Royal Bank of Scotland closed the syndication of a $900 million loan for the Gulf LNG liquefied natural gas project on 7 February 2008. The financing is the first LNG financing in the US since Cheniere's Sabine Pass refinancing in November 2006, and the first construction financing in North America since Canaport, which closed the same month. If gas consumption picks up in the US as much as market consultants predict, this trickle could turn into a flood.
Gulf LNG involves the construction of a $1.1 billion greenfield LNG receiving terminal at Pascagoula, in Jackson County, Mississippi. It has a base send-out capacity of 1.3 billion cubic feet per day, has 6.6 billion cubic feet in storage capacity, and will receive its LNG from Angola in West Africa. The project benefits from a lump sum, turnkey, engineering, procurement and construction contract with a consortium of Aker Kvaerner and IHI.
The sponsor is a consortium of the Crest Group, a privately-held developer, with a 30% stake, Angola's national oil company, Sonangol, with 20%, and El Paso, which agreed to acquire a 50% stake in December 2007, and funded on this acquisition at financial close.
RBS held two rounds of syndication, bringing in four banks at mandated lead arranger level (Fortis, Standard Chartered, Bank of Nova Scotia, and WestLB), and a further 19 participants at the retail level. The syndication was oversubscribed; RBS secured $1.4 billion in subscriptions, despite market conditions.
The financing consists of an $870 million bank loan, with a maturity of construction plus 10 years. The construction phase is expected to be 3.5 years, and is due to be completed in 2011. The debt is priced at 150bp over Libor for the construction phase, and 125bp thereafter. A working capital facility of $30 million is also written into the financing, though it has not funded. Indeed, this second tranche may not be drawn at all, and was included in the financing package before El Paso had become involved.
Chuck Zabriskie's boutique Gulf Advisory was financial adviser to the sponsor, along with RBS. He explains that "the working capital facility was to increase the oil companies' confidence that the Gulf LNG special purpose company would have adequate liquidity during operation. It addresses a reasonable concern, but as a practical matter, Gulf LNG will most likely not have a need for significant working capital. In addition, when El Paso came on board, confidence in Gulf LNG's reliability was further increased."
Though ultimately closed in the bank market, the sponsor considered other options for the financing, but reverted to the more conventional solution after debt markets began to wobble. The mooted possibilities included a more highly leveraged bond deal, and even a 100% financing, neither of which are feasible in the current climate. But at the heart of the financing is a very solid set of contracts.
The project benefits from two 20-year terminal use agreements, one for 60% of the terminal's capacity with the Angola LNG (ALNG) consortium, through a special purpose vehicle in the US, and the other for 40% of the capacity with Italy's Eni. The ALNG consortium comprises Sonangol and Chevron (each with 36.4%) and Total and BP (each with 13.6%). The four members collectively guarantee the others' obligations.
ALNG is planning to construct a 5 million tonnes per year production facility in North Angola, which is due to open towards the end of 2009. The Pascagoula terminal will be ready to receive LNG from mid-2009. The site will host the eighth LNG receiving terminal in the US.
The various oil majors account for 87% of the guarantees on the contracts, and Sonangol guarantees the remaining 13%. Says Zabriskie of Sonangol; "It's a cash-rich but unrated company, and is unfamiliar to many banks, and so the sponsor couldn't ask banks to take risk on Sonangol credit". He also notes that it was "a shrewd move to bring in Sonangol as equity, and it was unprecedented for a national oil company to invest in a US receiving terminal at the time. It made a lot of sense for Sonangol to invest in Gulf LNG in concert with its plans to develop an upstream project both for economic and ecological reasons."
The terminal will have direct access to four arterial pipelines serving the North Eastern regions and three pipelines serving Florida and the South East. The location is also close to the Bayou Casotte ship channel, meaning that marine access to the terminal is relatively easy.
This project is Crest's second in as many years, since it was also the initial developer of the Freeport LNG terminal, which is currently under construction in Texas, and which RBS part-financed with a $383 million private placement. According to Zabriskie, Gulf has a locational advantage next to other Gulf of Mexico projects, as its closer proximity to the pipelines serving the North East and Mid-Atlantic states, where gas demand is greater, and supply is more constrained, results in a higher relative value for the project's gas. The gas at Pascagoula is also approximately 25¢ per million BTU more valuable than that from, for example, Cheniere Energy's Sabine Pass terminal in Louisiana.
Obtaining the terminal use agreements was generally considered to be the most challenging aspect of the deal. Finding majors willing to sign terminal use agreements has bedevilled the US LNG market, and Sonangol's determination to expand markets for its gas was key to Gulf's users signing for such a long term.
The other shareholders might have preferred to use the empty capacity that is still available at some of the other terminals in the US. While gas prices have remained high, and gas-fired generating capacity underutilised, demand has been limited. European and Asian customers have offered better prices, and until recently, coal was set to make up the bulk of additions to the US generating fleet.
But utilities and developers have been finding it very hard to win permits for new coal plants, and market studies now point to gas playing a much greater role in new generation additions, since gas plants do not excite as much opposition. If demand majors and national oil companies with access to capacity takes off, oil will be paid off on their bet handsomely.

Gulf LNG Clean Energy LLC
Status: Closed 7 February 2008
Size: $1.092 billion
Location: Pascagoula, Mississippi
Description: Construction of a 1.3 billion cubic feet per day LNG receiving terminal
Sponsors: Crest Group (30%), Sonangol (20%), and El Paso (50%)
Equity: $222 million
Mandated lead arrangers: RBS, Fortis, Standard Chartered, Bank of Nova Scotia, WestLB
Financial advisers: RBS, Gulf Advisory (now part of Acquest Advisors, formerly Schnitzius & Vaughan)
Sponsor legal counsel: King & Spalding
Lender legal counsel: Chadbourne & Parke