Yemen LNG: Finance in unfamiliar territory

The Yemen LNG (YLNG) project is the largest foreign investment and the largest construction project ever undertaken in Yemen. Once fully operational in 2009 it will become the Yemeni government's largest single source of income.

In many respects, the $4.8 billion scheme, to build a liquefied natural gas (LNG) plant near Balhaf in Yemen's Gulf of Aden Coast, is a classic LNG project, with robust economics and strong, experienced sponsors and offtakers.

According to Pascal Breant, Total's project and corporate finance manager for the Middle East and chairman of the Yemen LNG finance committee, "what sets the project apart is that it is in Yemen, a challenging jurisdiction that the international financial community knew very little about."

To overcome the issue of unfamiliarity, the sponsors arranged for the lenders and their consultants to visit the country, including the project site, and to meet with Yemeni officials, who confirmed the government's support for the project and the financing.

"To address the challenging security environment, YLNG entered into a Security MOU with the Yemeni Government and developed a detailed security plan, which was reviewed by the lenders' security consultant," adds Breant.

Financial close was delayed but not denied by the removal of Hunt Oil as upstream operator (Yemen took over operation of Marib from Hunt in November 2005). And, at time of financial close, arbitration proceedings were pending between Hunt and Yemen

The deal also had to overcome many legal challenges relating to the absence of precedents in Yemeni law for a financing of this complexity and the deteriorating bank conditions of spring 2008. Despite an overcast lending environment, the deal closed without flex to the debt pricing or structure.

The banks derived much comfort from the heavy ECA involvement, as well as the strong sponsors. The total costs of Yemen LNG are around $4.8 billion, which have been funded by a combination of debt and equity on a 60:40 ratio.

The project's lead sponsor is Total, with a 40% interest. The Yemeni government holds 22% through two affiliates, and other shareholders include Hunt Oil Company (17%), SK Energy Co., Ltd. (10%), Korea Gas Corporation (9%) and Hyundai Corporation (3%).

The $2.8 billion financing comprises a $648 million loan funded by a syndicate of commercial banks, a $430 million Coface-covered facility, $400 million of Kexim facilities (comprising a $240 million direct loan and a $160 million guarantee), a $120 million JBIC direct loan, an $80 million Nexi-covered facility and a $1.1 billion commercial bank-funded sponsor loan that benefits from a guarantee from Total.

The uncovered tranche has an 11.5-year tenor while the loan's average life is seven years. All other facilities have a 15.5-year tenor. Debt repayment is every six months and is priced at 165bp for construction-plus three years, 180bp for the following three years and 210bp thereafter.

Initial lead arrangers for the uncovered and ECA facilities were BTMU, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, SMBC, Société Générale and Sumitomo Mitsui Banking Corporation. Fortis, Lloyds, Mizuho, BACB, KDB and Dexia also contributed small, undisclosed amounts. In addition to the initial lead arrangers, Calyon also funded Total's guaranteed facility.

The lenders benefit from completion guarantees from all shareholders, including Yemeni shareholders, which are backed by the Ministry of Finance. However, there are political risk exclusions to the guarantees, which means the lenders are taking political risk from day one – quite an achievement for a deal in Yemen.

The financing funds the development and construction of a two-train natural gas liquefaction plant with a capacity of 6.7 million tonne per year (tpy) plus associated pipelines, storage and port facilities. The project will monetise gas extracted from the gas fields in the Marib region of central Yemen.

Yemen LNG has committed almost 100% of the guaranteed plant capacity under three 20-year take-or-pay LNG sales and purchase contracts with Korea Gas, Total and Suez LNG Trading.

The plant is 90% built and will produce 6.7 million tpy of LNG (proven gas reserves are sufficient for that rate of production for at least 20 years) when it comes on stream in early 2009.

Although the lending environment and oil prices have moved considerably since last spring, the Yemen LNG deal highlights the support and structuring required to make international banks comfortable enough to lend uncovered into LNG projects in unfamiliar territory. Yemen LNG sets a global benchmark for future LNG projects located in jurisdictions with increased political risk, particularly the protracted Nigerian deals.

Yemen LNG
Status: Financial close 19 May 2008
Size: $4.8 billion
Debt: $2.8 billion
Sponsors: Total, Hunt Oil, Yemen Gas Company, SK Energy, Korea Gas, the General Authority for Social Security and Pensions of Yemen and Hyundai.
Financial adviser: Citigroup
Mandated lead arrangers: BTMU, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, SMBC, Societe Generale
Sponsor guarantee funders: Calyon, BTMU, BNP Paribas, Citigroup, ING, Royal Bank of Scotland, SMBC, Societe Generale
Participants: Fortis, Lloyds, Mizuho, BACB, KDB, Dexia
ECAs: Coface, JBIC, Nexi, Kexim
Lender legal counsel: Milbank, Tweed, Hadley & McCloy
Sponsor legal counsel: Sullivan & Cromwell
EPC: Technip, JGC, KBR (plant and port); Amec, SPIE, Capag (pipelines)