Several billion dollars worth of Middle Eastern petrochemical and oil and gas projects are coming up for financing over the next eighteen months, and will provide a test for the appetite of both international and regional banks.

The driving force behind many of these projects is the desire on the part of countries in the Arabian Gulf to diversify away from their heavy reliance upon oil exports. To this end a range of facilities are being built, exporting everything from fuel additives to fertiliser and Liquid Natural Gas.

In contrast to four or five years ago, many deals are now getting done without Export Credit Agency support, and this is having two positive effects. First, it is speeding up transactions, and second freeing up ECA time and capital resources for transactions where they are still required.

But without ECA involvement lenders are having to look more closely at the creditworthiness of offtakers, and much of the structuring work is addressing the strength of sales contracts, or the likely ability to find other buyers in the event that an offtaker fails to perform.

One high profile project which has hit the headlines this year is the Oman India Fertiliser Company (Omifco), sponsored by Oman Oil Company, Indian Farm Fertilisers Co-operative (Iffco) and Krishak Bharati Co-operative.

General syndication of the $646 million loan took place in March, and was oversubscribed, though bankers caution that Omifco tells little about the current state of project finance in the Gulf, since it was pushed through with a high level of government determination in both Oman and India. The project only became bankable when, after many years of negotiations over offtake contracts, the Government of India stepped up to the plate with an unusual direct sovereign guarantee for the purchase of the urea produced at Omifco.

?I would take Omifco with a pinch of salt, since there was a great deal of political pressure to get the deal done ? the Omanis were very keen to get it done,? comments one banker. ?Once a project is around for a long time it gets tainted with a bad reputation,? he adds, noting that the project loan was eventually not underwritten, but instead sold down on a best effort basis. ?Having said that the deal is well structured, and the rich pricing does reflect the nature of the Indian offtake risk, and syndication did go very well.?

Perhaps surprisingly, given the relatively low creditworthiness of Indian offtakers, and the high profile failure of Dabhol Power Co in Maharashtra state to fulfil its obligations on its 1998 contract with Oman LNG, Indian offtakers also feature in another large upcoming project in the Gulf, this time taking LNG from one of the planned new trains three and four at Ras Laffan in Qatar.

Plans for RasGas train three are already well advanced, and its production, transportation and liquefaction facilities will take gas from the vast North Field. Train three will produce approximately 4.7 million tonnes of LNG per year. A 25 year Sale and Purchase Agreement has already been signed with Petronet LNG Limited of India.

?What happened with Dabhol remains a factor for lenders,? says one market observer, who also points to the added political risks involved in the dispute between India and Pakistan, which has sparked fears of war. ?Petronet is an SPV with a credit standing of its own, and it has back to back agreements with three companies which are strong by Indian standards,? adds another banker. ?But the problem in India is not just the credit standing of these entities, but also the doubts about the affordability of LNG, both in absolute terms and relative to other fuels.?

?India was all very gung-ho about wanting to buy LNG when prices were low, but as oil prices have shot up they have become rather less gung-ho, and people are raising questions about whether the country can afford to buy such expensive fuel,? he continues.

?These concerns need to be addressed, and one of the ways that the financing for train three may be facilitated is to combine it with financing for train four, which will sell to Edison in Italy. From the standpoint of lenders there will be a mixture of Italian and Indian risk, and possibly the Edison contract on its own might well be sufficient to repay the debt, together with some spot sales. Either way there is likely to be a story to persuade lenders that, even if things go wrong in India, which has happened before, the debt can still be repaid.?

In addition, market talk suggests a low debt to equity level of 50:50 in order to give lenders comfort. The financial adviser is BNP Paribas, and this latest RasGas deal will probably come to market late this year, or early in 2003.

Since there is another large project coming up for financing in Qatar, the Qatari authorities will want to ensure that there is a decent interval of at least three months between the two financings. Tipped to come first is the Qatar Gas To Liquids (GTL) project, which needs $800 million worth of debt financing, and which may get syndicated in September.

The GTL project is a joint venture between Qatar Petroleum (51%) and the South African company Sasol (49%). The project is based on Sasol's Slurry Phase Distillate technology, and is supplied from Qatar's North Field. It will consume around 330 million standard cubic feet per day of lean natural gas, and produce naptha and liquefied petroleum gas.

?This is the first commercial scale gas to liquids project in the state of Qatar, and there are six similar projects mooted, so it is a strongly emerging sector in Qatar- like the LNG sector,? says Michael Crosland, Senior director in Structured Finance department at Royal Bank of Scotland, which is financial adviser on the GTL project.

?The name of the game for Qatar Gas to Liquids is to maximise the premium ? they are producing a premium grade of diesel ? but that is more an equity play than a financing play, because we are not making an aggressive assumption on the premium in our base case economics,? Crosland explains.

