The financing of the $5 billion Tangguh liquefied natural gas (LNG) project is one of the longest-running sagas in Asia's complex project finance market. The signing of facilities worth a total of $2.6 billion on August 1 marks the largest private sector investment in Indonesia's oil and gas sector since the Asian financial crisis.

Three separate facilities were signed on the same day, between Tangguh, Japan Bank for International Cooperation (JBIC), Asian Development Bank, and a consortium of international commercial lenders.

One further tranche remains in documentation, and Tangguh is expected to sign the $900 million portion with a group of Chinese banks before the end of this year. While the sponsors originally intended to seal the entire $3.5 billion financing in one go, the final tranche is waiting only on what one banker referred to as "government-level negotiations" over the sale of Tangguh gas to China.

Bringing Indonesia's largest ever debt deal to financial close was never going to be a simple task, and the signing of facilities worth a total of $2.6 billion is a credit to the arrangers, sponsors and development banks involved. "When you take account of all the developments associated with this project, the total investment runs into the tens of billions of dollars," says one banker who worked on the deal.

The debt financing includes a $1.065 billion secured commercial loan signed with Bank of Tokyo-Mitsubishi, BNP Paribas, Fortis Bank, ING, Mizuho, Standard Chartered and Sumitomo Mitsui Banking Corp.

This commercial tranche was launched into syndication in the first week of September, and the pricing of the loan surprised some in the market.

The interest margin on the 15-year loan, which involved an Indonesian trustee borrowing structure, is 22.4bp over Libor – much lower than is typical for a long-term project financing. This is explained by the presence of an unconditional guarantee, which allows the sponsors to benefit from much tighter pricing.

According to the mandated lead arrangers the tight pricing reflects the guarantees provided by BP and China National Offshore Oil Corp (CNOOC), the state-owned oil company. Although the project is located in Indonesia, BP North America is covering 58% of the deal, mitigating lenders' exposure to Indonesian risk. CNOOC is guaranteeing the remaining 42% of the facility. There is also a put option on January 31, 2014, and the arrangers are marketing the facility with an average life of 6.94 years. Lenders have been invited to join with commitments of between $30 million and $100 million and will earn participation fees of 20bp to 28bp.

There were some suggestions that a guarantee was only included after commercial lenders expressed their reluctance to fund the project on a non-recourse basis. None of the arrangers would comment on this, although bankers said that the main challenges in structuring the loan were caused by changes to the law governing Indonesia's oil and gas sector, which complicated negotiations in the early days of the project.

Indonesia amended its oil and gas law in October 2001, removing state-owned Pertamina's monopoly over the sector and establishing new agencies to issue and regulate oil and gas concessions. BP Indonesia operates Tangguh under a production sharing contract with BP Migas (not linked to BP), which replaced Pertamina as the regulatory body for upstream activities.

Tangguh is the first LNG deal to be completed since the new law was implemented and therefore carves out a precedent for future investment in Indonesia's oil and gas sector.

It is also only the second successful gas project in the country since the Asian financial crisis, following the Bontang LNG Reliability Enhancement (BLRE) project, which added a ninth train to the Badak LNG plant in Kalimantan – already the world's largest LNG facility.

The JBIC and ADB loans are both bilateral, and are also guaranteed by BP and CNOOC.

JBIC's $1.2 billion commitment reflects the importance of the project to Japan, as the country looks to secure long-term energy resources for growth. BP may be the largest single stakeholder in Tangguh, but Japanese companies together account for 45.88% of the equity interest in Tangguh. Japan already buys more LNG from Indonesia than from any other country.

The ADB has committed $350 million in a private sector loan – the bank's first in the Indonesian oil and gas sector.
Only the Chinese portion remains outstanding, and this tranche is not guaranteed by the sponsors. Few details are available ahead of the signing, but bankers familiar with the deal say that the $900 million non-recourse loan will be secured by offtake contracts between Tangguh and the Fujian LNG terminal in China.

As long ago as 2002, Tangguh signed an agreement to supply 2.6 million tonnes per year to the Fujian plant for a period of 25 years. That agreement is being fine-tuned and the financing is expected to close by the end of the year. While lenders will have no recourse to the sponsors, the Chinese receiving terminal is being developed by CNOOC and the offtake risk will be closely linked to the Chinese company.

China began construction of the facility last year and intends to use the gas to supply two new 1800MW power plants, as well as the cities of Fuzhou, Xiamen, Quanzhou, Zhangzhou and Putian.

The non-recourse tranche will be underwritten and funded by five of China's largest banks. Agricultural Bank of China, China Construction Bank, China Development Bank, Export-Import Bank of China, and Industrial and Commercial Bank of China first expressed their interest in April 2005 and were originally expected to underwrite $1.3 billion, but the sizes of the commercial tranches were altered once JBIC and ADB's commitments became clear.

Tangguh LNG
Status: In syndication
Size: $5 billion
Debt: $3.5 billion ($2.6 billion signed)
Description: Two-train, 7.6 million tonnes per year LNG liquefaction project in Papua, Indonesia
Sponsors: BP (37.16%), CNOOC (16.96%), Mitsubishi and INPEX (16.3%), Nippon Oil Exploration (12.23%), Kanematsu and Japan Oil (10%), Sumitomo and Sojitz (7.35%)
Offtakers: CNOOC (2.6 million tpy), Posco and K-Power (600,000 tpy), Sempra Energy (3.7 million tpy)
Mandated lead arrangers: Bank of Tokyo-Mitsubishi, BNP Paribas, Fortis Bank, ING, Mizuho, Standard Chartered and Sumitomo Mitsui Banking Corp
Financial advisor to sponsors: Societe Generale
Legal counsel: White & Case (sponsors), Paul Hastings (JBIC), Latham & Watkins (BP Migas), Allen & Overy, Shook Lin & Bok (ADB and commercial lenders)