Mizuho Bank and Bank of Tokyo-Mitsubishi are finalising commitments for the $195 million Campeche Gas Compressor deal ? a first for Mexico's oil and gas sector. In a country that, in common with many of its peers, wants to keep foreign control over hydrocarbon resources to a minimum, the presence of foreign investors at one remove from the wellhead is quite an opening. Marubeni and Duke Energy, owners of a five-year concession to supply services to Petroleos de Mexico (Pemex), will be looking to see how this bridgehead develops into a working relationship with a customer facing serious investment demands.

The two sponsors won the bid in 1998, and construction is complete on the compressor station, designed to turn gas into a suitable form for pipeline transportation. This ancillary facility is largely the limit of foreign ownership of gas assets at present. But the plant was bid out on a build-own-operate (BOO) basis, in contrast to the build-lease-transfer (BLT) and build-own-operate transfer (BOOT) deals that have characterised refinery and nitrogen deals in the country. Mexico's own government has been adept at finding loopholes in the constitutionally mandated public ownership requirements.

The contract backing the financing, however, is not itself revolutionary. Pemex, through its exploration and production arm, essentially pays for the availability of capacity to convert its gas into transportable form. This payment is subject to achieving minimum performance targets of 220 million cubic feet of gas converted per day. Pemex' payment also features a pass-through of operations and management (O&M) costs.

The plant is already half a year into its contract, which started in October 2001, meaning that less revenue is available to cover the five-year financing than might have been possible with a pre-completion, or at least pre-commissioning, financing. But the deal has stripped out many of the factors that might have made the financing of an offshore facility difficult.

The sponsors had in fact tried to finance the facility pre-completion, but ran into a couple of obstacles. The first of these was a change to the Mexican tax laws that changed the compressor's depreciation profile. The second, more serious, issue concerned the limitations placed on the ability of lenders to step in if the project did not operate as planned. This is believed to be a creature of the concession agreement. Weather-related force majeure provisions also required new definition, as might be expected for machinery based offshore.

Perhaps the most baffling part of the financing was the decision by Pemex to opt for a five-year term ? the asset has a 20-year life ? and better terms on the financing might have been possible should it have been extended. In this instance, however, the sponsors have opted for a fully amortizing, mortgage-style repayment profile that leaves the sponsor with an unencumbered asset after five years. There is little doubt that the government will extend the agreement ? one source close to the deal calls this ?99% certain?.

But as a consequence the financing is conservatively leveraged at 62% debt, giving a total project cost of $314 million. The technology used is not extremely advanced and has an operating history. It is a speciality of Westcoast Energy, the operator and original joint venture partner, acquired by Duke last year and now enduring a rebranding. According to sources close to the deal, technological risk is backed by various guarantees and uses a GE subsidiary for day-to-day maintenance. Should a unit go down a replacement can be in place in 72 hours and two of the three units involved would meet performance obligations.

The Rolls Royce turbines used to drive the compressor are fuelled by gas supplied by Pemex as part of the agreement subject to the turbines reaching a certain heat rate. This tight O&M agreement is one reason why lenders are comfortable with constrained step in rights. As the source says, ?it is difficult to see any bank doing a better job than the current set of contractors, all of whom are replaceable?.

For lenders, by far the most important risk is that associated with Pemex ? not so much the risks of extending the agreement, more that the compressor links a Pemex offshore production platform with a Pemex distribution network. There are no alternative customers (just as there are no alternative customers for most independent power projects) for Campeche, and Pemex' corporate credit is not immovable.

These risks are at present hypothetical ? Mexico's sovereign rating is BBB-/Baa2 and Pemex is still assumed to carry an implicit government guarantee. Within a five-year period, the likelihood of a major restructuring or change in ownership is slim. Economic downturn is more possible, although Pemex' dollar-denominated revenues should isolate it from this.

The deal is the start of a new generation of gas deals involving a Pemex credit, but will probably be the last. Whilst the future political will for greater involvement is the imponderable that overshadows much of this financing, there is a great deal of work to be done. Should the asset be suitable, such financing will be a useful tool in Pemex' and it's clients' hands.

Compania Servicios de

Compresion de Campeche

S.A. de C.V.

Status: closed, awaiting final allocations

Size: $314 million

Location: Off the coast of Mexico

Description: Gas compression facility with 220 million cubic feet per day capacity

Sponsors: Marubeni, Duke Energy

Debt: $195 million

Arranger: Mizuho, BTM

Tenor: 5 years

Lawyers to the sponsors:

Shearman & Sterling

Lawyers to the lenders: Vinson & Elkins