Africa Oil and Gas Deal of the Year 2001-Chad-Cameroon Pipeline
It was many years in the making, but the financing package for the
massive Chad-Cameroon pipeline finally closed in 2001. Syndication
was signed in June and the project that will set a huge benchmark
for financing in sub-Saharan Africa is becoming a reality. Chad's
Doba oil fields are being developed and 1070km of pipeline
constructed to run to offshore loading facilities on Cameroon's
Atlantic coast. With a total cost estimated at $3.5 billion, it
marks Sub-Saharan Africa's largest foreign direct investment to
date and US Exim's first non-recourse foray into the region.
Both countries present serious political risk considerations, particularly Chad with its ongoing civil war. Closing a deal of this size in such a volatile climate demanded considerable time and co-operation from a significant number of bodies. The decision to raise non-recourse funds was based on the need to attract multilaterals and political insurers rather than a shortage of cash. The sponsors, oil giants Chevron, ExxonMobil and Petronas, have balance sheets that could have coped with putting up funds on a corporate basis.
The project was split into two sections for the purpose of raising funds. The upstream section, comprising production wells and associated infrastructure, is being financed directly by the consortium sponsors. The $600 million non-recourse tranche was raised solely against downstream development. Project financing therefore accounts for only 30% of the pipeline and 15% of the total project but its key use was in attracting political risk mitigation.
Commercial lead arranging banks ABN Amro and Credit Agricole Indosuez and ECAs Coface and US Ex-Im signed up in 1997 to arrange the $600 million project tranche. It is said by one source close to the deal that by this time the, ?skeleton of the financing structure as it was signed in the end was already loosely in place.? The World Bank Group had already pledged its commitment, stated as crucial in securing the other players and allowing the project to move forward.
During the time lag between 1997 and 2001, the financing plan was sculpted and tweaked until all parties were happy with associated levels of risk and comfort. The major issue was said to be specified events, with a lot of work focused on pinpointing exactly what project fall-outs were covered by multilaterals or political risk insurers.
A complete overhaul of the sponsor profile at a late stage has also been blamed for holding up the transaction. The original line up had ExxonMobil with 40%, Shell with 35% and Elf with 25%. But in 2000, Shell and Elf pulled out, claiming that their corporate profiles and investment interests were becoming incompatible with the pipeline venture. Although such an upheaval could easily throw a project into crisis, one banker said that in this case it did not turn out to be a major issue. Petronas and Chevron were quick to fill the places and accepted the project and finance structures already in place. ?The sponsor changeover was one of a number of reasons for the delays in financing, but certainly not the most significant one,? says the source. Low oil prices, environmental due diligence and the sheer size and innovative nature of the deal are all highlighted as well.
The final structure saw the $600 million debt break down into a $100 IFC A loan, a $200 million IFC B loan, a $200 million Exim tranche and a $200 million Coface-covered tranche. ABN and Credit Agricole took the latter three to a general syndication which came in oversubscribed. HypoVereinsbank, BNP Paribas, Dexia, Fortis, ING, IntesaBci, KBC, Natexis, Standard Chartered and WestLB all joined pro-rata. Pricing has not been disclosed but varies on each according to the level of cover.
The enthusiastic market response is testament to the deal's high profile status and tight structure. Exim has provided 100% cover but Coface only 95% which, combined with the IFC B loan, meant that commercial banks have opened themselves to an element of risk which is unprecedented on a project of this size in the region. ECA support is purely political pre-completion and then converts to comprehensive, although the sponsors have put up commercial guarantees for the construction period. An ABN spokesperson points to the ?seamless? way in which the different guarantees fit together as one of the project's most significant achievements.
The borrowing vehicle and project company for the pipeline project have been split into two special purpose vehicles. Tchad Oil Transportation Company (TOTCO) is owned by the private consortium and the Chad government, while Cameroon Oil Transportation Company (COTCO) is owned by the consortium and the governments of both Chad and Cameroon. TOTCO and COTCO's debt service is underpinned by transportation contracts with the consortium sponsors. ExxonMobil, Petronas and Chevron have contracted TOTCO and COTCO to export all production from the Doba fields through the pipeline.
A monthly tariff outlines payment according to the number of barrels shipped. In the event that no barrels are shipped in any one month, a nominal amount is paid based on the average over the last 12 months. If COTCO and TOTCO have insufficient funds to service minimum debt requirements they can make a cash call on the sponsors. If the shipper fails to pay the tariff then the SPVs can seize those relevant barrels and sell them themselves. However, if the failure occurs as a result of a specified event as stated in the contract, the political insurance will be called into play.
World Bank Group support for this project was not solely channelled through the IFC. The World Bank, along with the EIB, provided loans to fund the Chad and Cameroon governments' equity stakes. ?The extent of the World Bank Group endorsement was the single crucial factor in banking this deal,? says one source.
