Just when the market thought that margins on Qatari LNG projects had reached their tightest, Qatargas 4 has set a new historical low – the $2.8 billion commercial bank debt offers a margin of 30bp to 60bp over Libor.

In total the project, sponsored by Qatar Petroleum (QP) (70%) and Shell (30%), has raised over $4 billion of financing – it is QP's second largest project financing after Qatargas 2.

The project comprises upstream facilities to produce around 1.4 billion cubic feet per day of natural gas, including 24,000 bbl/d of LPG and 46,000 bbl/d of condensate from Qatar's North Field over the 25-year life of the project. The integrated project also includes a 7.8 million tonnes-per-annum liquefaction plant and an LNG shipping capability.

The main engineering, procurement and construction contract for onshore facilities was awarded in December 2005 and construction activities are in full swing in Ras Laffan. First LNG cargoes are scheduled for delivery in 2009. Q4 has signed an eight-LNG vessel charter agreement with Qatar Gas Transport Company (Nakilat).

The LNG volumes are intended to flow primarily into natural gas markets in the eastern United States. Shell has arranged for capacity at the Elba Island LNG import terminal as well as in the new Elba Express natural gas pipeline to receive and regasify the LNG exported to the United States.

The financing comprises a $2.8 billion bank tranche, a $225 million L/C and a $1.2 billion sponsor loan from the Shell. In all 30 international, regional and Qatari banks participated in the deal. All the facilities have a maturity of 15.5 years.

Banks were asked to commit to take-and-hold positions of $100 million on the senior and $15 million on the L/C, although many offered larger commitments. Banks were scaled back slightly on a pro-rata basis. Pricing on the debt starts at 30bp over Libor pre-completion, rising to 50bp during years five to eight, 55bp during years nine to 12 and 60bp for the final four years.

This compares with the $1.488 billion 16.5-year bank backing QP-ConocoPhillips' Qatargas 3 project that closed at the beginning of 2006. The Q3 debt debt had a pre-completion margin of 45bp over Libor, rising to 60bp post-completion through to year eight, 65bp from years nine to 12, and 70bp from years 13 to 161/2.

The deal is not a template copy of Q2 or Q3, and falls between Q2/Q3 and RasGas 2/3 in terms of covenant package – with Q2 and Q3 exhibiting more non-recourse covenants and RasGas more flexibility for the sponsors in a more corporate-structured deal. Cover ratios on Q4 are 2.9x minimum debt service and 3.05x average DSCR. The debt is backed by a construction guarantee from QP with Shell providing the same for its loan. Following the Q2 precedent, the banks are taking gas market price risk on Shell's offtake.

An original 30 bank group was tweaked slightly: following the merger of Banca Intesa and SanPaulo IMI, a new bank came in to keep the numbers at 30, Europe Arab Bank – a new European-based subsidiary of Arab Bank.

Calyon acted as the documentation bank and is the bank facility agent and intercreditor agent. Citigroup is the security trustee and account bank. International bookrunners are Barclays Capital and RBS. Regional bookrunners are Apicorp and Qatar National Bank. (See info box for full bank list).

Despite the low margins, the bank portion was upsized from an anticipated $1.5 billion – a figure which would have seen the club come in on a take-and-hold basis – to $2.8 billion. In the initial financing plan it was envisaged that a $1.3 billion 144a bond tranche would negate the need for a general syndication. It is QP's explicit aim to diversify its funding sources.

However, because the joint venture and sale and purchase agreements were signed by Shell and QP at a late stage (10 July), there was not enough lead time to incorporate a capital markets financing before the holiday period and adhere to the financing schedule. That the bond was overtaken by events was a blessing in disguise, allowing Q4 to avoid the choppy conditions of the capital markets following US sub-prime mortgage sickness.

The bank portion was upsized from an anticipated $1.5 billion – a figure which would have seen the club come in on a take-and-hold basis – to $2.8 billion. Appetite in general syndication, which is due to launch imminently, should be healthy despite the historically low margins. The recent results of Shell, which is committed to Q4's entire LNG output, are among the healthiest among the majors. It is the seventh LNG project in which Shell has taken an equity interest.

Also, as a measure of the credit quality of the Qatari's energy program, QP was upgraded by Moody's in late July from Aa3 to Aa2 on the back of an improved sovereign rating for Qatar.

In a separate agreement also signed 10 July, Shell was appointed as the shipping and maritime services provider for Nakilat's fleet of some 25 newbuild liquefied natural gas (LNG) carriers. Shell will be responsible for staff recruitment, training and operational management of the vessels, and also develop Nakilat's shipping expertise over 25 years.

Despite the margins the sponsors may consider a capital markets refinancing if the credit markets return to their pre-turmoil state. The financing is structured to give the sponsor the option of a bond take out of part or all of the bank debt on the same term sheet. If Qatargas 4 can be refinanced, then QP's other LNG projects, banked at higher margins, are also certain candidates.

Qatargas 4
Status: Financial close, syndication launched September
Description: $4.03 billion financing of LNG train Qatargas 4
Sponsors: Qatar Petroleum (70%), Shell (30%)
Financial adviser: Royal Bank of Scotland
Mandated Lead Arrangers: Arab Banking Corporation, Apicorp, Banco Santander, Bank of Tokyo-Mitsubishi, Barclays Capital, Bayerische, BBVA, BNP Paribas, Caja Madrid, Calyon (facility and intercreditor bank), Citigroup (security and accounts bank), Commercial Bank of Qatar, Dexia, DNB Nord, EDC, Fortis, HVB, Intesa SanPaulo, KfW, Lehman Brothers, Lloyds TSB, Mizuho, Natixis, Qatar National Bank, SG, Standard Chartered, SMBC, RBS, WestLB and Europe Arab Bank.
International bookrunners: Barclays Capital and RBS
Regional bookrunners: Apicorp and Qatar National Bank.
Legal adviser to the sponsors: White & Case
Legal adviser to the banks: Skadden, Arps, Slate, Meagher & Flom