Qatargas 2: 21st century model

At $10.65 billion in total costs ? $9.3 billion for facilities in Qatar and £706 million ($1.33 billion) for a LNG import terminal (South Hook) in South Wales ? and involving 57 institutions at senior level; Qatargas 2 broke all records for energy project size when it reached financial close on 15 December 2004.

But there is more to this deal than just size. Structured by Royal Bank of Scotland (RBS) and sponsored by Qatar Petroleum (70%) and Exxon Mobil (30%), Qatargas 2 has initiated a change in the way bankers look at gas market price risk ? in effect this is the first LNG project financed on the back of a UK gas spot market and a seminal global gas spot market.

It is also the first of a new LNG development template ? an integrated supply chain financed, developed and operated by the same sponsors, with full net-back throughout the chain (for more detail on the genesis and structure of Qatargas 2 search www.projectfiancemagazine.com).

The model sledge-hammered debt margins, despite banks taking on gas price risk, and the deal was so well received by the lending market that it borrowed double its original requirement.

Even at the micro level of deal mechanics Qatargas 2 has set new benchmarks. It features the largest long-term Islamic project financing (the term is only rivalled by Shuweihat, which is dwarfed by the size and complexity of Qatargas 2) and the first Islamic project financing for either of the sponsors. In addition, at 25 years, the South Hook Terminal project has the longest tenor of any sterling financing closed in the bank market without government or monoline credit support.

The most significant part of the deal for the global market is banks willingness to take on gas price risk. With 25-year sponsor SPAs in place there is no volume risk. But the extent of bank appetite for the deal was still initially surprising given once the sponsor construction guarantees fall away pricing has a look-through to the UK gas price, with no guarantees nor a market floor price.

However, detailed analysis of the UK gas market was included in the information memorandum, demonstrating future price projections and demand ? British Gas conspicuously put retail gas prices up 12.4% when the memos were circulated.

The bank take-up says as much about the future for the UK gas spot market as the project model, and that confidence is reflected in the pricing for both upstream and downstream elements of the deal.

The upstream project involves construction of two liquefaction trains with an annual capacity of 7.8 million tons of LNG ? 60% bigger than any in operation elsewhere ? and the offshore development of new blocks in Qatar's North Field. Total upstream project cost is a record breaking $9.3 billion on its own, which, in addition to commercial facilities, includes $2.8 billion in equity and a $1.93 billion sponsor loan from Exxon Mobil.

Upstream financing comprises three tranches ? commercial (15 years), Islamic (15 years) and ECA (16.5years). The $3.6 billion commercial bank tranche ? which pulled in 36 banks at mandated lead arranger level, each committing $100 million ? priced on at step-up at 50bp over libor for years 1-5 pre-construction; 95bp in years 5-7; 105bp in years 8-9; 115bp for years 10-12 and 125bp for years 13-15.

Pricing on the $530 million Islamic tranche ? arranged by Dubai Islamic Bank, Gulf International Bank, HSBC Bank Middle East, Kuwait Finance House, Qatar Islamic Bank and Qatar National Bank SAQ ? effectively mirrors the international commercial debt.

Conversely, the $ 1 billion in ECA facilities were priced differently. The $600 million provided by Sace (the facility has yet to materialise and will replace $600 million from the commercial tranche when it appears) came in at 21bp, while the $405 million from US Ex-Im priced at around 2bp tighter.

The downstream portion of the project funds construction of a 7.8 million tonnes per year (equivalent to 10% of UK gas demand) regasification terminal in Milford Haven, South Wales. The £706 million project was structured as a separate financing, has a much longer 25-year tenor than the upstream and includes a £180 million Exxon Mobil sponsor loan.

The £420 million commercial debt ? lead arranged by ABN Amro, Ahli United Bank, Bank of Ireland, Bayerische, BBVA, BNP Paribas, Calyon, Fortis, ING, RBS, SG and SMBC ? priced at 40bp pre-completion; 65bp in years 5-9; 75bp for years 10-14; 90bp for years 15-19 and 105bp for years 20-25.

Qatargas 2 breaks with all LNG financing traditions ? both in pricing, size and structure.

Past LNG projects have suffered from very elaborate chains, with many shareholders with often competing interests. Projects have tended to get very strong sponsors on the upstream ? for example Exxon has a AAA credit and QP an A+ credit ? and weaker on the downstream.

The benefits of the integrated supply chain are reflected in the pricing on this deal and it is a model that is certain to be repeated in future LNG projects.

Qatargas 2 ? upstream

Status: Closed 15 December 2004
Debt: $5.23 billion (excluding Exxon Mobil loan)
Location: Ras Laffan, Qatar
Description: Development of two LNG liquefaction trains
Sponsors: Qatar Petroleum (70%); Exxon Mobil 30%
Financial adviser: RBS
Mandated lead arrangers: ABC; ABN Amro; Ahli United; ANZ; Apicorp; Arab Bank; BNP Paribas; BBVA; Bank of Ireland; Bank of Scotland; BTM; Barclays Capital; Bayerische; Calyon; CBQ; Citigroup; Dexia; Fortis; GIB; HSBC; Hypo; ING; IntesaBCI; KfW; Lehman Brothers; Mashreq; Mizuho; Natexis; QNB; RBC; RBS; SG; Standard Chartered; Sumitomo; UBM; WestLB.
Islamic arrangers: Dubai Islamic Bank; Gulf International Bank; HSBC Bank Middle East; Kuwait Finance House; Qatar Islamic Bank; Qatar National Bank;
ECAs: US Ex-Im; Sace
Financial adviser to the ECAs: Taylor-DeJongh
Legal counsel to the sponsors: White & Case
Legal counsel to the lenders: Skadden Arps
Legal counsel to the ECAs: Latham & Watkins

Qatargas 2 ? downstream

Debt: £420 million (excluding Exxon Mobil loan)
Mandated lead arrangers: ABN Amro; Ahli United Bank;
Bank of Ireland; Bayerische; BBVA; BNP Paribas; Calyon; Fortis; ING; RBS; SG; SMBC