Espadarte MV 14: Charter changes

Petrobras has gained a reputation among US investors as a well-run national oil company, but its close relationship with Japanese joint venture partners sometimes meant adapting to their low tolerance for risk. The financing for the Espadarte MV 14 demonstrates that Petrobras has started to demand better terms from its partners, and their banks have learned to live with this.

Petrobras has been able to command better terms from suppliers than it could five years ago, even in an environment where the supply of offshore drilling equipment is tight and demand is increasing. The series of large-scale offshore projects that Petrobras developed in the early part of the decade relied upon large quantities of structured corporate debt.

Those deals bundled together drilling, subsea equipment and floating production, storage and offloading (FPSO) vessels. The Japanese trading companies own a special purpose vehicle that leases the equipment to Petrobras, and these lease payments are not dependent on availability or operating performance. While heavily structured to minimise the owners' tax liability, the charter arrangements broadly left the lessee on the hook for lease payments.

For the FPSO Espadarte MV14, Petrobras issued an indicative charter agreement and asked bidders to comment on the document when submitting bids. While the total engineering, procurement and construction price for the asset, as well the size of the charter payment, helped determine the winner, bidders were also graded according to how much risk they were prepared to assume.

Modec's bid reflected an earlier pitch to Petrobras of an FPSO financing based on a greater degree of risk transfer than had previously been the norm globally for FPSOs. Oil majors have dominated the market for these assets, and the first true project financing for an FPSO was Modec and Mitsui's $200 million JBIC financing in 2004 for a vessel at the Su Tu Den field Vietnam.

Modec, a publicly traded former member of the Mitsui family of companies, and Mitsubishi, supported by Mizuho, were selected in August 2005, and signed an agreement in early 2006. This agreement calls for Petrobras to pay the lessee, an SPV owned by the sponsors, a charter payment that reflects the days that the asset is available. If the vessel is out of operation beyond scheduled maintenance outages, the charter payments decrease in a sliding scale.

The charter has a term of construction plus eight years, and can be extended at the option of Petrobras for four one-year periods. If Petrobras exercises all of these options, MV 14 could bring in charter payments of up to $733 million over this 12-year period.

The FPSO will be used in the exploitation of the Espadarte Sul field off the coast of Brazil. It is now operating in the 1-RJS-409/4-RJS-415 area of the field, roughly 100km offshore Campos. Modec converted an older tanker into the FPSO at the Jurong shipyard in Singapore, delivered it during the fourth quarter of 2006, and achieved first oil on 9 January 2007.

The asset is installed in water with a depth of 1,350m, and will be connected to nine subsea wells, five of which produce oil and natural gas and the other four are used for water injection. It has a tanker size of 264,148 deadweight tonnes, and is capable of processing 100,000 barrels of crude per day and has a storage capacity of 1.6 million barrels. It can also compress 87 million cubic feet of natural gas per day and inject 113,000 barrels of water per day.

Lenders are not exposed to volume risk, but are exposed to the risk that Petrobras will terminate the contract. Petrobras cannot do so at will, but there are instances, such as for non-performance, force majeure or a delay to the in-service date, where sponsors and lenders might be left with a serviceable asset, but no client. Depending on the cause, the operators can find an alternative destination for the FPSO, or the project can call upon business interruption insurance, or it can draw upon the debt service reserve account, which is sized to take this into account. In certain instances the sponsors may have to provide contingent undertakings to the project, and on future financings sponsors will look to reduce these commitments.

In the period between selection and financial close the sponsors also brought in Mitsui as a sponsor, and are in the process of bringing in Etesco, a Brazilian conglomerate, as an additional shareholder. They settled on using Japan Bank for International Cooperation (JBIC) funding for the asset, because of the pricing and political risk insurance benefits.

The deal is the first pure project financing in Brazil in which JBIC has participated. JBIC has been a substantial supporter of earlier oil and gas projects in Brazil, but because of the high degree of pass-through to Petrobras on these financings, it has classified them as corporate finance, and has worked on them through the corporate finance department.

The total debt breaks down into a $126 million direct loan from JBIC with a construction plus seven-year maturity, and a commercial loan of $84 million with the same tenor. The commercial loan, on which Mizuho was mandated lead arranger and ING arranger, includes political risk insurance from JBIC. The debt syndicated to Sumitomo Mitsui Banking Corporation, Citigroup and Bank of Tokyo-Mitsubishi UFJ.

The financing has also been structured to accommodate Brazil's new suite of tax regulations – REPETRO – that govern the import of equipment into Brazil and their depreciation treatment. In common with earlier deals, the borrower is a Dutch-registered holding company, which minimises the project's withholding tax liability.

The financing was not the only Petrobras FPSO to close in 2006, since Modec is set to place a second FPSO – Espadarte MV 15 – in service soon. ING was the arranger of financing for that vessel, and did not use JBIC cover. However, given the large number of offshore assets that Petrobras is likely to be procuring in coming months, the Japanese trading companies' grip on this business, and JBIC's ability to depress borrowing margins, expect the financing of 14 to be influential.

Espadarte MV 14 B.V.
Status: Closed 31 March 2006
Location: Espadarte Sul field, offshore Brazil
Description: 1.6 million barrels and floating production, storage and offloading vessel
Sponsors: Modec, Mitsubishi, Mitsui
Debt: $210 million
Mandated lead arranger: Mizuho Corporate Bank
Arranger: ING
Lender legal counsel: Allen & Overy (international), Villemor (local)
Sponsor legal counsel: Ashurst (international), Pinheiro Neto (local)