The phenomenal growth in LNG over the last few years has seen a massive investment programme launched into facilities on the tiny Gulf state of Qatar, of which the latest is the financing for the US$5.8 billion Qatargas 3 (QG3) project to supply the US for 25 years

All told, the Qatargas and RasGas projects will make the emirate the world's largest producer of LNG by 2010. This will occur just as a whole slug of regas receiving terminals comes on stream around the US in readiness to receive the vital cargoes.

QG3 itself was one of the largest project financings of 2005 - coming out at more than US$4 billion and involving 26 mandated lead arrangers plus the Japan Bank for International Cooperation (JBIC) and the US Export-Import Bank (Eximbank).

The project came into being on 11 July 2003, when joint sponsors Qatar Petroleum and ConocoPhillips signed heads of agreement to produce 1.4 billion cubic feet of gas per day from Qatar's North Field and build a 7.5 million tonne per year LNG train within Qatargas' plot at Ras Laffan Industrial City.

This is almost a replica of Qatargas II's (QGII) project structure as it includes gas production, liquefaction and shipping all within one package. Participants in the financing deal say that this was crucial in pushing the deal through, since it followed a proven path that bankers were already comfortable with and were confident would deliver results.

White & Case advised the Qatargas sponsors, with London infrastructure chief Philip Stopford leading the team. He explains: 'QGII established the model that the producer of the gas also liquefies it and looks to capture the value stream. What the Qataris did with QGII was to sell into the UK market where there was a liquid price. QG3 took the same principle and applied it to the US.'

In fact the deal was the first project financing based on LNG sales to the US alone, all of it secured by ConocoPhillips from its participation.

The deal closed on 20 December 2005, concurrently with contractors Technip and Chiyoda being awarded a joint contract worth US$4 billion to carry out EPC works on Qatargas 3 and the Qatargas 4 project involving Shell. The two trains for these projects will be shared between them and are due to come on stream in the middle of 2009.

The Parties

Qatari state oil and gas firm Qatar Petroleum (QP) is the lead sponsor in all of the Qatargas and RasGas LNG projects. In Qatargas 3 it has a 68.5 per cent stake, with US major ConocoPhillips holding 30 per cent and Japanese firm Mitsui 1.5 per cent after buying into the project in September.

ConocoPhillip's participation is crucial, since it will purchase all of the LNG produced under the 7.5 million tonne per year Qatargas 3 contract for 25 years and will also have complete responsibility for regassification and marketing in the US.

Stopford says: 'ConocoPhillips is the third largest trader of gas in the US, while ExxonMobil [QP's partner in QGII] has a strong position in Europe. QP partnered with people who had positions in the markets they were looking to ship to - ConocoPhillips in the US and Exxon in the UK.'

Société Générale was financial adviser to the sponsors, as it was to the BG/Petronas-led consortium on the Egyptian LNG Train 2 deal that signed earlier in the year. Its team was led by Steven Craen, the bank's London-based managing director for oil and gas project finance.

The White & Case legal team advising the sponsors pulled in around 50 people as the deal drew towards close before the year-end. Skadden Arps advised the commercial banks with New York-based corporate finance partners Hal Moore and Julia Czarniak leading the team. Allen & Overy advised the two export credit agencies, tEximbank and JBIC.

A total of 26 lead arrangers were mandated for the project. Those were:

• Calyon (documentation, intercreditor and facility agent)
• Sumitomo Mitsui (JBIC agent)
• BNP Paribas (bookrunner and US Eximbank agent)
• HSBC (offshore account and security trustee bank)
• Apicorp (bookrunner)
• Mizuho (bookrunner)
• QNB (bookrunner)
• Société Générale (bookrunner)
• ABC
• Bank of Ireland
• Bank of Tokyo-Mitsubishi
• Bayerische Landesbank
• Citigroup
• CBQ
• Dexia
• EDC
• Fortis
• GIB
• ING
• Mashreqbank
• Natexis
• San Paolo IMI
• Standard Chartered
• WestLB

EPC contractors Chiyoda and Technip were given a joint contract worth US$4 billion covering both Qatargas 3 and Qatargas 4.

The Project

Like Qatargas II, the Qatargas 3 project integrates upstream gas production from Qatar's North Field with LNG liquefaction and shipping.

