BTC: Controversial but concrete

The Baku-Tbilisi-Ceyhan (BTC) pipeline has suffered a lot of bad press through 2004: cost overruns; ineffective adhesive; and mandated lead arranger Banca Intesa's sale of its debt. To some critics the very existence of the project undermines the Equator Principles.

Yet these criticisms, largely from the more vocal NGOs, have been over-egged. In their minds, the nadir was Banca Intesa's sale of a third of its project debt, but this was purchased by HVB, already a participant to the debt ? and hardly looks like a sign of a project in serious trouble.

BTC is a landmark deal for its sheer size, complexity, and the number of institutions involved. Given the number of institutions ? 15 lead arrangers, seven ECAs, three multilaterals, 11 shareholders and their respective advisers ? overcoming the logistics of negotiation and agreement was a feat in itself. BTC was also the first large deal of real geopolitical significance closed after the widespread adoption of the Equator Principles.

The International Finance Corporation (IFC) and European Bank for Reconstruction and Development (EBRD) held multi-stakeholder forum meetings on the project, and a 120-day comment period on the environmental and social impact assessment was allowed. The IFC published a detailed response to the public comments; and independent environmental and social specialists and engineers, working on behalf of the financial institutions, evaluated all of the project work. In all, the environmental due diligence sets the standard for future deals of similar geopolitical import.

?The most difficult job initially was understanding and coordinating the disparate group of sponsors ? each of differing credit strengths,? says John Wingate, BTC project finance manager. ?The task was to devise a single project financing that could take advantage of the inherent support of the stronger credits.?

The total project cost is $3.6 billion. Financing features four multilateral-backed loans: Two 12-year $125 million A loans from IFC and EBRD and two 10-year $125 million B loans. Opic has also put up $100 million in political risk insurance for a commercial bank tranche.

Total syndicated debt is $1.6 billion with a 12-year tenor. Of the remaining funds, $923 million is coming from loans from consortium members BP, Statoil, Total and ConocoPhillips. The sponsors have already expended around $1 billion in equity so far.

The $1.6 billion of debt is heavily ECA-backed with US Ex-Im insuring $125 million, Nexi $120 million, the ECGD $106 million, Coface and Hermes covering $90 million, and Sace $30 million. JBIC has put up a $180 million tied export facility, and a $300 million overseas investment facility.

?It was important that some sponsor companies, such as BP and Statoil, contributed to the project at a significant level and benefited from the inherent risk mitigation, but also achieved flexibility in terms of the level of external debt they guaranteed,? adds Wingate. ?This was achieved through sponsor-provided senior loans. This in turn had to be tied together and translated into a commercial package.?

Pricing on the ECA loans is dependent on cover: US Ex-Im and ECGD are providing 100% cover; Nexi is providing 97.5% political and 95% commercial; Sace the same cover at 95% and 90% respectively; Hermes and Coface 95% commercial and political. Average pricing across the loans is 225bp pre-completion and 270bp post-completion. The project is backed by pre-completion guarantees from the sponsors and a debt service undertaking when the pipeline opens. (Search ?BTC? at www.projectfinancemagazine.com for the deal analysis)

BTC will be the primary export route for oil produced from the Azeri-Chirag-Gunashli (ACG) field. Volumes dedicated by ACG shippers, resulting in tariff payments to BTC, are the foundation of the credit for the BTC financing. BTC is required to make capacity available and the ACG shippers, in return, commit to transport all the ACG oil through BTC. Under the transportation agreement put in place, ACG shippers agreed to a ship-and-pay tariff arrangement, and as such the BTC lenders assumed significant ACG field risk. As the ACG offshore investment significantly outweighs the BTC investment, the incentive to both produce and then ship oil through BTC is obvious.

Construction was scheduled to be complete by March but this has slipped by four to six months. All of the line pipe has been welded and is in the ground, with above ground facilities currently in construction.
Given its size, complexity and the political risk of the countries it covers ? particularly Georgia and Azerbaijan, it is unlikely that a similar deal will be done in the near future. Prospective pipelines involving similar risk include those mooted across Siberia, and a Unocal pipeline.

Despite JBIC, Nexi amd Ex-Im being involved with the project as early as 2002, construction had begun seven to eight months before financing, so the path to financial close did not follow the typical ECA method. The procurement package was taken as it was with the lending structure fitting around it. The involvement of ECAs at an early stage is likely to be repeated on the Sakhalin II project.

BTC Oil Pipeline
Status: Closed 3 February 2004
Description: $2.6 billion debt financing for oil pipeline
Total project cost: $3.6 billion
Sponsors: BP (30.1%); SOCAR (25%); Unocal (8.9%), Statoil (8.71%); TPAO (6.53%); ENI (5%); Itochu (3.4%); ConocoPhillips (2.5%); Inpex (2.5%); TotalFinaElf (5%); Amerada Hess (2.36%)
Mandated lead arrangers: ABN Amro; Citigroup; Mizuho; SG; BNP Paribas; Calyon; Dexia; HVB; ING; Intesa; KBC; Natexis Banques Populaires; Royal Bank of Scotland; Sanpaolo IMI; WestLB
Multilateral lenders: EBRD; IFC; Opic
ECA backing: US Ex-Im; Nexi; ECGD; Coface; Hermes; Sace; JBIC
Legal counsel to IFC and EBRD: Allen & Overy
Financial adviser to the consortium: Lazards
Project legal counsel to sponsors: Baker Botts; Ashursts
Finance legal counsel to sponsors: Sullivan & Cromwell; Maples and Calder
Legal counsel to ECAs: Freshfields
Legal counsel to commercial lenders: Allen & Overy
Financial advisers to the ECAs: Taylor De Jongh (Most ECAs) PwC (Hermes)
Technical advisers to the lenders: Worley Parsons; Paragon; Netherland, Sewell and Assocs.
Environmental adviser to the lenders (pre-finance): Mott McDonald
Environmental adviser to the lenders (post-finance): D'Appolonia
EPC contractors: Spie Capag; CCIC; Botas