A total of 22 banks signed up for the Spanish Egyptian Gas (SEGAS) refinancing on Friday 27 July, leaving some banks disappointed to be left outside the lead arranger group. The sponsors, Union Fenosa Gas (UFG), EGAS and EGPC and their adviser Royal Bank of Scotland, negated the need for a general syndication by bringing in over 20 banks at the top level.

The liquefied natural gas export complex is located at Damietta, on the Mediterranean Coast, 60km west of Port Said. Construction of the facility began in September 2001. The refinancing takes out an five-year corporate facility that the sponsors put in place in August 2004. The corporate financing was put in place as a bridge to allow more to time to finalise project documentation for a long-term project financing.

The refinancing comprises commercial bank debt and bank-guaranteed EIB facilities. The pricing for the $720 million 15-year commercial tranche starts at 60bp, rising in 10bp increments to 90bp. The pricing is 5bp higher than the model pricing distributed to banks in the preliminary information memorandum. While the debt could have been sold at the lower levels to a smaller number of underwriters, the larger bank group that results from the higher pricing means that no general syndication is necessary.

The financing also includes a $250million EIB tranche split between a $125 million Euromed facility priced at to rise in 10bp increments from 45bp to 75bp and a $125 million Article 18 facility also increasing in 10bp increments, starting at 50bp and rising to 80bp. A $50 million working capital facility in priced at 40bp.

The project is financed on the back of a tolling agreement, which does not expose lenders to any commodity price risk. The plant's entire 5.5 million tonnes per year capacity is fully contracted over 20 years, leaving lenders with a healthy tail of 5 years beyond the debt's maturity.

Both the project and its financing benefit from the strong fundamentals of the regional LNG market and a committed sponsor group. Eni is a 50% owner of Union Fenosa Gas, which owns 80% of the project, and has the largest presence of international oil companies operating in Egypt. Eni is also present upstream of the project, since an Eni-BP gas field supplies it.

Union Fenosa Gas (UFG) is taking around 60% (3.2 million tones a year) of the project's capacity, and will use its gas to fuel its power plants in Spain via a receiving terminal at Sagunto. EGAS, which owns a further 10% of SEGAS, has contracted to sell the remaining 2.3 million tonnes per year of spare capacity not accounted for by UFG. EGAS has in turn signed five-year agreements with BG Group, EGAS, EGPC and Petronas to process gas from the West Delta Deep Marine (WDDM) concession offshore of the Nile Delta.

These separate agreements are relevant because revenues under these agreements are placed into an escrow account for the benefit of the project's lenders. While the primary credits behind the project are those of the tolling counterparties, UFG and EGAS, the escrow arrangement provides the banks with exposure to the familiar credits of oil majors such as BG, BP and Petronas. Given this compelling story, it is little wonder that the pricing on the debt sets an historic low for Egyptian project financing.

The terminal markets for the gas processed at Damietta will vary according to the majors' strategy and market conditions at the time. Egypt's gas policy means that Damietta will also process a portion of gas for use in Egypt's domestic grid.

At present the policy of the Egyptian government is that at most one third of Egypt's gas can be exported, one-third must be used for domestic consumption, and one third must be strategically stored. However, several banks have suggested that it may be looking warily at the example of Oman, where gas reserves were over-estimated, even while the country developed several downstream petrochemical and LNG projects. The resultant supply shortfall has led Oman to rethink its energy policy, and several nearby governments are rethinking their own export policies. Even Qatar has now imposed a moratorium on future LNG projects following Qatargas 4, pending an assessment of its North Field gas reserves.

Any rethinking of Egypt's gas policy would come much too late to have a bearing on SEGAS train one, but it could stem the flow of inward foreign investment and the monetization of Egypt's offshore blocks. Nevertheless, SEGAS is considering plans for a second 5.5 million tonnes-per-year train at Damietta. BP is likely to take a substantial equity interest in the new train since it made a major 1 trillion cubic feet discovery in the offshore West Nile Delta at the end of January. The discovery was in the North Alexandria concession, for which BP, RWE and EGPC/EGAS are operators.

Spanish Egyptian Gas Co (SEGAS)
Status: Financial close 27 July 2007
Size: $1.02 billion
Location: Damietta, Egypt
Description: Refinancing of an operational SEGAS LNG terminal with 5.5 million tonnes-per-year capacity
Sponsors: Union Fenosa Gas (80%), EGAS (10%), EGPC (10%)
Financial adviser: Royal Bank of Scotland
Mandated lead arrangers: ABC, BBVA, Banesto, Bayerische, Landesbank, BNP Paribas, Caja Madrid, Dexia, DNB Nor, DZ Bank, Europe Arab Bank, Fortis, HSBC (accounts bank), Hypo Public Finance Bank, ING, Mizuho (working capital agent), Natixis, SG, Standard Chartered, Santander, SMBC, RBS (agent), Unicredit HVB
Sponsor legal counsel: White & Case
Lender legal counsel: Skadden Arps