Despite tension with the US, Iran is becoming one of world's major emerging project markets. Although the nuclear technology issue looks likely to be high on the agenda for President Bush in his second term, it is not yet affecting the ability of Iran to attract both international developers and lenders, with European banks and sponsors doing steadily increasing business volume across a range of Iranian project sectors.

And it is not just banks and sponsors - the big European ECAs have all been very busy in Iran during 2004. Hermes is probably the most active ECA, having provided more than Eu1 billion of cover this year. However, Asian ECAs and sponsors are also upping their presence.

A large number of downstream petrochemicals projects are at various stages of development, all featuring National Petrochemical Company of Iran (NPC). And two other areas of focus are telecoms, where Turkcell is moving forward with the first foreign controlled mobile concession, and power generation, where there are plenty of deals on the drawing board, even though financial closings have been slow to happen.

Lure of South Pars
But by far the biggest lure for bankers is the exploration and development activity in the vast South Pars gas field, which constitutes the other half of the giant North Field which belongs to Qatar.

Such is the volume of financing required for South Pars, together with various associated downstream petrochemical projects, that multi-sourcing is a necessity, and most financings typically involve a number of ECAs working together.

Despite the so-called 'special relationship' between the UK and US, Iran has become a major area of focus for the UK's Export Credits Guarantee Department (ECGD) which has supported major structured finance transactions with both NPC and the National Iranian Oil Company (NIOC).

Since 2002 ECGD has been willing, for certain contracts, to provide support for UK companies trading with NPC and NIOC without the need for additional security, and UK exporters have begun to make significant use of this.
Late in 2003, Deutsche Bank led a consortium of 17 banks with a $1.75 billion financing for NIOC, for Phases 9 and 10 of the South Pars project. This included $1.23 billion with ECA cover, and another $525 million of commercial loans.

The German ECA Hermes was most heavily involved, supporting exports from MAN Ferrostaal and Salzgitter International, though since both have UK subsidiaries there was also ECGD involvement.
In addition, this year ECGD has put in place two Supplier Credit Finance facilities, provided by a consortium of banks led by Deutsche Bank, to help UK exporters wishing to get involved in the South Pars gas field development.

Structured finance enters market
South Pars 9 and 10 is notable for the fact that all the funding is being done on a structured finance basis, backed by revenue streams from the NIOC, whereas previous phases had all used buyback contracts. Phase 9 and 10 includes four onshore gas processing trains, and 100km of offshore pipeline providing connections to the drilling platforms.

The ECA covered element of the South Pars 9 and 10 financing, led by Deutsche Bank, includes support from ECGD, Export-Import bank of Korea (Kexim), Hermes, Sace, and Atradius of the Netherlands. The Kexim participation includes some direct lending.

South Pars Phases 1, 2 and 3 are now up and running, producing 75 million cubic metres of natural gas, 120,000 barrels of liquefied gas, and 600 tonnes of sulphur per day. Phase 1 was done with domestic Iranian firms, while phases 2 and 3 are led by TotalFinaElf, which had financing put in place by a bank consortium led by SG.

Phases 4 and 5 of the South Pars Development Project are now nearing construction completion, and should go onstream in the first quarter of 2005. The offshore project includes construction of two wellhead platforms, two flaring platforms and undersea pipelines. Onshore installations will include a gas refinery, being led by ENI of Italy, together with local partners Petropars and NIOC.

Japanese trading company Mitsui is heavily involved in South Pars Phases 6, 7 and 8, and has raised a syndicated bank loan, featuring a group of banks including BNP Paribas. And Norwegian oil company Statoil is using its experience in the North Sea to undertake much of the offshore drilling work.

Downstream and petrochems
Crucially, in addition to recovering gas from the South Pars field, Iran has also embarked on a massive infrastructure programme to get involved in downstream processing of the gas, and build up its domestic petrochemicals industries.

These projects are generally led by the National Petrochemical Company (NPC) and until the late 1990s were all done on balance sheet. But since 2002 NPC has financed a third wave of projects using structured finance techniques, by borrowing on its own balance sheet but with the added security of pledging receivables into offshore escrow accounts.

And since 2003 a fourth wave of projects have shown that the European ECAs are willing to support NPC 'clean risk' structures, taking direct NPC risk without any guarantees from the Ministry of Economic Affairs and Finance, nor complex security structures.

The ECGD was the first ECA to provide pre-underwritten limits for corporate risk business involving NPC and NIOC, under which support is available on a corporate or clean basis. This cuts out the need for special structured finance security arrangements, and provides UK exporters with a faster, simpler service that is especially suited to firms seeking smaller contracts. ECGD provided cover totalling £76 million ($141 million) for nine small UK companies supplying parts to petrochemical projects for the year ending March 2004.

During 2003 NPC did several major structured financings, including a styrene monomer plant, low and high density polyethylene plants, and a utilities plant in the Olefin 9 complex.