Qatar's North Field is estimated to be the largest single gas reservoir in the world, with around 400 trillion cubic feet of recoverable reserves in the emirate's waters alone. However, it was discovered by BP in 1971 when gas was not as fashionable as it is nowadays, so initially the field was only exploited by QP for local consumption.

The Qataris sensibly looked to build up their export capacity though, originally forming the first Qatargas company in 1984 and then establishing RasGas in 1993. To site the necessary LNG trains and ancillary facilities, it authorised and promoted the construction of an entirely new urban and industrial development, including an extensive port area at Ras Laffan in the north east of the country, close to the North Field.

Qatargas I started exporting LNG to Japan in 1997 and QGII will start exporting to the South Hook terminal at Milford Haven in the UK in 2007-8.

QG3 is due to come on stream in the middle of 2009. The project will share two 7.5 mtpa trains with the QP-Shell venture Qatargas 4 (the last of the Qatargas projects, due to close by the end of this year). These trains will be virtual replicas of those in construction for QGII. They will process 1.4 billion cubic feet of gas per day from the North Field, with an estimated 70,000 barrels of liquefied petroleum gas (LPG) produced as a by-product.

ConocoPhillips has contracted to buy all of the LNG for 25 years with view to supplying its various regas interests in the US - including perhaps the Freeport terminal in Texas.

As a part of its participation, Mitsui will purchase 10 million barrels of QG3 LPG per year for 13 years from 2010. The Japanese company is also looking to secure some LNG offtake at some stage to deliver to the Japanese market.

Financing

Like the project structure, Qatargas 3's financing replicated to a large extent the successful formula employed in Qatargas II. This helped in getting the deal wrapped up three months ahead of the anticipated closing date in March 2006.

In fact the financing took only 10 months from when advisers Société Générale and White & Case were appointed in February 2005, compared to 20 months for RBS and White & Case-advised QGII.

Like the previous project, QG3 started off with QP owning 70 per cent and the offtaker 30 per cent. It also also had a debt:equity ratio of 70:30. The terms were also very similar, though slightly more favourable to the sponsors given the perceived success of QG2 and the strong liquidity that continued to exist in the bank market - despite so many large-scale Qatari projects being on the market at the same time.

One obstacle that presented itself was the fact that the long-term, off-take agreement with ConocoPhillips is predicated on Henry Hub gas prices in the US - something that not many of the bankers involved were familiar with. The Henry Hub is a major interconnection point on the US gas network in Louisiana from which the price of gas is taken for the negotiation of US gas futures contracts.

In the end, what was agreed included:

• US$1.488 billion bank facility from a syndicate of 26 international, regional and Qatari banks
• US$1.212 billion co-financing facility provided by a wholly-owned subsidiary of ConocoPhillips
• US$1 billion loan from JBIC
• US$340 million facility guaranteed by the Export-Import Bank of the United States (US Eximbank)

All of the facilities are on a limited-recourse basis and have a maturity of 16 years.

The interest rate agreed on was set at LIBOR plus 45 basis points up to project completion, then LIBOR plus 60bp to year eight, LIBOR plus 65bp to year 12 and LIBOR plus 70bp to year 16.

What was significantly different from QG2 was the lack of an Islamic facility and also, importantly, the involvement of Eximbank and JBIC. The catalyst for JBIC's participation was Mitsui's decision to come in as a minor equity holder in September, while ConocoPhillip's role let in Eximbank. The participation of these two is seen as crucial in getting the deal done as quickly as it was.

JBIC's involvement was also significant for the fact that it has effectively given the Japanese government a stake in the project, something that could prove interesting in the future as the scrabble for scarce gas resources around the world hots up. Mitsui has made it clear that it is interested in some future LNG off-take from the project, in addition to the agreement that it already has for condensate supplies.

Conclusion

This project is the third Qatargas LNG train to be financed in Qatar - the last one of the group Qatargas 4 is expected to reach financial close by the end of this year and it is expected to be financed in much the same way as this deal or its predecessor (QGII) with an Islamic tranche.

With this deal reaching financial close in record time and work already started on both QG3 and the yet-to-be-fnanced QG4, the export end of the delivery stream is well placed to go into operation (for both projects) in 2009.

One thing remains certain, there will be every bit as much appetite for the financing of the next Qatargas train as there has been for the previous two.

The project at a glance