And he sees appetite among bank lenders as being generally good at the moment. ?We would expect strong regional and international interest in the Qatar Gas to Liquids deal,? says Crosland. ?The New York bank market has been much more adversely affected by all the scandals at Enron etc, which has battered bank confidence. But in London the bank market is still very strong, and there is a lot of interest in well structured oil and gas deals.?

?In most of these project deals, at the lead arranger level you will find more international banks as opposed to regional banks, because most of the regional banks have a small capacity for underwriting? adds Mark Yassin, head of Global Project and Structured Finance at Arab Banking Corporation in Bahrain. ?But in many transactions the majority of the selldown occurs in the region,? he says, with regional banks stepping up to buy pieces in the $10 million to $25 million range.

Thus the region has proved itself able to absorb fairly sizeable financings, though Yassin notes that, as tenors get longer, the number of regional banks willing to participate falls off. ?Regional banks have less appetite for long tenors,? he explains. ?The international banks have huge balance sheets, and they can afford to have small pieces of their portfolios in long term deals, whereas this could be a problem for regional banks, because these project loans could constitute a big percentage of their portfolios.?

Of course lenders are still looking very carefully at the way in which projects are structured, and may often want to see a conservative debt to equity ratio. With regard to offtakers, whether a project is bankable or not may depend not only upon long-term sales agreements, but also on whether the product can easily be diverted in case of offtaker non-performance.

?In LNG projects you definitely need to have a highly creditworthy offtaker, whereas for more easy tradeable chemicals such as urea, if the offtaker goes bust, the producer can sell the urea on the spot market,? explains Richard Grantley, Director, Project and Export Finance at HSBC.

?The sponsor group will often include someone who is in the business of selling the product, who would be expected to play an important role in sales,? he continues. ?In some cases you also see sponsors making standby sales agreements, giving two-tier support by not only offering marketing assistance, but also second tier standby commitments to buy in the event that not enough product is sold.?

?In the case of very tradeable product lenders may accept a trading company as offtaker,? says Grantley. ?Trading companies typically have weak balance sheets, but lenders are ready to recognise that, where a trading company can demonstrate a good track record in trading the product, their expertise counts for a lot more than their financial strength.?

But in general, lenders into Middle Eastern projects are more comfortable with regional risk than they were five years ago, when ECAs needed to step up to get deals done. ?Oman is very well established in the market, and nowadays there are few Omani projects which absolutely require ECA involvement,? says Bimal Desai, partner at Allen & Overy in Dubai. ?For example, when Oman LNG refinanced $1.3bn worth of debt earlier this year, Moody's gave an A3 rating on commercial debt going out 16 years.?

?When we did the original Oman LNG financing back in 1997 there were four ECAs involved, plus a commercial debt tranche,? says Desai. ?But since then Oman has matured, and can now get competitive commercial bank pricing for well structured projects.?

Oman LNG signed a contract to sell some of its LNG to Dabhol, but was successful in selling most of the volume on the spot market when Dabhol stopped taking deliveries. In any case, the main contracts underlying the Oman LNG project are with Korea Gas Corporation (Kogas) and Osaka Gas, both well-regarded counterparties.

?The project economics for Oman LNG are very robust,? says Chetan Modi, analyst at Moody's in London. ?Even if you take out Dabhol and say it is not going to be replaced with anything at all, which is somewhat unrealistic, the economics stand up to that.?

The country of Oman itself carries a sovereign rating of Baa2 from Moody's, and other countries in the Gulf are also rated investment grade, such as United Arab Emirates at A2 and Qatar Baa2. Deals in these countries are looking increasingly bankable.

One such is Q-Chem II in Qatar. In June Qatar Petroleum, Chevron Phillips Chemical Company and Atofina of France signed three comprehensive joint venture agreements for independent but related projects in the Ras Laffan Industrial City.

Financing for the Q-Chem I project closed back in 1999, and this next phase is sometimes referred to as Son of Q-Chem, and will produce Normal Alpha Olefins and Polyethylene. A second related project known as Qatofin will establish a nearby low density polyethylene plant, while a third project will include an ethane cracker and a 120 kilometre pipeline to transport the ethylene produced by the cracker project. As was the case with Q-Chem I, the financial adviser on Q-Chem II is Royal Bank of Scotland, and financing is expected to close sometime late in 2003.

All these large scale financings will test the appetite of the banks for Middle Eastern risk, and of course everything could change with a possible outbreak of war involving the United States and Iraq. But for the moment, project arrangers seem confident that the banks are willing to step up on projects in highly rated countries such as Oman and Qatar.

More problematic will be attempts to start getting deals done in countries such as Iran.

But even there, a number of LNG projects are under discussion, and European bankers are busy getting a foot in the door, taking advantage of the fact that US companies are still forbidden to do business in Iran.

?Iran will definitely require ECA involvement, and the Japanese and European ECAs are certainly interested,? says one market observer. ?The Italians, French and Germans are already all over Iran, and though the British have been slightly slower, they are now getting their act together.?