Bridge financings were arranged for all of these projects. In addition, in February of this year, NPC signed a $1 billion framework agreement with Japan Bank for International Cooperation and Development (JBIC) to support exports of Japanese equipment to Iran. The first use of this facility occurred in April, and involved financing for an Ammonia and Urea plant in Bandar Assaluyeh.

In 2003 ECGD and SACE provided cover on $115 million worth of financing for a NPC styrene monomer plant being built by Snamprogetti. This was an example of one of the new projects structured as a project financing, with no Ministry of Finance guarantees. HSBC arranged the financing.

Power BOTs under development
While developing its petrochemicals sector, Iran is also using its gas resources to improve its power infrastructure, in a country where power shortages are still a problem.

The government has ambitious plans to add 3,000MW of electricity generation capacity by 2008, using gas fired power plants. Plants are scheduled to be built in locations including Tehran, Azerbaijan Province and Khorassan Province. The first of six 157MW units at the Parand plant in southwest Tehran is expected to come onstream next year. And build-operate-transfer (BOT) structures are also being pursued by the Iranian government, with the 900MW Par-e Sar plant in Gilan Province likely to be the first BOT project to come onstream.

During 2004 Hermes has approved cover for gas turbines being supplied by Siemens, with financing provided by HypoVereinsBank (HVB), as well as polyethylene plant equipment supplied by Uhde GmbH and Technip Seiffert GmbH, with financing from HSBC and Credit Commercial de France respectively.

And in late 2003 Hermes also provided cover for the financing of 22 gas turbines being supplied by Siemens, with an 8.5-year financing led by BNP Paribas. As part of the same transaction, Kexim provided cover on 22 heat steam recovery generators being supplied by Doosan Heavy Industries. The $1.4 billion financing deal was done direct with Iran Power Plant Projects Management Co (Mapna), which is a subsidiary of the Ministry of Energy, and acts as general contractor for new power projects in Iran.

The first of the 22 combined cycle plants is expected to come onstream in Neka within the next three years. As part of the deal between Siemens and Mapna, the two sides have agreed on a programme of technology transfer, which will allow for more advanced domestic Iranian production of turbines and power plants.

Telecoms licensing hits a hurdle
There are also financing opportunities in the telecoms sector. Early this year Turkcell emerged as the winner of the bidding process for the nationwide GSM900/1800 licence.

Together with local partners, Turkcell has established Irancell, and in late September the contract was signed. But the joint venture has run into opposition from the conservative parliament, which has been demanding veto powers over projects that are more than 50% foreign owned.

At time of going to press, Turkcell had not yet finalised the transaction, via payment of a Eu300 million licence fee which will trigger the official award of the GSM licence to Irancell.

But the deal is widely expected to proceed, and few bankers doubt that Irancell will be a big success, since there are currently long waiting lists in Iran for people wanting to use the services of Iran Mobile: a black market has sprung up, with traders putting their names down to obtain mobile telephone accounts, and then selling them on.
Once the project begins to move forward Turkcell is likely to be looking for both vendor finance and bank loans to support Irancell.

Financing Irancell
Turkcell is highly profitable in its home market in Turkey, and has a reasonable level of debt, so is well placed to finance part of the Irancell venture via its own balance sheet.

Late last year Turkcell mandated HSBC and the Islamic Development Bank to arrange a $100 million Murabaha facility, with a maturity of two years from each drawdown. This was successfully syndicated in January of this year, with Turkcell intending to use the funds for equipment purchases.

And, also this year, Turkcell has put two 3 year corporate loans in place, $100 million from Akbank at 350bp over Libor, and another $100 million from Garanti Bank at 340bp over Libor.

The domestic Turkish bank market offers loans at competitive pricing to large corporates such as Turkcell, and the backing of these banks, together with international support from players such as HSBC, puts Turkcell in a strong position with regard to the financing requirements of Irancell.

Overall, Iran's financing requirements remain very high for the next few years, and they will have to compete with big projects from countries such as Saudi Arabia, Oman and Qatar.

But Iran enjoys a strategic position in the world oil and gas market, with various countries anxious to ensure reliable oil and gas supplies, and bankers remain keen on Iranian projects. And financing requirements may be helped in the coming years by the potential involvement of Chinese banks.

Not surprisingly, given the bad state of relations with the United States, it is China that has emerged as potentially the most important offtaker for Iranian oil and gas. In late October the governments of Iran and China signed a preliminary accord, under which China is slated to buy 10 million tonnes of Liquid Natural Gas (LNG) a year over 25 years.

But implementation is at least five years away, since Iran must build the LNG plants, and it is a long way behind neighbours such as Qatar, which already has several trains up and running.

The same memorandum of understanding also grants Sinopec the right to develop the Yadavaran oil field on a buy back basis, in co-operation with another international oil company. This oil field could be on-stream within four years, producing 300,000 barrels a day, with Sinopec expected to take half of this amount for itself.