SEA (South East Australian) Gas breaks from Australian tradition. It is the first greenfield gas pipeline to opt for project funds from the word go. An A$338 million ($190 million) facility closed on 29 May 2002 and construction is on schedule.

The 680km pipeline is to run from Port Campbell in Victoria, where there are large reserves of undeveloped natural gas, to Adelaide in South Australia. SEA Gas was selected by the South Australian government as preferred bidder to provide a new source of gas to the state in March 2001.

The project company is a 50:50 joint venture between Origin Energy and International Power, with the pipe's projected capacity divided between them in roughly the same ratio. Both are integrated energy companies with downstream assets in South Australia that are hungry for gas. The vested interests both have in ensuring gas flow provide the necessary lender comfort for raising non-recourse financing in this new venture.

Origin Energy is the largest retailer in Adelaide, where demand is on the rise, and also owns two small generation plants. Its main source of supply will be the Yolla field, in Bass Strait, Melbourne. Yolla is the central is the central component of the BassGas project, in which Origin has a 37% stake. Capacity demand by SEA Gas was a key factor in the decision, officially made on 22 April 2002, to commence development. Gas will come on line in 2004. To complement, this Origin has also entered into supply agreements with International Power for Minerva gas.

The Minerva field in the Otway Basin off the Victorian coast, feeds International Power's entire initial capacity allocation. In March, the company entered into a take-or-pay gas sales agreement, contingent on securing funds for pipeline construction, with BHP Billiton, majority owners and developers of Minerva. Under the terms of the contract, BHP will supply approximately 260 petajoules of natural gas over a ten-year period. This agreement underwrites development of Minerva, accounting for 90% of BHP's share of reserves. The remainder will be sold into the market on a merchant basis.

International power has the gas earmarked for its wholly-owned subsidiary, Pelican Point Power. The gas-fired generation plant in South Australia is already constructed and fully commissioned. At the moment, gas is being sourced from Northern Australia but this area, which currently feeds the whole country, is projected to run out in eight to ten years. Exploration outfits are thus starting to look elsewhere and Victoria has rich reserves.

With supply and offtake risk minimised by these agreements, securing funds does not pose too many problems. The mandate went out to banks last year and proposals came in towards the end of the year. At the beginning of 2002, ABN Amro Australia, Australia and New Zealand Banking Group, RBS (Australia) and Toronoto-Dominion Bank were appointed as equal lead arrangers. The full amount was underwritten on financial close in May and it is suggested that there may be some further sell down, but this has not been confirmed.

A$338 million debt breaks down into an A$214 million non-recourse senior term loan and an A$124 million equity bridge. The latter is to be taken out on completion of construction, split equally between the two companies and the former converts to a 3-year bullet at commencement of commercial operations. The loan does not thus fully amortise, with lenders taking on refinancing risk. It is likely to be taken out by a longer term project financing. The sponsors have opted for this route because there is more upside, since they may be able to negotiate more attractive contracts once the pipeline is in operation.

SEA Gas has awarded the major pipeline engineering, procurement and construction (EPC) contract to a joint venture between AJ Lucas Joint Ventures and Spie Capag Australia Pty Ltd. A contract for the first compressor station has been secured by HPS Technology Pty Ltd. Final design and planning stage is underway at the moment and ground should be dug for the first time in August.

Up to 70 petajoules is projected to be moving through the pipeline to South Australia by October 2003 and commercial operations will begin in 2004. A staged expansion is planned thereafter, a first phase ending in 2007. SEA Gas has announced that it is now open for business to third-party shippers for excess capacity space. Lateral pipelines are planned to service towns and industries along the route. Origin Energy has already signed a Heads of Agreement with Teys Bros, a major regional meat supplier along the pipe's route.

Financing greenfield gas pipelines on the back of non-recourse funds is a new option in Australia. Traditionally the government has built gas infrastructure and then sold it off. Financings in the sector have been dominated by acquisitions.

Duke Energy paved the way with a large-scale multi-asset project financing that closed earlier in the year. However, according to initial drawdowns only brownfield assets EGP and QGP benefit from project tranches. The greenfield Tasmanian Natural Gas Pipeline (TNGP) is funded with a Duke guarantee during construction and then taken off balance sheet on completion.

SEA Gas takes a step further, however, with banks taking project risk during construction along with the EPC contractor. This could well set a precedent for Australian pipeline financings in the future.

The two possible ones that dominate conversation at the moment are from the Timor Sea and from Papua New Guinea to the Australian mainland. The last one has been under discussion for years and financing would have to factor in political risk, given that the fields are owned by Papua New Guinea. The former would also be priced up considerably compared with SEA Gas since the Timor Sea remains a disputed area.