The deal to finance the construction of the Sohar refinery in Oman could be the most successful deal to come out of the Middle East this year. Ten banks (eight international and two regional) underwrote the 14-year $646 million commercial facility in June. And syndication, which was launched in October, is bringing in many more banks than expected - so much so that the arrangers are flummoxed as to why it is so popular.

The attractive pricing on this sovereign backed deal is seen as the principal reason for its success. And the fact that there have not been many large deals to come to market in the Middle East this year has also contributed to a high market appetite.

The $1.3 billion project comprises a $646 million commercial facility, a $262 million Nippon Export & Investment Insurance (NEXI) backed export credit facility, as well as a direct $262 million loan from JBIC. NEXI is providing 97.5% political risk cover and 95% commercial risk cover. Japan's JGC was awarded the $879 million contract to construct the refinery in May, hence the Japanese backing, and SK Corporation was awarded the five-year operations management and services contract. The sponsors are contributing $129 million in equity. The lead arranging group comprises Gulf International Bank, BNP Paribas, HSBC, Arab Bank, ANZ Investment Bank, Bank of Tokyo-Mitsubishi, Credit Agricole Indosuez, Mizuho Financial Group, Societe Generale and Sumitomo Mitsui Banking Corporation.

Syndication was launched at the beginning of October. BNP Paribas - in charge of documentation and coordinating syndication - is running the international syndication with HSBC, while Gulf International Bank is running the regional syndication.

Roadshows were held in Muscat on 13 October and in London on 17 October. Commitments were expected by early November and the date for financial close has been set for 16 December. About 20 to 30 international, regional and local banks were approached. The majority of local interest is expected to come from Oman, Bahrain, Qatar and the UAE. Saudi Banks were also approached but it is not certain whether they will get approval from the Saudi Arabian Monetary Association to participate in this cross-border transaction.

Because pricing is generally aggressive in the Middle East, syndications have not attracted much international interest and demand has come mainly from regional banks lending cross-border and from local banks. However, there is expected to be a pretty even split between international and regional buyers in the syndication of this deal because of the attractive pricing and the low risk profile of the project. Fees on the Sohar loan are 110bp over Libor at the top-level and margins on the loan start at 90bp over Libor during construction, 115bp over Libor for the first five years after which pricing will step up to 130bp over Libor, then to145bp over Libor and finally to 160bp over Libor by year 14. The margin on the NEXI tranche is 60bp over Libor.

The interest that this deal has managed to generate is good news for the government of Oman. Oman may in fact have been willing to pay inflated fees on this deal in order to attract substantial international interest. The government's project finance plans extend beyond the oil and gas sector, with port infrastructure, telecoms and PPP projects on the cards. As a result, Oman is probably keen to make itself known to the lending community and gain its confidence and this deal has provided an opportunity to do so.

The higher pricing can also be ascribed to the fact that the tenor on the deal is 14 years, which is long for an oil and gas deal in the Middle East. The deal carries substantial sovereign backing - the sponsor is providing a full completion guarantee on this deal. The lenders also do not have to worry about market risk as it will have a tolling structure - Oman Refinery Company will be paying a set fee for Sohar to process the heavy residue.

The Sohar refinery is being built because 50% of the current production at Oman refinery is heavy residues. Because the refinery does not have the capability to process these residues they are dumped as waste. The original plan was for the existing refinery to be expanded to accommodate the facilities to process this heavy residue into useful by-products but environmental restrictions prevented the project from going ahead at the site of the existing refinery, hence the decision to opt for a new site.

Sohar is an area 250km northwest of Muscat, which is set to become an industrial hub, with a number of projects under development in the area. The project will have a crude unit capacity of 116,000 barrels per day (bpd) and a residual fluid catalytic cracking unit with a capacity of 75,260 bpd. It will be operating in a maximum olefin mode to maximise propylene production of about 340,000 metric tonnes per year.

Residues will be transported via a 260km pipeline from Muscat to Sohar. Construction of the pipeline should begin next year at a cost of about $120 million. How it is to be financed is still to be decided - either by the Oman Refinery Company or by the Oman Gas Company. The Oman Gas Company was established in 2000 to operate gas pipelines in the region.

Oman Polypropylene (OPP) is looking to develop a $200 million polypropylene plant close to the refinery. OPP is an SPV made up of Oman Oil Company, ABB and LG International. The refinery will provide the plant with its feedstock. OPP has appointed Apicorp as financial advisor on this project, which is expected to come to market next year.

The development of these projects reflects the government's efforts to create downstream development so as to create jobs and encourage development in less developed regions. The government's policy of Omanisation will be adopted in this project. Omanisation is a means of developing the skills base of the local population by calling on contractors to replace foreign workers working on a project, who will most likely come from countries like India and the Philippines, over time with locals. Construction of the refinery started in July and is expected to be completed by the first half of 2006.

Sohar Oil Refinery

Status: Underwritten by lead arrangers on 20 June, financial close expected 16 December

Location: Sohar, Oman

Description: Construction of a new refinery

Sponsor: Sohar Refinery Company (a wholly owned government company)

Total project cost: $1.3 billion

Lead arrangers: Gulf International Bank, BNP Paribas, HSBC, Arab Bank, ANZ Investment Bank, Bank of Tokyo-Mitsubishi, Credit Agricole Indosuez, Mizuho Financial Group, Societe Generale, Sumitomo Mitsui Banking Corporation.

Multilateral support: JBIC, NEXI

Financial advisor to the sponsor: Bank of America

Lawyers to the sponsor: Clifford Chance

Lawyers to the lenders: Linklaters

EPC Contractor: JGC Corporation