When BNP Paribas agreed to underwrite a $750m pre-export facility for the State Oil Company of Azerbaijan, it was seen as a brave move by other banks. Interest in the Caspian region will surely make the deal worthwhile. Edward Russell-Walling talks to the team.
When a BNP Paribas (BNPP) team arranged a $750m pre-export facility for an Azerbaijani oil company, it opened up a whole new market. It also added new dimensions to the word ‘team’, combining different talents from Paris, Geneva, Moscow and London and even deploying its own resident petroleum engineer.
The borrower was AzACG, a subsidiary of the State Oil Company of Azerbaijan (Socar). This was the first funding of a state-owned Azerbaijani company not to involve development banks or export credit agencies, and BNPP underwrote the facility on its own before syndicating the deal.
BNPP has made something of a speciality out of natural resources lending, and the Energy Commodities Export Project (Ecep) division is one of its principal business units. On the energy front, it has been active in reserve-based lending (RBL) for about 20 years, initially out of Houston, lending to US oil independents who put up future production as collateral.
Today the bank has a more global RBL presence than most, having expanded its activities first to Canada and, more recently, to Europe, the former Soviet Union, Africa and the Middle East.
The latter regions all fall under the European oil & gas group, set up in 2001 by group head Xavier Venereau, who spent four years in the bank’s Houston energy group. “Eastern Europe and the former Soviet Union countries are a very strategic part of Ecep’s business, accounting for a material part of its activities,” Mr Venereau explains.
Azerbaijani prize
Bankers’ eyes have been on Azerbaijan for some time, as economic management improves and its oil-based economy begins to take off. A key development here is the $3.7bn Baku-Tblisi-Ceyhan (BTC) pipeline, which comes into full operation later this year. The 1768km pipeline, which replaces tanker transport through the Black Sea, will carry oil from the Caspian offshore Azeri, Chirag and Gunashli (ACG) fields to the Mediterranean, and will give a powerful boost to Azerbaijani economic growth.
BNPP’s man on the ground in Russia and the Caspian states for many years has been Jean-Pierre Autelli, who is based in Moscow but also serves as the bank’s head of territory for Azerbaijan. His colleagues say he has been marketing this transaction since 1997, when early production from the giant ACG field began. “In these countries, personal relationships are very important,” says European oil & gas group vice-president Vincent Véron, who led the structuring of the AzACG deal. “You can’t arrive one day and do a deal the next. It requires a long relationship.”
Socar owns 10% of the ACG field, which is operated by BP. Production is running at around 400,000 barrels-per-day (bpd) and, as the new pipeline comes into play, will be ramped up to a massive 1 million to 1.2 million bpd by 2008. AzACG, which holds Socar’s share of the project, financed its stake via carry agreements – essentially inward investment in return for legal title to a proportion of the oil production – with partners such as Exxon. What the market had been anticipating for some years was the opportunity to refinance those carry agreements.
Mr Autelli’s patient groundwork began to bear fruit in the summer of 2005, when AzACG invited proposals. “When we heard about the opportunity we created a working group,” Mr Venereau recalls. It comprised the European oil & gas group as the core team, with the addition of officers from Geneva, the seat of commodity trade and structured finance expertise for former Soviet states, Mr Autelli himself, and petroleum engineering know-how. Later, the global syndication team based in London, Paris and Geneva would become more involved.
BNPP had an edge over the competition, in that Paribas had been the technical bank in the BTC project. But it certainly did not have the field to itself. “This had been discussed in the market for more than two years,” says François-Xavier Reignier, Geneva-based commodity structured finance specialist for eastern Europe and former Soviet states. “We weren’t the only bank that was interested.”
The team proposed an RBL structure, but one – of necessity – with a twist. “This was a hybrid facility,” Mr Venereau explains. “It was a pre-export financing structure but the underlying asset had still to be fully developed. So we had to do a lot of technical assessment work, since the finance relied not only on existing production, but also on future production. This demanded a real combination of expertise.”
The real work started in September 2005, when BNPP was awarded the mandate and signed a confidentiality agreement. Then it was able to begin an informed technical analysis and proceed with technical due diligence. Allen & Overy was appointed to handle the legal due diligence.
“One thing that contributed to our winning the mandate was our ability to complete the due diligence and build an information memorandum in a relatively short time,” says senior petroleum engineer Yann Lagalaye, who worked for Total before joining the bank 18 months ago. “As technical bank for BTC, we had knowledge of the pipeline and of the country.” Speed was important because the borrower wanted the funding before year-end for tax reasons.
The point of the technical analysis was to develop a realistic and reliable cash flow forecast. Once ACG’s potential future production had been analysed, the data was modelled, along with the macro-economic outlook for commodity prices and the specific price and cost characteristics of the field.
This was the responsibility of Paris-based Olivier Warnan, an associate in the European oil & gas group, who then used the cash flow estimates to determine the borrower’s debt capacity.
The five-year facility is repaid via a cash sweep mechanism on the proceeds from a portion of the oil production. The borrower has signed offtake agreements with energy traders Glencore Energy UK and Germany’s Select Energy Trading.
An added complication to an already complex deal was the fact that the European Bank for Reconstruction and Development (EBRD) had to be involved. It already had rights to a portion of Socar’s production, as the result of an earlier gas field financing. “We spent a lot of time negotiating an intercreditor agreement with the EBRD, setting the rules over what we could do and what it could do,” Mr Venereau says.
Easy sell
The transaction was closed on December 23 and funded on December 28 and 29. Only then did BNPP start to arrange sub-underwriting. The first phase of syndication took place in January, when BNPP invited in eight, mainly large, banks. A second phase began in February, and the aim is to end up with about 15 syndicate banks.
Persuading them of the transaction’s merits has clearly not been an uphill struggle, in spite of its size and term. “The market loves this deal,” Mr Véron declares. “It’s rare to have such a success rate in underwriting.”
The Azerbaijanis love the deal too, because it effectively throws open the gates of global commercial finance for their country. As the economy booms, it will be looking for a lot more infrastructure finance and, in the wake of this, there should be no shortage of international lenders.
“This is the first of many deals out of Azerbaijan,” Mr Véron predicts. “The market was wary, but now the doors are open.”
