Dolphin Energy: Equal lending

The biggest Islamic structured financing in the oil and gas sector to date, the $1 billion Islamic tranche raised by Dolphin Energy as part of its $3.45 billion bridging facility, has raised perceptions of the project volume that can be financed in the Sharia compliant market and at what price.

But the single most important aspect of the Dolphin facility is economic and risk equivalence between the commercial and Islamic tranches – something not seen before.

The bridging loan backs construction of the Dolphin Gas Project – the first cross-border pipeline project in the Gulf. The project is due to come on-stream at the end of 2006 and involves development of Qatar's offshore North Field gas reserves – the world's largest single reservoir of natural gas and taking the gas 400 kilometres, via a 48-inch pipeline, for processing at a $1.6 billion plant under construction in Qatar's Ras Laffan industrial city.

From Ras Laffan, where the gas processing plant will extract condensates and liquefied petroleum gas and other by-products, the refined gas will be sent through another dedicated 370-kilometre long pipeline at a rate up to 3.2 billion cubic-feet-a-day to Al Taweelah in Abu Dhabi. The gas will then flow on through landlines to customers in Abu Dhabi, Dubai, the northern emirates and Oman.

The project is lead sponsored by Mubadala Development Company (51%), on behalf of the Government of Abu Dhabi, along with Total (24.5%) and Occidental Petroleum (24.5%), and already has signed a number of long-term offtake agreements in place.

Last September, Dolphin signed an agreement to deliver 200 million standard cubic feet of gas a day to Oman Oil Company starting in 2009. Other initial long-term clients include Abu Dhabi Water & Electricity Authority and Fujairah's Union Water & Electricity Company. Dolphin has also reached a 25-year agreement with Dubai Supply Authority to provide 200 million standard feet-a-day of gas to Jebel Ali starting in 2007.

In addition to providing more funding for the project – which is backed by $1.5 billion of equity – the four-year bridging loan takes out a $1.36 billion five-year commercial bridge signed in 2004.
The original deal had proved popular with banks pulling in the following takers: Abu Dhabi Commercial Bank ($250 million); NDAB ($200 million); Barclays Capital, BNP Paribas, GIB ($125 million); First Gulf Bank, HSBC ($100 million), Standard Chartered, ($75 million); Ahli United, QNB, ($50 million); ADIC, BBK, ($30 million); Apicorp, ABC, CBQ and UNB, ($25 million). But the response to the call for a second facility was $4 billion in binding financing commitments – a response that was unexpected and prompted the take out of the original bridge.

Pricing on the original five-year bridge was 45bp over Libor in the first 18 months, climbing to 60bp for the next 18 months and then to 75bp to term. Pricing for the second four-year deal was significantly better – 35bp over Libor for the first two years and 45bp for the final two.

The second deal – totalling $1 billion of Islamic debt and $2.45 billion of commercial debt – closed in September 2005, having raised binding commitments in June.

Despite the tight pricing, 15 mandated lead arrangers (MLAs) joined the conventional portion: National Bank of Abu Dhabi (facility agent), Abu Dhabi Commercial Bank (documentation), Barclays Capital (co-documentation), First Gulf Bank (On-Shore Security Trustee), HSBC (Off-Shore Security Trustee), Bank of Tokyo-Mitsubishi, Bayerische Landesbank, Calyon, Export Development Canada (EDC), Mizuho, Royal Bank of Scotland, Societe Generale, Sumitomo-Mitsui Banking, Qatar National Bank, and WestLB. And five further banks came in as participants: ABC Banking, Arab Bank, BNP Paribas, Lloyds TSB and Standard Chartered Bank.

Although smaller, the Islamic portion of the deal is the most significant in that it achieves economic equivalence with the commercial tranche and is based on a floating (3 month Libor-plus) rate rather than fixed payments.

The tranche was led by five banks with Sharia Committees supervising: ABN Amro Bank (security trustee), BNP Paribas (documentation), Citigroup (bookrunner), Dubai Islamic Bank (bookrunner), and Gulf International Bank (facility agent).

The facility is an Istisna'a transaction in which Dolphin enters into an agreement to construct a portion of the project on behalf of the Islamic investors and signs a forward lease agreement with the investors for the use of those assets when they are built.

The structure is the norm for Islamic greenfield projects, however the critical difference on Dolphin is that the for the first time Sharia scholars have concluded that an advanced rental payment can be effectively linked to a floating rate rather than fixed.

Dolphin also achieved risk equivalence in its attribution of security between the Islamic and commercial tranches. Islamic lenders are investors rather than creditors which throws up lender security implications between combined Islamic and commercial facilities. But through a variety of mechanisms Dolphin managed to achieve the equivalent of a pooled risk without actually putting a pool in place.

For conventional lenders there was nothing material to choose between the commercial debt and the Islamic tranche. Only one purely Islamic bank, Dubai Islamic Bank, came into the deal with the remainder – the other MLAs and HSBC Amanah, Barclays Bank, Natexis Banques Populaire, SG, WestLB, Export Development Canada (EDC), Sanpaolo IMI, China Construction Bank, and Commercial Bank of Qatar – a largely conventional bank line-up.

In addition to the equivalence of both tranches, the bank line-up is symptomatic of the fact that regional banks were pushed to lend at sub-40bp (cost of funding is higher for regional GCC banks than the internationals). Nevertheless, around 20% of takers were local and the deal has broadened perceptions of what constitutes the Islamic lending base – a number of the Islamic participants had never invested in an Islamic project before.

Dolphin Energy
Status: Signed 8 September 2005
Description: Largest Islamic oil and gas project facility to date
Size: $1 billion
Sponsors: Mubadala Development Company, Occidental Petroleum, Total
Islamic lead arrangers: ABN Amro Bank, BNP Paribas, Citigroup, Dubai Islamic Bank, Gulf International Bank
Participants: HSBC Amanah, Barclays Bank, Natexis Banques Populaire, SG, WestLB, Export Development Canada (EDC), Sanpaolo IMI, China Construction Bank, Commercial Bank of Qatar
Sponsor legal counsel: Sherman & Sterling
Lender legal counsel: Allen & Overy