, had medium and long-term commitments worth E4.65bn at the end of 2003 – “they are still keen to do more business”.
This is reflected by Jan Vassard, a director of the international department at Denmark’s Eksport Kredit Fonden, which has financed deals in Iran’s cement sector. Mr Vassard acknowledges that many observers point to the political risks inherent in the deep-seated divisions within Iranian society, and the country’s relations with the international community over the nuclear proliferation issue. “However, on the whole, we continue to consider Iran to be a fairly good credit risk,” he concludes.
