The right time for project finance: NLNG+

In 2000, a team was put together to find non-recourse financing for the next two trains of the project. The package and the actual trains were bigger than the first three trains of the plant. Shareholders needed US$2 billion, half of which they hoped to raise as non-recourse debt.

Nigeria had just defaulted on its national debt, and at first there was little or no ECA support, with the notable exception of the US Ex-Im bank. Nigeria was then high on the US foreign agenda, Bill Clinton having visited the country in 1998 and in 2000, and there was a newly elected government to support. Pressure from various capitals eventually got ECAs in line and ECGD agreed to the project while being already owned £5 billion by Nigeria. The Dutch and Italian ECAs would follow.

Raising non-recourse finance for trains 4 and 5 started in August 2001 with the selection of the banks. On 21 September 2001, ten days after TA911, negotiations for the underwriting started in Allen & Overy’s office in London. Both Alan Rae Smith, partner at A&O (which advised Nigeria LNG Ltd) and Philip Stopford, partner at White & Case (which advised the banks) recall the determination of the project players in the face of the radical uncertainty of the period.

The project rationale and fundamentals (especially the growth of gas demand worldwide) made it thoroughly viable and the way agreements had been made by sponsors with project finance in mind, significantly helped the financing to be arranged. The fact that the world economy and financial markets were entering a grey area was not an issue.

In October 2001, a new meeting saw the appointment of the lead arrangers for the financing. A direct agreement with the gas suppliers was then finalised in March 2002 and all financing documents were signed in December 2002. According to all those involved, Nigerian authorities were very helpful in helping closing the financing of NLNG+ in less than a year and a half.

While there is usually a single off-taker in a typical LNG project financing, in the case of NLNG+, the number of players made the arrangement much more complex. NLNG has three gas purchase agreements, three EPCs and 11 SPAs. The project’s fundamentals had also changed since the mid-1990s:

• The existing cash flow from the first three trains was enough to finance NLNG+.
• There were a variety of sources of gas (both onshore for the first three trains and off shore for trains 4 and 5) guaranteeing the project’s operations, even in the event of delays or accidents.
• Unlike a Greenfield project, the existing plant was enough to guarantee that there would be repayment of the whole facility.

All NLNG SPAs are take or pay agreements, more than 50 per cent sales of the plant’s production had to be secured for lenders to go ahead. But unlike the SPA saga of the mid-1990s, it was not an issue this time according to Alan Rae Smith at Allen & Overy. “The primary financing issue was political risk, and it necessitated full involvement of ECAs.”

In January 2002, NLNG could announce it had signed preliminary sales agreements covering the entire production of LNG from its planned fourth and fifth trains. Moreover, while the financing was guaranteed on the whole plant production, five trains’ worth of LNG were more than necessary to honour repayment of the project debt. There was still room for manoeuvre for spot sales.

Train five is now 30 per cent complete – and ahead of schedule. By September 2003, NLNG is planning to have all production of train 5 committed to in various SPAs.

The deal: no segregation

Allen & Overy was appointed to work on the project a year before banks were brought in to define the terms of agreements that would achieve sponsors’ objectives. Some of the negotiation took some time: ECAs are notoriously time consuming to deal with, and EPC contracts and the SPAs were not signed when NLNG’s counsel was appointed.

As the financing was put together, only trains 1 & 2 were there as ‘real’ security, but by December 2002 train 3 had become operational, before the financing was closed. However, instead of looking at a typical refinancing of the first three trains once trains 4 & 5 were closed, sponsors decided to give lenders security over the whole plant. This was part of the sponsors’ outlook in the first place insists a source at Nigeria LNG, not something imposed by the banks. The counsel to the lenders confirmed that there is no segregation of NLNG’s assets: the whole company comes as security. Nigerian law is also such that giving assets as securities is rather easy and customary, as in any Common Law system.

“The legal structure was a really typical LNG financing structure,” says Philip Stopford at White & Case – who has worked on a number of LNG projects in the past 20 years. “The issue was not the overall structure, provided all exposure was covered.” The issue was to allow for NLNG to have some flexibility with the financing so the vision of a six train plant first formed in 1973 could be realised. The sponsors had to avoid finding themselves in the situation of Qatar Gas which raised money through a bond issue and then could not finance its new extension within the same framework. For that purpose, NLNG+ allows for additional debt to be raised for train number six within the existing agreement, provided the project meets a number of financial tests.

“Lenders recognized the justification for not applying typical project finance rules; the deal is all about structure,” says Alan Rae Smith.

NLNG is more interested in preparing the financing of train six than in taking the first three trains off the shareholders’ balance sheets. Thus, while the whole plant acts as security for the loan, sponsors did not have to agree to any completion guarantees with the banks. The decision to give the whole plant as security is certainly a sign of confidence on part of shareholders.

Indeed, apart from political risk, the operation of the project as such is nothing the sponsors group cannot handle. The risk of diversion of supply is very unlikely given how dangerous it is to “tap” into a gas pipeline, as opposed to crude. As for diversity of supply, it is guaranteed by the numerous wells and routes, plus the fact that gas for trains four and five comes from numerous offshore rigs (even if one or two rigs were disrupted following an attack of some kind as happened in April 2003, security of supply is guaranteed.)

“The bottom line,” insists one of the counsels, “is that this is an ‘integrated’ structure, each party, starting with the Nigerian state, has a vested interest in maintaining the levels of supply and output.”

Finally, all parties involved confirm that trains one, two & three are enough to repay the project debt.

Default being extremely unlikely given the economics of the project, the main issue lenders had to address was political risk: “What if NNPC is asked to repatriate all its hard currency to Nigeria?” asks Stopford (the project’s cash flow transits through off shore accounts.) Hence the necessary involvement of ECAs, so banks would only run political risk on the commercial part of the loan on the balance-sheet.

But ECAs will not lend to established companies. So the whole project had to ‘look like’ project finance, according to a source very close to the project. The opposite exercise had to be done with banks. This approach allowed the sponsors to reach a “sweet and sour ratio” of 77.5:22.5 per cent for the whole facility. Also worthy of notice is the involvement of the AfDB, which is more used to working with governments and on its own. In an effort to get involved with the private sector, the bank provided a loan of US$100 million, and threw in its political weight.

Conclusion

NLNG features all the ingredients of a difficult project with strong fundamentals. The fact that sponsors had to resort to funding it on balance sheets for the first three trains says a lot about the nature of the LNG business. The risks and the stakes are very high at the greenfield stage and should not be underestimated.

The NLNG project is a story of shareholders’ commitment, holding their ground for two decades and overcoming very serious difficulties including a radical change of regime in the host country and years of uncertainty regarding potential off-takers.

NLNG+ demonstrates how a good project financing can be done when the market conditions are right and political cover is present. It also reveals the nature of the change that has affected the natural gas market in the past ten years, and the momentum gained by LNG.  

Finally, this project is also the demonstration of how a country like Nigeria can benefit from stakeholders’ commitment to developing its natural resources along with the national oil & gas company. Two centuries ago, Bonny Island was the main slave trading port in the whole of Africa. It is now bringing back to Nigeria some of the wealth that was taken away then. IJ