In 1999, the record low price of crude and the Asian crisis (a major factor in Middle Eastern and North African (MENA) economies) gave bankers the regional jitters. Expectations for the year 2000 are brighter. In the first quarter of this year, the price of crude is predicted to stay at about $18 a barrel and Asia is beginning to pick up again. The new climate, although imperfect, is stimulating interest again.

"The fall in the price of crude made it very difficult for foreign investors to find projects in the region. It is simply impossible to create a project with market conditions of below $10 a barrel," notes Henri d'Ambrieres, senior project manager in the oil and gas group at Credit Lyonnais in Paris. Frits Beukema, senior vice-president and head of oil and gas, mining and chemicals at ABN Amro in Amsterdam, adds: "People got really scared. A severe screening exercise was put into place by oil majors in order to go ahead with high-yield projects only."

But in the second half of 1999, compliance with production quotas set by members of the Organization of the Petroleum Exporting Countries (OPEC) created the conditions for the price of crude to rally above $20 a barrel. Too late for 1999 deal flow, as by the end of the year only two major projects in the oil and gas sector reached financial close in the MENA region - those were financings for the $800 million NGL-4 and the $850 million Q-Chem deals, both in Qatar.

Market consensus now is hope tinged with caution. ABN Amro's Beukema says: "I am pretty optimistic about the year 2000. The sustained growth in the price of crude over the last six months gives the market a bit of relaxation. Nevertheless, nobody is prepared to calculate projects on market forecast of beyond $20 a barrel. This will have an impact on the attitude of market players with oil companies, now more prone to look at the long rather than immediate term gains."

Julia Nanay, director at Petroleum Finance Company in Washington, forecasts stabilization in the price of crude at between $18 and $20 a barrel. "It is very hard to predict what will happen this year but a repetition of the extraordinary changes in the price of crude witnessed throughout 1999 is unlikely. The increasing cooperation between OPEC members has been beneficial for the price of crude, with two of the biggest, Iran and Saudi Arabia, agreeing on a production ceiling. But if overproduction becomes a reality again in the market there are scares that some concessions granted by OPEC countries to foreign consortia might be cut back. Nobody is prepared to face such nightmare scenarios," says Nanay.

The recovery in the price of crude is not the only good news for 2000. Political events over the last 12 months have sparked opportunities in countries previously ignored because of international sanctions or trade embargoes. With the noticeable exception of Iraq, European governments have shown willingness to re-establish relations with important countries in the region such as Iran and Libya and renew their efforts in strengthening political and commercial ties with Algeria and Egypt.

Throughout 1999, a flurry of diplomatic activity on behalf of members of the European Union has eased the way for oil and gas companies to do business in Algiers, Tehran and Tripoli. These destinations are becoming increasingly popular with international sponsors and financiers interested in chasing new mandates.

In Algeria, projects in the pipeline include the In Salah gasfield and Hassi Berkine oilfield. The $2.5 billion In Salah project involves the development of seven gasfields south of the capital, Algiers. BP Amoco and local developer Sonatrach are the sponsors of the project that will extract and carry Algerian gas to Italy, starting from 2003.

When operational, In Salah will produce between nine and 11 billion cubic tonnes of gas a year. The Hassi Berkine oil venture between Anadarko Petroleum, Halliburton, Sonatrach, Lasmo and Maersk has estimated reserves of 1 billion barrels of oil. At the end of September 1999, US' Anadarko Petroleum signed with Sonatrach a $770 million joint venture agreement for the development of phase two of Hassi Berkine with production expected to reach a quota of 285,000 barrels a day by the second half of 2001.

The developing deal potential reflects the new peace in Algerian politics. With 100,000 deaths over the last eight years, the potential disbandment of the armed wing of Algeria's banned Islamic Salvation Front (FIS) at the beginning of January 2000 is a welcome further possibility. And the new international image has been polished by the return of President Abdelaziz Bouteflika, a former foreign minister, after a 20-year enforced absence.

A number of international banks have, over the last three months, reopened their offices in Algiers. Tighe Noonan, global head of oil and gas at Societe Generale in Paris, is convinced the year 2000 will mark the beginning of project finance in Algeria: "The process will involve educating some members of the banking market to look with confidence at Algerian deals. Algerian sponsors are interested in project finance but more international banks must be ready for lead arranging roles. So far, only two or three banks are ready for that - but the market needs at least five or six. We are ready to finance Algerian projects involving transformation and transportation of local natural resources."

Unlike countries on the Arabian peninsula, Algeria has a unique geographical position given its closeness to European countries such as France, Italy, Spain and Portugal. More sophisticated commodities such as petrochemicals can be produced locally and exported abroad. Noonan adds: "Location factors and availability of local feedstock play in favour of Algeria in comparison with countries in the Persian Gulf where the tendency is more for the export of bulk commodities to far-away markets such as South Korea or Japan. Increasingly, the market is reckoning the importance of Algeria with export credit agencies across Europe, such as Italy's Sace and France's Coface careful not to lose political advantage to other countries when dealing with Algeria."

