Financing on the record breaking $9 billion-plus Qatargas 2 project has closed. The key issue on the project for banks is accepting gas market price risk on LNG. And given the wariness of banks to take any form of price risk after the US and UK merchant power slumps, the fact that Qatargas 2 has tapped the bank market for double its original requirement is all the more impressive.

In addition, and in the same month, financing closed for the downstream LNG terminal at Milford Haven, South Wales, that will buy Qatargas 2 LNG.

Financing of the upstream is provided in three tranches: commercial, Islamic and ECA. The largest tranche, the commercial bank tranche, has 36 banks at mandated lead arranger level, each committing $100 million. This $3.6 billion commitment was scaled back to $3 billion. The Islamic tranche came in at $530 million, and the export credit agency facility at $ 1 billion, with Sace providing $600 million and US Ex-Im $400 million. Financial close was delayed slightly whilst the ECA portion was finalised. First draw down is due on 21 December and general syndication will launch in January 2005.

Total upstream project costs weigh in at a hefty $9.3 billion. Exxon provided a pari passu sponsor loan of $1.9 billion and the balance from $2.8 billion in equity.

The project encompasses the construction of two liquefaction trains rated for an annual capacity of 7.8 million tons of LNG - the largest ever built - and the offshore development of new blocks in Qatar's North Field.

The sponsors provide a guarantee during construction, which falls away once the facility is complete. Then the pricing is pegged against the UK gas market price.

Coming in at mandated lead arranger level are 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, and WestLB. The bookrunners for the commercial tranches were Qatar National and GIB on the local side, and RBS and Sumitomo on the international side.

Pricing is on a step up structure starting at 50bp over Libor pre completion - while the sponsor's guarantee is in place  rising from 95bp after completion to 125bp. Participation fees are 120bp. Pricing has a look-through to the UK gas price, and unusually there are no guarantees nor a market floor price. But unlike a purely merchant-backed deal there is no volume risk as there are 25-year sponsor SPAs in place.

As part of the info memo, detailed analysis of the UK gas market was included, and price projections and recent hikes in gas prices for final users probably buoyed lenders - British Gas conspicuously put retail gas prices up 12.4% when the memos were circulated.

The $1 billion ECA tranche has a tenor of 16.5 years, funded by Sace and US Exim. The Sace facility is priced at 25bp, with the $400 million US Ex-Im loan priced tighter still.

The sponsors were able to drive a hard bargain to the lenders - they got both gas market risk and tight margins - as the project exhibits a new integrated supply chain model. Seventy percent owned by Qatar Petroleum and 30% owned by Exxon, both are project sponsors of the upstream and offtakers at the LNG terminal at Milford Haven in South Wales, UK. Unusually, QP and Exxon manage all aspects of the LNG chain.

Traditionally LNG projects have suffered from very elaborate chains, with many shareholders, with often competing interests. Projects tend 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 tight margin on the deal is symptomatic of the voracious international bank appetite for Qatari project debt. The deal had originally set out for $1.5 billion to finance a single train, but such has been lender appetite that two trains are incorporated into the financing. At present this appetite shows no sign of abating. The financing is also notable for having the first Islamic component in a Qatari project finance deal: this piece will total $530 million over a 15-year tenor.

Dubai Islamic Bank, Gulf International Bank, HSBC Bank Middle East, Kuwait Finance House, Qatar Islamic Bank and Qatar National Bank SAQ arranged the Islamic component.

Financing for the downstream South Hook LNG terminal in Wales will be separate from the upstream deal. Twelve banks were appointed as mandated lead arrangers, these are: ABN Amro, Ahli United Bank, Bank of Ireland, Bayerische, BBVA, BNP Paribas, Calyon, Fortis, ING, RBS, SG and SMBC. The £427 million ($826 million) 25-year financing was upped from the original £380 million sought because of higher than expected engineering, procurement and construction bids.

The terminal will be built under a lump-sum turnkey contract by Chicago Bridge & Iron (CB&I). The contract is worth between $725 million and $750 million. The terminal is designed to process 7.8 million tonnes per year and should be operational by the end of 2007.

Pricing, under a step up structure, is 40bp over Libor pre-completion, rising to 65bp, before rising in three steps to 105bp.

The total project financing is split into three portions: upstream, shipping, and UK receiving. The overall project will include the two liquefaction trains, the development of offshore blocks, a fleet of LNG carriers, and re-gasification/terminal facilities. The LNG onshore facilities will be constructed at the existing Qatargas LNG plant that has been operating since 1996.

Qatargas 2 - upstream
Status: closed 15 December
Size: $6.5 billion, including $1.9 billion Exxon loan
Location: Ras Laffan, Qatar
Description: Two LNG liquefaction trains
Sponsor: QP (70%); Exxon 30%
Financial adviser: RBS
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