Right deal structure, right sponsors and right for the time ? Qatar Petroleum Corporation (51%) and Sasol's (49%) $700 million QGTL gas-to-liquids project has all but closed. The sponsors and lenders are waiting on signing of the EPC contract in January at which time financial close will officially take place. Commercial close is forecast for all documentation by mid-December.

The structure ? devised by QPC advisor Royal Bank of Scotland (RBS) ? has proved popular with the banking sector despite the Middle East angst caused by an impending US-Iraq war. Initial expectations were that between seven and 10 banks would participate with a final hold of around $50 million each. But given such strong banking interest 15 leads have come in at below final hold with pro rata underwritings of $46.7 million each.

Lead arrangers on the deal include Abbey National Treasury Services, Arab Banking Corporation, Apicorp (joint regional bookrunner); Bank of Tokyo-Mitsubishi (BoTM), BNP Paribas (documentation and facility agent); Credit Lyonnais, Credit Agricole Indosuez (international bookrunner); Gulf International Bank (joint regional bookrunner); HSBC Investment Bank (security trustee); HypoVereinsbank; KBC Ireland (pre-financial close technical); Mizuho Financial Group (pre-financial close insurance); Qatar National Bank, RBS and Sumitomo-Mitsui Banking Corporation.

Despite the overwhelming response QPC has decided to go ahead with a small general syndication. The idea is to give banks unfamiliar with Qatar a taste for the market and the technology ? a canny Qatari move given there are six more GTL deals out of the country in the pipeline.

The project has a tenor of 14 years, although average life will depend on how the repayment schedule unfolds: average life is 10 years under the base case but could push to 12 years if market conditions are not ideal. The same mechanism was used on the $750 million Q-Chem deal in 1999 which has also clearly influenced pricing of bids on QGTL ? all bids came in close to, but under, Q-Chem.

Pricing is the keenest yet for Qatar with a step-up structure of 75bp over Libor during construction; 115bp for the first three years of operation (to year seven); 135bp to year 10; and 150bp to year 14. The deal comes with a balloon mechanism that ranges from 15% to 25% depending on performance during the repayment schedule. A cash sweep mechanism of 50% of distributable dividends is used to prepay the balloon at end of year seven. This rises to 100% of distributable dividends in year 11. Consequently, if Sasol and QPC are expecting dividends, the deal will almost certainly refinance during year seven.

GTL technology was first developed in the 1920s by Franz Fischer and Hans Tropsch. The process involves the conversion of natural gas into synthetic crude oil and other hydrocarbon products. GTL differs from LNG in that the conversion into another product is permanent. LNG also requires the use of expensive purpose-built cryogenic carrier vessels for distribution ? GTL products can be taken to market in conventional oil tankers at reduced cost.

GTL is widely tipped as the way forward for countries looking to use their stranded gas reserves, reduce emissions and diversify into non-gas energy markets. Around 60% of global gas reserves are thought to be stranded (extraction and transportation is either economically or physically not viable). GTL makes gas transportation not only viable, but also uses existing oil storage infrastructure. Similarly, GTL is likely to make it viable for developing nations to put an end to gas flaring ? in effect waste-to-energy.

According to Michael Crosland, head of advisory at Royal Bank of Scotland, ?the banks see this as the first gas-to-liquid project financing and a dry run for future deals.? Lenders are having to take on board the concept of oil market risk for a gas project whilst taking comfort from the fact that GTL does not have the high costs associated with traditional LNG and gas piped deals.

The deal is also important for Qatar in terms of monetizing its gas reserves whilst diversifying its product range ? once operational QGTL will be the largest commercial plant in the world, producing 33-34,000 barrels per day.

QPC was careful in its choice of partner. Sasol developed GTL technology during the apartheid years in a bid for South African fuel self-sufficiency and has a number of domestic plants. Sasol is also co-sponsor, along with ChevronTexaco and NNPC, on the other immediate GTL deal in the market ? Nigeria's 34,000 barrel per day Escravos project which is expected to award an EPC in early 2003.

With six more GTL deals planned in Qatar alone QGTL is not going to be a one-deal wonder. All the oil majors are looking at the technology with Shell looking particularly aggressive in its pursuit. Shell has the only commercial plant in operation ? a 12,500 barrel per day plant in Bintulu, Malaysia ? and is planning to build four more by 2010.

QGTL

Sponsors: Qatar Petroleum; Sasol

Financial advisor: Royal Bank of Scotland

Total project amount: $700 million

Pricing: step-up structure of 75bp over libor during construction; 115bp for the first three years of operation (to year seven); 135bp to year 10; and 150bp to year 14.

Lead arrangers: Abbey National; Arab Banking Corporation; Apicorp; Bank of Tokyo Mitsubishi (BoTM); BNP paribas; Credit Lyonnais; Credit Agricole Indosuez; Gulf International Bank (GIB); HSBC Investment Bank; HypoVereinsbank; KBC Ireland; Mizuho Financial Group; Qatar National Bank; Royal Bank of Scotland (RBS); Sumitomo-Mitsui Banking Corporation

Documentation and facility agent: BNP Paribas

International bookrunner: Credit Agricole Indosuez

Regional bookrunners: Apicorp; GIB

Technical advisory: KBC

Security Trustee: HSBC

Legal counsel to sponsors: Linklaters

Legal counsel to lenders: Skadden Arps