PETRORabigh's US$5.8 billion financing is the largest project financing ever to take place in Saudi Arabia and gave a substantial shot in the arm to the country's efforts to become the next big thing on the project finance scene.

The funds raised are being used to fund 60 per cent of the US$9.8 billion estimated total cost of a new refining and petrochemicals complex at Rabigh, north of Jeddah on the western (Red Sea) coast of Saudi Arabia.

When it is finished in the third quarter of 2008, the Rabigh complex will be one of the largest of its kind in the world to be built in a single stage. It will have the capacity to process 18.4 million tons per year of high value petroleum products and 2.4 million tons per year of ethylene- and propylene-based petrochemical derivatives - predominately for export.

But the process of getting to final close was far from smooth. For one thing, the estimated project cost soared from US$3 billion to US$5billion between 2004 and 2006 as construction and materials costs went up and up.

Also, the financing options were narrowed because many banks will not even consider investing in Saudi Arabia on account of the perceived political risks - based on fears that the secretive kingdom is vulnerable to an Islamist coup from factions inside the royal family.

Meanwhile, those financiers confident enough to participate were faced an incredibly tight pricing structure because of the strength of the sponsors, supported by generous politically-motivated assistance from the Japan Bank for International Cooperation (JBIC) and the Public Investment Fund of Saudi Arabia (PIF).

The Parties

Saudi Aramco (originally the Arabian American Oil Company) is Saudi Arabia's national oil company, with control over nearly all of the Kingdom's vast reserves and daily production of 10 million barrels -making it the world's largest oil company. As such you could not have a better local counterparty for such a project (except from the PR angle, given the high level of secrecy surrounding it).

You could also hardly have a better partner than Sumitomo Chemical - part of the huge Sumitomo network of companies in Japan. Its involvement brought in Sumitomo Banking Corporation and Sumitomo Mitsui Banking Corporation (SMBC) as project financial advisers and SMBC and The Sumitomo Trust & Banking Company's participation as MLAs.

HSBC Saudi Arabia (HSBC Amanah) provided advice on the Islamic element of the financing package.

As one would expect, a whole horde of lawyers worked on the deal for various parties. Sumitomo Chemical's adviser Herbert Smith alone had more than 50 working on the project, led by partners David Clinch in Tokyo and Andrew Calderwood and David Laurence in London.

David Wells from the law office of Dr Mujahid M Al-Sawwaf also acted for Sumitomo in relation to Saudi Arabian law.

White & Case, which has been advising Saudi Aramco for 30 years, provided counsel for the company on the project. Partners Craig Nethercott and Christopher Cross, based in London and New York respectively, led the financing negotiations while Steve Payne, counsel in the Washington, D.C. office, provided advice in respect of the related power and steam project.

Cross led a team advising Aramco on other parts of the deal, including corporate structuring, project development, technology and environmental issues. Mohammed Al-Sheikh in White & Case's Riyadh office advised the company on Saudi law.

Clifford Chance advised JBIC and the other lenders, led by partner Rodney Short with principal assistance from John Wilkins, Qudeer Latif, Suzannah Browning, Natalie Fell and Richard Tomlinson. The lending consortium also received Saudi-specific advice from the Al Jadaan Law Firm.

Norton Rose - led by head of energy project finance John Inglis - acted for the Marubeni-led consortium also including JGC, Itochu and Saudi firm ACWA that won the circa-US$1 billion independent water steam and power (IWSP) contract that was funded using  the financing package.

The lump sum EPC contracts went to JGC Corporation (for the high olefin fluid catalytic cracker and ethane cracker), Foster Wheeler (for the offsites and utilities) and Mitsubishi Heavy Industries (the IWSP).

For lenders, see 'Financing' section below.

The Project

The Rabigh project will see the expansion of Saudi Aramco's existing 400,000 barrel per day oil refinery plus the development of a 1.3 million ton per year ethane cracker and various downstream petrochemical process units.

Once finished, it will be one of the world's largest export-oriented refinery and petrochemical complexes in the world - producing 18.4 million tons of petroleum products and 2.4 million tons of ethylene and propylene-based petrochemical derivatives products every year.

There will also be a captive independent 380MW oil-fired water, steam and power project to serve the complex, with Marubeni leading a consortium of developers also including JGC, Itochu and ACWA.

Saudi Aramco and Sumitomo Chemical brought the project into official being when they signed a memorandum of understanding to take it forward on 9 May 2004 - starting a joint feasibility study that was concluded in September 2005 when they signed a joint venture agreement.

The project will benefit from the cheap oil that Aramco can provide in addition to the expertise that Sumitomo brings. In return the Japanese company believes it will secure a reliable and stable supply of feedstock to strengthen its competitiveness in polyolefins production. Rabigh is Sumitomo's first move into an oil and gas-producing country.

Financing

Most parties in the financing process will not talk about the process or their participation because of the premium put on secrecy by Saudi Aramco.

Saudi Arabia's intention to guarantee the success of the Rabigh project was signaled early on when its public investment fund committed US$1 billion on equal terms with the other lenders -showing strong political support from the Saudi government.

Bringing in Sumitomo, JGC, Marubeni and Itochu then brought a huge reward in the form of a US$2.5 billion loan from JBIC - the largest the Japanese state bank has ever committed to the Gulf region and the first major project financing that it has joined in Saudi Arabia.

The commercial banks and Islamic banks were mandated in the final quarter of 2005. They were:

Commercial bank facility

• Arab Petroleum Investments Corporation (APICORP)      
• The Bank of Tokyo-Mitsubishi UFJ
• Banque Saudi Fransi   
• BNP Paribas   
• Calyon
• Citigroup 
• Gulf International Bank
• HSBC  
• Mizuho Corporate Bank
• Riyad Bank    
• The Saudi British Bank ('SABB') 
• Saudi Hollandi Bank   
• Sumitomo Mitsui Banking Corporation   
• The Sumitomo Trust & Banking Company
• WestLB, London Branch 

Islamic facility

• Arab Petroleum Investments Corporation (APICORP)      
• Bank Albilad  
• Calyon
• Citigroup
• Gulf International Bank
• Islamic Development Bank      
• Riyad Bank    
• The Saudi British Bank ('SABB')

The basis for the financing was incredibly tight - fixed at LIBOR plus 35 basis points (bp) during the construction phase, rising to LIBOR +55bp and then +65 after completion. The loan term is 15 years.

The Islamic facility comprised a procurement agreement followed by a forward lease agreement (Ijara-fil-thimma) and is the first time this shari'a-compliant structure has been used in the Kingdom of Saudi Arabia

The Nippon Export and Investment Insurance (NEXI), an independent Japanese administrative institution, agreed to insure the project as a means of hedging the risks associated with the investment.

Conclusion

Saudi Arabia is an interesting case for the project finance world. On one hand there is the perceived political risk of investing there, but on the other hand it is a potentially huge market for the banks to participate in - with a raft of large-scale projects in the planning stage.

From the Saudi point of view, Rabigh was a project that could not fail, and Aramco's decision to bring Sumitomo and the other Japanese companies in was a clever move - securing as it did a huge slug of financing from JBIC plus participation from the Sumitomo banks plus BoTM.

However the financing terms were almost prohibitive for the commercial banks, prompting plenty of unease about whether participating in such projects is really worthwhile giving the returns on offer.

The project at a glance