For their part, the World Bank Group used their considerable clout to progress environmental and social safeguards. A directive, which passed into Chadian law in 1998, stipulates that 80% of project revenues collected by the government must be spent in the health sector, 10% held in a trust and 5% spent directly on communities in the oil producing region. The disbursement and use of these monies is to he monitored by an independent consortium of NGOs. The entire project has the capability to double Chad's GDP.
Both countries present serious political risk considerations, particularly Chad with its ongoing civil war. Closing a deal of this size in such a volatile climate demanded considerable time and co-operation from a significant number of bodies. The decision to raise non-recourse funds was based on the need to attract multilaterals and political insurers rather than a shortage of cash. The sponsors, oil giants Chevron, ExxonMobil and Petronas, have balance sheets that could have coped with putting up funds on a corporate basis.
The project was split into two sections for the purpose of raising funds. The upstream section, comprising production wells and associated infrastructure, is being financed directly by the consortium sponsors. The $600 million non-recourse tranche was raised solely against downstream development. Project financing therefore accounts for only 30% of the pipeline and 15% of the total project but its key use was in attracting political risk mitigation.
Commercial lead arranging banks ABN Amro and Credit Agricole Indosuez and ECAs Coface and US Ex-Im signed up in 1997 to arrange the $600 million project tranche. It is said by one source close to the deal that by this time the, ?skeleton of the financing structure as it was signed in the end was already loosely in place.? The World Bank Group had already pledged its commitment, stated as crucial in securing the other players and allowing the project to move forward.
During the time lag between 1997 and 2001, the financing plan was sculpted and tweaked until all parties were happy with associated levels of risk and comfort. The major issue was said to be specified events, with a lot of work focused on pinpointing exactly what project fall-outs were covered by multilaterals or political risk insurers.
A complete overhaul of the sponsor profile at a late stage has also been blamed for holding up the transaction. The original line up had ExxonMobil with 40%, Shell with 35% and Elf with 25%. But in 2000, Shell and Elf pulled out, claiming that their corporate profiles and investment interests were becoming incompatible with the pipeline venture. Although such an upheaval could easily throw a project into crisis, one banker said that in this case it did not turn out to be a major issue. Petronas and Chevron were quick to fill the places and accepted the project and finance structures already in place. ?The sponsor changeover was one of a number of reasons for the delays in financing, but certainly not the most significant one,? says the source. Low oil prices, environmental due diligence and the sheer size and innovative nature of the deal are all highlighted as well.
The final structure saw the $600 million debt break down into a $100 IFC A loan, a $200 million IFC B loan, a $200 million Exim tranche and a $200 million Coface-covered tranche. ABN and Credit Agricole took the latter three to a general syndication which came in oversubscribed. HypoVereinsbank, BNP Paribas, Dexia, Fortis, ING, IntesaBci, KBC, Natexis, Standard Chartered and WestLB all joined pro-rata. Pricing has not been disclosed but varies on each according to the level of cover.
The enthusiastic market response is testament to the deal's high profile status and tight structure. Exim has provided 100% cover but Coface only 95% which, combined with the IFC B loan, meant that commercial banks have opened themselves to an element of risk which is unprecedented on a project of this size in the region. ECA support is purely political pre-completion and then converts to comprehensive, although the sponsors have put up commercial guarantees for the construction period. An ABN spokesperson points to the ?seamless? way in which the different guarantees fit together as one of the project's most significant achievements.
The borrowing vehicle and project company for the pipeline project have been split into two special purpose vehicles. Tchad Oil Transportation Company (TOTCO) is owned by the private consortium and the Chad government, while Cameroon Oil Transportation Company (COTCO) is owned by the consortium and the governments of both Chad and Cameroon. TOTCO and COTCO's debt service is underpinned by transportation contracts with the consortium sponsors. ExxonMobil, Petronas and Chevron have contracted TOTCO and COTCO to export all production from the Doba fields through the pipeline.
A monthly tariff outlines payment according to the number of barrels shipped. In the event that no barrels are shipped in any one month, a nominal amount is paid based on the average over the last 12 months. If COTCO and TOTCO have insufficient funds to service minimum debt requirements they can make a cash call on the sponsors. If the shipper fails to pay the tariff then the SPVs can seize those relevant barrels and sell them themselves. However, if the failure occurs as a result of a specified event as stated in the contract, the political insurance will be called into play.
World Bank Group support for this project was not solely channelled through the IFC. The World Bank, along with the EIB, provided loans to fund the Chad and Cameroon governments' equity stakes. ?The extent of the World Bank Group endorsement was the single crucial factor in banking this deal,? says one source.
For their part, the World Bank Group used their considerable clout to progress environmental and social safeguards. A directive, which passed into Chadian law in 1998, stipulates that 80% of project revenues collected by the government must be spent in the health sector, 10% held in a trust and 5% spent directly on communities in the oil producing region. The disbursement and use of these monies is to he monitored by an independent consortium of NGOs. The entire project has the capability to double Chad's GDP.
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