The pricing on the Dolphin gas pipeline deal – probably the nearest comparable oil and gas project financing in the region involving international banks – was set to serve as a benchmark. But the sponsors of the $14 billion Jubail refinery and petro­chemicals complex were able to extract comfortably sub-200bp margins. This, despite very difficult market conditions starting in 2009, including disruption to the Saudi market from the defaults of the Saad and Al Gosaibi Groups and the disruption to region­al markets from the Dubai World default. It helps that the spon­sors are Saudi Aramco and Total.

With a financing requirement of around $8.5 billion, the Jubail refinery financing is the largest project financing to date in Saudi Arabia and one of the largest project financings in the MENA region The deal is significant not only for its scale and low debt margins, so soon after the credit crunch, but it is also the first time since the 1990s that project finance banks have accepted net refinery margin risk on a greenfield project.

Despite the grudging willingness of banks – particularly inter­national banks – to participate in the deal at such low pricing, the size and multi-faceted nature of the financing and the scope of the project makes the deal a landmark transaction. It is the first full-conversion and second largest refinery in the area, and one of the most advanced refineries in the world.

The project features 15 engineering procurement and construc­tion contractors and the financing attracted a diverse group of international and local banks, PIF, direct loans from JBIC and KEXIM, and ECA covered loans from NEXI, CESCE, KEXIM, KEIC, Hermes and Coface. In sum there are 19 different facilities and 40 separate financial institutions. The deal marks the first time that Saudi banks participated in ECA-covered facilities and it is also the first time ever that KEIC and KEXIM provided cover to Saudi riyal-denominated facilities.

As a reflection of the liquidity of local banks, the riyal tranches priced below the dollar tranches. Although six Saudi banks took small dollar tickets, at least one international bank was able to take advantage of the discrepancy between riyal and dollar pricing and local bank liquidity by entirely flipping its commitment to a local bank days after financial close.

Once completed, the refinery will be one of the most advanced refineries in the world. The refinery will be a 400,000 barrels-per-day facility that processes Arabian heavy-grade crude oil, and production will focus on diesel and jet fuels, and will also include paraxylene, benzene and polymer-grade propylene for ex­port to markets in Europe, the Far East and the US. The refinery is scheduled to come on-stream in late 2013 with com­pletion scheduled in late 2014.

The low debt pricing should not disguise how challenging the risk profile was for bank credit committees. The sponsors have put up completion guarantees but there are no fixed-price contracts on either the feedstock or output, resulting in refining margin risk and volatility risk. Saudi Aramco has committed to a 30-year crude oil feedstock supply agreement to supply 100% of SATORP’s heavy crude requirement and Saudi Aramco and TOTAL have committed to a long term products offtake agree­ment to lift 100% of the production.

SATORP will therefore assume price (but not volume) risk on the refined products it produces. Lenders became comfortable because of the refinery’s very high net cash margin with an average debt service coverage ratio of 2.2x and debt-equity ratio of 61:39.

SATORP is a Saudi Arabian limited liability partnership and is owned 62.5% by Saudi Aramco and 37.5% by TOTAL. A 25% interest will be offered to the public in an initial public offering that is likely just before construction is completed in late 2013, reducing Saudi Aramco’s equity interest to 37.5%

Lead arrangers Deutsche Bank and Samba are in the process of approaching banks and are going through documentation for a $995 million project sukuk that will refinance the sponsor loans. Financial close is expected in by early April. There were some challenges in documentation to allow for the addition of the sukuk – it is the first time in the Middle East that a greenfield project financing was structured to include option of raising financing through a project sukuk and it will be the first sukuk for a project in the operational phase.

The precedents set in the Jubail refinery deal – the early use of a project sukuk, ECA cover for riyal debt and Saudi bank participation in ECA facilities – are likely to be repeated on Saudi Arabia’s upcoming mega projects. 

Status: Financial close October 2010
Size: $14.062 billion
Location: Jubail, on the east coast of Saudi Arabia.
Description: Design, construction, financing and operation of a 400,000 bpd refinery
Total debt: $8.5 billion
Tenor: 16 years
Financial advisers: Credit Agricole, Banque Saudi Fransi
International bank MLAs: Credit Agricole, Société Générale (documentation), Kfw – IPEX Bank, Deutsche Bank, HSBC, Bank of Tokyo-Mitsubishi UFJ, Mizuho Corporate Bank, Standard Chartered, Sumitomo Mitsui Banking Corporation, Export Development Canada, Arab Bank, Barclays, Citibank, JP Morgan, Royal Bank of Scotland, Arab Petroleum Investments Corporation, Gulf International Bank
Local bank MLAs: Banque Saudi Fransi, Riyad Bank, Samba Financial Group, Arab National Bank, Saudi British Bank, National Commercial Bank, Al Rajhi Bank, Alinma Bank, Saudi Hollandi Bank, Islamic Development Bank, Bank Al-Jazira, Saudi Investment Bank
Export credit agencies: Korea Trade Insurance Corporation (K-SURE), Compañía Española de Seguros de Crédito a la Exportación (CESCE), Export-Import Bank of Korea (K-EXIM),  Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE), Japan Bank for International Cooperation (JBIC), Nippon Export and Investment Insurance (NEXI), Euler Hermes Kreditversicherungs-AG (Hermes)
Sponsor legal counsel: Allen & Overy
Lender legal counsel: Linklaters, Abdulaziz H. Fahad
Market consultant: Wood MacKenzie
Technical consultant: Jacobs Consultancy
Main EPC contractors: Technip, Tecnicas Reunidas, Daelim, Chiyoda, Samsung, SK E&C