TGP: Sidestepped

If the BTC pipeline project represents the Equator Principles at its most assertive, Camisea shows up their limits. This is not to say that Peru's Camisea is an example of lax environmental monitoring, but that there exist alternative sets of standards to those of the World Bank, and alternative sources of debt to international banks. Indeed, Camisea's greatest achievement lies in raising a mixture of multilateral, bilateral and domestically-issued debt to fund a project that struggled to come to fruition.

An $850 million project, Transportadora de Gas del Peru (TGP) is the midstream component of a larger $1.6 billion development of the Camisea gas field. The project involves bringing gas from deposits located in the Uyacali basin, 431km east of Lima, to the Pacific coast. It goes through some sensitive and unspoilt areas, and the delicate task of building a pipeline through the region was one reason why the financing attracted a great deal of attention.

TGP is a 30-year concession to build and operate two pipelines, for gas (714km) and for liquids (540km). The two pipelines will run in parallel from the field to the Pisco area, 200km south of Lima. The sponsors of the upstream production segment are Pluspetrol, joined by Hunt Oil, SK Corp. and Tecpetrol, joined by Sonatrach, Grana y Montero and Tractebel for the pipline development. Tractebel is operating a proposed distribution system in Lima, while Hunt is developing an LNG terminal at Pisco.

But the main rationale behind the project is domestic, rather than export-related. The project, as President Alejandro Toledo's government always stresses, is set to add 1% to the country's GDP per year during the concession. The government's consistent support is one reason for the strong interest that local debt investors displayed in the project.
70% of the pipeline's estimated throughput is destined for the domestic generation market, with the balance destined for sale to residential and industrial users. The pipeline has 285 billion cubic feet per day gas and 50,000 barrels per day liquids capacity, and there is very little capacity to spare for export projects.

The government, keen to encourage the development of Peruvian business, has offered the project a minimum revenue guarantee, so that it is not subject to revenue uncertainty while the sponsors go out and find customers. Much of the generation capacity has yet to be built, or will consist of retrofitted oil-fired plants. While Peru largely depends on coal to produce electricity, the price is often set by expensive oil, and thus can Toledo promise a 15% drop in electricity prices.

Shippers are a stronger credit, since they have no alternative client, and are all shareholders. The upstream producers will have to pay penalties to the pipeline should they not decide to use it, and have also had to sign up to the same package of environmental mitigants as the pipeline project. Failure to comply would result in a default under the pipeline loan agreement.

The reason for this lies in the history of environmental scrutiny of the project. While the deal started life as a Shell project, and was once a target of Enron's acquisitive International group, it has struggled to line up lenders. Citigroup was once the project's financial advisor, and sounded out the market about a potential deal, but made little progress.

Citi then became the target of a number of a number of NGOs, led by the Rainforest Action Network, which agitated strongly against its involvement. Citi withdrew, although it denies that the protests had any effect, and promptly began work on the Equator Principles for environmentally-conscious lending, in conjunction with ABN Amro and the IFC.

The United States Export-Import Bank also contemplated lending the upstream sponsors $200 million, but ultimately voted against the project, without giving reasons for its decision. Thus the sponsors and the remaining lenders decided, in part to mute criticism of their involvement in the midstream section, that the envronmental mitigation package should also apply to the production element.

The Inter-American Development Bank (IDB), with $75 million, Corporacion Andina de Fomento (CAF), with $50 million, and BNDES of Brazil, providing $103 million in support of steel piping exports, remained the project's lenders. The IDB and CAF share environmental clauses, while the BNDES loan has recourse to the sponsors. BNDES may renegotiate the terms at a later date, providing that the project can demonstrate a strong operating history.

The project is well under way, and has been funded to date using sponsor equity, but the sponsors have provided joint and several completion guarantees, with the less strong parties providing cash or letters of credit behind their obligations. The upstream construction has been particularly tricky, since the sponsors have had to fly, rather than truck, in equipment to minimise environmental impact.

The remaining $270 million debt requirement, as envisaged by the arrangers, was to be raised by a combination of IFC B loans and locally-raised debt. Indeed, the IDB had received informal commitments from three international banks. One of these banks, it should be noted, was a signatory to the Equator Principles.

But the domestic bookrunner, Banco de Credito del Peru, received an overwhelming response to its domestic issue. It led $200 million in 15-year dollar notes, priced at 350bp over Libor, and $70 million equivalent in 25-year soles-denominated notes, which priced at 712.5bp over the VAC, an index-linked version of the Peruvian Sol.

This issue eliminated the need for a B loan, and gives some indication of the pent-up demand for good quality assets at the Peruvian pension funds and insurance companies. The deal, rated at AAA by Fitch affiliate Apoyo y Asociados, is the largest ever attempted in the Peruvian market. Peruvian pension funds, it should be noted, are not signatories of the Equator Principles.
The mitigation of environmental damage is extensive, and is exhaustively documented at www.camisea.com.pe, but the financing does highlight one key weakness in monitoring international lenders to controversial projects – that local lenders may eventually make them obsolete.

Transportadora de Gas del Perú
Status: Closed and funded, 20 August 2004
Size: $1.2 billion
Location: Peru
Description: Local financing for the Camisea pipeline project.
Sponsors: Techint Group, Pluspetrol, Hunt Oil, Sonatrach, Tractebel, SK, Graña y Montero
International debt: $75 million from IDB, $50 million from CAF, and $103 million from BNDES
Local financing: $270 million, with a 15- and 25-year maturity.
Local bookrunner: Banco de Crédito del Perú
Lawyers for TGP: Sullivan & Cromwell (New York), Estudio Muñiz (Lima)
Lawyers for BCP: Cleary, Gottlieb, Steen & Hamilton (international), Estudio Rubio Leguía, Normand y Asociados (local) and in-house counsel
Lawyers to CAF and IDB: Clifford Chance (international) and Rodrigo, Elías & Medrano Abogados (local)