After a strong year for Caribbean hydrocarbon financings, December ended with the close of one of the most complex financings yet in the region. The Atlas methanol plant closed with participant banks salivating at the prospect of getting their hands on its debt. In fact, one sponsor, in an unusual move, has decided to take a piece of the debt, with additional implications for structuring the deal.

Atlas is a 5,000 tonnes per day (1.7 million tonnes per year) methanol production facility located at the Point Lisas Industrial estate in Trinidad and Tobago. Its sponsors are the listed Canadian specialist producer Methanex (63.1%) and BP (36.9%). It is set to be the largest single-train production facility of its kind in the world, according to lead arranger WestLB.

Like many petrochemical projects, Atlas is a link in a longer chain of projects, and although the Trinidadian government does not have an equity stake in the project, it has been encouraging of efforts to diversify revenue streams away from crude oil and raw gas. This is a strategy dear to BP, with substantial interests in the region, largely through properties inherited after its merger with Atlantic Richfield.

Methanex, however, gained a 10% interest in the neighbouring 850,000 tonnes per year Titan plant from its acquisition of Saturn Methanol in September 2000. It subsequently bought a 75% stake in the project from the Beacon energy Global Fund in 2001. Construction on the project received approvals from the sponsors in August 2001.

Nevertheless, the project is dependent on a number of inputs, several of which require their own financings, a situation that will be familiar to Qatari oil and gas bankers. The government-owned National Gas Company of Trinidad and Tobago has signed a long-term gas supply contract with the project, with physical delivery through a BP subcontract.

Equally important is the use of Oxygen as a feedstock. This is supplied from a plant owned by Air Products, rated A2 by Moody's Investors Service. This plant was financed through a facility provided by GE Capital, but the lenders to Atlas required a security package that gave them substantial rights over the oxygen supply arrangements. These include remedies from GE, consent agreements and the right to purchase the contingent equity put up by the sponsor.

The project has three offtakers, including both sponsors, taking 350,000 tonnes per year each under a ten-year take-or-pay agreement. The third, whose identity has not been disclosed, has an as-needed agreement for 15 years of up to 150,000 tonnes per year. The remainder will be sold onto the merchant market.

Methanol's prospects are strong and, using up-to-date technology, Atlas should have a strong competitive advantage. More worrying, and the source of reams of marketing reports, is the prospect of contraction in the MTBE market. MTBE is the second largest use of Methanol, as a fuel additive, but California, the car market that others follow, is attempting to ban its use.

The prospect is not encouraging, and Methanex has filed briefs with NAFTA appealing the decision. One reason given by opponents is that MTBE has been found in groundwater readings, but cynics also suggest that the influence of the US corn-growing lobby, whose product can be used to create rival additive ethanol, is at work. The assumption on the part of participants is that any contraction in demand would hit smaller and higher-cost producers first.

However, initial attempts to syndicate the deal fell neatly between the Enron and Argentina bankruptcies, so that lender appetite was not pronounced at first. At the time, Brazil's bonds fell to 50 cents on the dollar, and several nearby countries went through elections. Indeed, political instability still affects Venezuela, which shares the same oil and gas deposits as Trinidad.

Nevertheless WestLB underwrote the deal, and used a combination of bank and private placement debt to fill the senior debt requirement of $237 million. Of this, one tranche of $113 million, with a tenor of construction plus six years, was syndicated to Scotiabank Trinidad and Tobago ($15 million), Bank of Scotland, SG (both $18.767 million) and ANZ ($41.697 million), with the arranger retaining the last piece of just under $19 million.

A second tranche of $100 million was taken up by John Hancock Life Insurance of Vermont ($63.1 million) and ANZ ($36.9 million). It is understood, however, that ANZ is providing a swap into BP's corporate borrowing rate so that BP could participate in the debt. Having BP on both sides raised potential conflicts of interest, so the sponsor is excluded from several key decisions under a schedule of rights.

Citigroup placed a final tranche of $24 million to Trinidadian institutions, in much the same capacity as it acted for its Phoenix Park financing earlier in the year. $18 million of sub-debt came from EPC contractor Lurgi, but this was treated as equal to equity, according to the project's 60/40 debt/equity ratio.

Trinidad has substantial proven gas reserves, and BP alone has 20 trillion cubic feet of proven reserves, of which less than half is committed. In addition, the country is a stable political prospect, and has a BBB- rating. Commercial banks were offered political risk insurance on the deal, but none of them wanted to take the cover.

The deal bodes well for other financings coming up in the market, including a rumoured project financing of the second train of the Atlantic LNG project. In addition several of the banks are mulling selling down their exposure to participants, where they should get warm reception.

Atlas Methanol

Status: signed 17 December 2002

Location: Trinidad

Description: 1.8 million tonnes per year methanol project

Sponsors: Methanex, BP

Debt: $237 million

Lead arranger: WestLB

Tenor: 6-8 years, according to tranche

Lawyers to the sponsors:

Andrews & Kurth

Lawyers to the lenders: Freshfields

Insurance: Marsh

Engineer: Fluor

Marketing: CMAI