Petro Finance's Julia Nanay agrees that prospects for Algeria look good with security risks being minimized over the past six months. Nevertheless, she says, "Algeria is still a difficult country to operate in and is definitely more attractive to European rather than US oil and gas corporates. In fact, unless the Algerian government decides to open up big concessions, it is unlikely US companies will give priority to business in Algeria."

Iran is also looking more promising to foreign investors. The improvement in diplomatic relations between the Islamic Republic and the UK in May 1999 gave the impetus for a more optimistic view of realizing foreign investment in Iran for the first time in nearly 20 years. The visit to London of the Iranian foreign minister, Kamal Kharrazi, at the beginning of January 2000 has been interpreted as a further sign of the strengthening of ties between Iran and members of the European Union.

In November 1999, Shell jumped into the Iranian market with an $800 million deal for the Nowrooz and Soroush offshore oilfields in the southern part of the country. Under the agreement granted by local National Iranian Oil Company (NIOC), the two fields will be developed on a buy-back basis aimed at raising production level to 150,000 barrels a day for Soroush and 90,000 barrels a day for Nowrooz. Dr Edi Cartier, general manager for Shell in the Iranian capital is convinced of the strong impact the deal has made in opening the door for more investments in the Islamic Republic.

Meanwhile, the raising of $2 billion to finance the development of phases two and three of South Pars gasfield is seen as one of the most important transactions to hit the market in the year 2000. Societe Generale has been appointed financial adviser to France's Total, one of the project sponsors that include Malaysia's Petronas and Russia's Gazprom. South Pars is the single largest Iranian investment over the past 20 years and represents a landmark for the future of the Iranian oil and gas industry. Divided into five different phases, NIOC has awarded the first three, and is now in the process of awarding phases four and five.

Sources close to Societe Generale in Paris told Project Finance the deal is stagnating due to concerns over Gazprom. The source says: "There is no problem in arranging financing for the other two sponsors - Total and Petronas. But Gazprom, associated with the general condition of Russia as such, makes it difficult for the financing to progress swiftly. The problem is how long the project sponsors will be able to run the costs of developing the project without external financing. The situation is not an easy one with us looking for assistance from a number of export credit or multilateral agencies ready to take risks in the operation." According to the source a fact-finding mission was expected to leave Paris for Tehran soon.

In the market, the feeling is that Iran needs to do more to attract foreign investment. The buy-back formula, engineered by the Iranian authorities to replace production-sharing agreements banned under the Islamic constitution, is being questioned. Henri d'Ambrieres from Credit Lyonnais in Paris says: "The present buy-back formula that Iran is presenting to foreign investors needs to be amended. Foreign companies are keen to share more risks if they can have access to more remuneration. The conflict between Iran's government and the NIOC is slowing things down. NIOC has indeed understood the importance of creating credibility in the market by awarding two fields to Shell. But this is not sufficient and more steps need to be taken by them in order to attract the level of interest Iran deserves."

Julia Nanay agrees that Iran needs to do more: "Restructuring of NIOC has proved to be a long exercise and with the incumbent parliamentary elections due in February 1999 it is likely very little will be awarded before the beginning of the second quarter. A key issue is the status of relations between Iran and the US. Having solved the issue concerning the development of Caspian pipelines, it is likely the US administration will now assess ways to facilitate US companies in entering Iran. The road ahead is still long and Iran needs more negotiators in place. There are many of them in the country but not all in the right positions."

Libya is also back in favour. Libya and the UK restored diplomatic ties in July 1999 after a 15-year freeze, and the warming up between Europe and their southern neighbour culminated with the visit of the Italian prime minister, Massimo d'Alema, to the Libyan capital, Tripoli, in December 1999.

ENI of Italy is behind the development of a $5.5 billion gas venture that includes the development of oil and gas fields both onshore and offshore and the construction of a pipeline for the transport of gas to Italy across the Mediterranean Sea. At the end of July 1999, Agip, part of the ENI group, was granted the concession to develop the project by Libya's National Oil Corporation.

Market rumours suggest that ABN Amro will be acting as an arranger for the financing of the project. ABN Amro's Beukema says: "Right now there is not a huge appetite for Libyan deals, but the situation will change." Societe Generale's Tighe Noonan adds: "There is a strong interest in the market for Libya but so far there is limited scope for limited recourse or non-recourse financing. The Libyan legal framework needs to be modified to allow such transactions to happen given also that the present legal regime is little understood by most international banks. At present, financing for Libyan projects could be made available by banks only with full recourse to the European sponsors involved. Although it is uncertain when any mandates will be thrown into the market, opportunities in Libya are most interesting for us."