RAK Petroleum: Strait up

The first borrowing base facility for an independent oil and gas producer in the Middle East covers reserves located in one of the busiest and most strategically valuable shipping lanes anywhere. RAK Petroleum's $40 million loan for its block 8 assets, for which Royal Bank of Scotland was lead arranger, is secured on reserves in a deposit that straddles the Oman/Iran border in the Straits of Hormuz. The financing reflects a mixture of petroleum engineering and understanding of international relations.

RAK Petroleum is based in the Emirate of Ras Al Khaimah in the United Arab Emirates, after which it is named. Its formation is an initiative of Saud bin Saqr Al Qasimi, crown prince and deputy ruler of the emirate. RAK acquired the assets from Indago Petroleum, an Oman focused, AIM-listed independent, in April 2007 for £194.2 million ($287 million at current rates).

The sale encompassed all of Indago's production and development assets, and half of its exploration assets. It included a 40% participation in block 8 offshore Oman (Bukha, West Bukha production & development), a 40% participation in offshore RasAl Khaimah (RAK-B and Saleh), and a 100% interest in onshore Oman Block 30. Most of Indago's management moved over to RAK with the sale, leaving Indago's non-executives responsible for the exploration joint venture.

Indago had already been plotting a reserves-based deal since late 2006 following an extensive beauty contest, had mandated Royal Bank of Scotland, and by February 2007 was close to closing the deal. The RAK acquisition delayed an interrupted, but did not end this process.

Bukha is an offshore condensate field located 12km off the Musandam Peninsula in around 90m of water. The Bukha gas condensate assets are located in Omani waters, but the gas is piped through to Ras Al Khaimah, which lies across the border on the UAE side of the peninsular. The financing, essentially, uses credit for the operating assets to fund expenditure on the development of the West Bukha-2 asset.

They have been in operation since 1994, first as the property of Novus Petroleu, and then as that of Indago, the name for the management buy-out of the Novus' Middle Eastern assets after Indonesia's Medco bought Novus. Indago owned 40% of, and operates, the block 8 license, while Eagle Energy owns 10% and LG International the remainder.

Following the acquisition, Indago's management, now part of RAK, continued with the reserve-based loan. The Middle East has not traditionally been a fertile ground for independents and borrowing base deals, since both tend to suffer in the shade next to the larger oil super-majors and national oil companies. Indago approached banks for a debt financing for its appraisal well, but found the pricing to be too expensive, and only returned to banks following positive results at this well.

Smaller fields are starting to attract more attention, even though host government support lacks the urgency that characterises the efforts of the Dutch, British and Norwegian governments with respect to their declining North Sea reserves. But while the super-majors concentrate on the larger, if more technically challenging, fields in newer locations, independents have a variety of gas fields and depleted assets from which to choose.

The RAK financing benefits from the inattention of one large neighbour. The deposit that Bukha sits on straddles the Iran/Oman border, and Ras al-Khaimah and Iran dispute control of three islands in the straights. The geology of the deposit means that water from the Iranian side tends to replace condensate pumped out on the Omani side.

However, the exploitation of the field is governed by a 1974 treaty between Oman and Iran, and Ras al-Khaimah, which controls RAK, has initiated discussions with Iran about exploiting the Hengam field, which lies closer to Iran but would use existing Bukha's pipeline infrastructure. Iran's national oil company is concentrating on the development of the Pars field, in the face of US pressure on joint venture partners, rather than such small properties.
RBS had to be confident that geology and politics both worked in its favour. It also had to be confident that the RAK/ Indago combination had held, and that the assets would produce as strongly under local ownership as they did when answering to AIM shareholders.

Following the RAK acquisition, RBS brought in Mashreqbank as a lead arranger, on the strength of the bank's ties to RAK. Mashreq's CEO, Abdul Aziz Al Ghurair, is also chairman of RAK, and the financing extends the ties between the two. Bank Muscat serves as onshore security agent, since the tangled ownership history of Block 8 has left the financing with a complex holding company structure, including a Channel Islands subsidiary. The six-year loan, according to sources close to the deal, is priced at levels comparable to a financing for North Sea assets, and signed in October.

The arranger gave P50 credit to the producing assets in the NPV calculation that it used to determine the borrowing base, but P90 credit to the West Bukha-2 field, the asset to be developed following the financing. West Bukha-2 expenditure includes a drilling platform, as well as the pipeline to connect it to the existing Bukha pipeline infrastructure, which terminates at a Ras Al Khaimah processing plant.

The facility can be expanded to take in additional assets, and would be increased subject to satisfactory due diligence reports and credit approval from the lenders. Given RAK's expansive history, as well as its demonstrable development pipeline, an expansion is likely.

In the mean time, other borrowers are likely to follow RAK to market. The UAE and Oman are both hastening to attract more nimble participants, particularly in gas production. In Oman, a nascent petrochemical industry accounts for a huge proportion of the Sultanate's declining production. It has already started courting RAK's peers.

RAK Petroleum Block 8 Limited
Status: Closed October 2007
Size: $40 million
Location: Offshore Oman
Description: Borrowing base loan for gas condensate reserve
Sponsor: RAK Petroleum
Mandated lead arrangers: Royal Bank of Scotland, Mashreqbank
Maturity: 6 years
Lender legal counsel: Ashurst (international), AMJ (Oman) Ozannes (Guernsey), Appleby (Bermuda
Sponsor legal counsel: Hugh Fraser International
Reserve consultant: PGS Reservoir