By seizing on the appetite of European banks for lower priced debt than can normally be stomached by their US and Canadian counterparts, Canaport LNG's US$756 million project financing secured sponsors Repsol YPF and Irving Oil the longest tenor and lowest pricing for any oil and gas deal in North American history

Situated at Saint John in the state of New Brunswick, Canaport will be the first new liquefied natural gas (LNG) terminal to enter operations on the eastern seaboard of North America for 30 years - and the first to open in Canada full stop.

With Irving's existing Canaport oil refinery (Canada's largest) only 9km away the terminal's regasified natural gas already has one readymade customer on its doorstep, but its location, 100km away from the US border, means it will also have access to the premium-priced New England gas market.

However it has taken five and a half years to get to this stage where financial close has been attained and construction work well underway - Irving first announced its plan to apply for a permit way back in July 2001. It took just over three years of feasibility and environmental impact studies before that permit was received from New Brunswick and federal regulators.

However, despite the long lead time, Canaport was the first of the new wave of proposed LNG import projects on the eastern seaboard to get the regulatory nod - securing it a leading position amongst the various competing proposals, one that it has maintained.

In September 2004, just over a month after receiving approval, Irving secured what it really needed to get going - a big name partner with access to LNG supplies, in the form of Spanish-Argentine firm Repsol YPF.

Then in June 2005, with site clearing already complete, Repsol and Irving entered into definitive agreements to develop Canaport LNG and formed the project SPV CanaportLNG Limited Partnership. Site excavation and levelling work began in September that year and full EPC contracts were awarded in June 2006.

At the same time Repsol (which will market the regasified LNG in the US and non-Atlantic Canada) tied up transportation agreements to use the proposed 145km Brunswick pipeline and an expansion of the Maritimes & Northeast Pipeline system in the US.

The project's financial adviser Citigroup put in place a financing package with five MLAs on board by Summer 2006, but it was held up as Repsol took its time approving the remaining conditions precedent (CPs). With no need to hurry, the deal remained on the table for five months before finally closing on 20 November.

The project

Jim Trifon, vice president and manager of LNG business development for Repsol in the US, says: 'Canaport is a tolling facility, where Repsol Energy Canada owns all the capacity. It is an infrastructure provider. You collect your toll and, like for anything else, part of it is going to be demand charges. That is how it gets its revenue.'

When it is completed in December 2008, the facility will have three 160,000 cubic metre LNG storage tanks with a throughput capacity of 600,000 cubic meters of gas per hour (500 million cubic feet a day).

Altogether, it will have the capacity to pump an average of 1 billion cubic feet per day of gas (1bcf/d or 10 billion cubic metres per year) out into the North American pipeline network, with a peak send-out capacity of 1.2bcf/d. The project has also been designed with view to a potential future doubling of sendout capacity to 2bcf/d, while there is enough space on site for two extra storage tanks.

Canaport will be therefore be able to handle upwards of 7.3 million tonnes of LNG per year (7.3mtpa). This will be delivered to the terminal by tankers with up to 200,000 cubic metres of storage capacity - with the primary source of supply at least to begin with likely to be the Atlantic LNG facility in Trinidad.

Repsol holds capacity rights over 3.4 million tonnes per year of production from Atlantic's four liquefaction trains (less than half what Canaport can handle).

Trifon says: 'We are also looking at developments in Gassi Touil [a proposed liquefaction project in Algeria] and elsewhere. But by the same token, as with anyone else we are certainly entertaining third party supply options - what makes the most overall sense.

'It is arbitrage and it is also the fact that someone else might have a better different home for our supply and we could offer someone else a better home for some of their supply. Some of it will be day-to-day and some of it might be longer term. We are evaluating that at the moment,' he adds.

When the LNG tankers arrive at the terminal, they will moor at a 350m long jetty stretching out into the Bay of Fundy (with Nova Scotia across the water providing essential protection from the notoriously brutal North Atlantic sea swells).

Trifon says: 'It is outside the port of Saint John proper. It is an ice-free port all year round so we don't have to worry about ice. The tides were a challenge, but the oil tankers get with it and so do we. It really has to do with the orientation of how we set up the berthing dock to be in line with the tidal movements.'

To get its gas down into New England and to New York City, Repsol negotiated a 25 year send-or pay toll agreement with a company called Emera to transport gas through the Can$350 million Brunswick Pipeline - which will have an initial capacity of 850 million cubic feet per day.

The Brunswick Pipeline will bring Canaport gas to an interconnection point with the Maritimes and Northeast Pipeline at the U.S.-Canada border. The Maritimes is the main trunkline for gas transported from northeastern Canada down the east coast and into the US, and Repsol has also concluded an agreement for an expansion of the pipeline's capacity to take its gas.

Emera is due to get a decision on the Brunswick pipeline project next year - adding some uncertainty to the Canaport project, which is relying on it to get the bulk of its gas to market. Trifon says: 'In our view everything seems to be going along fine, and we will just have to see what happens.'

There is space on site for up to five storage tanks, and existing plans envisage a possible raising of throughput to 2bcf/d.  However a future expansion will present other problems, as Trifon explains:

'We have not set a timeline for an expansion project, and the reason for that is if you look further down, the Maritimes and Northeast Pipeline is fully subscribed. And the next bit of expansion will require steel in the ground, so costs will have to be evaluated. It will really be driven more by demand and the need from the market area rather than a supply push.'

But right here and now, construction is progressing. So far foundations have been laid for two of the storage tanks, and one is being prepared for the third. Work will slow down over the winter, but all is apparently going to plan for Canaport to enter service in December 2008.

The parties

The CanaportLNG Limited Partnership has the following ownership:

• Repsol YPF (75 per cent)
• Irving Oil (25 per cent)

Repsol, acting as managing partner, has a good pedigree as one of the biggest oil and gas companies in the world. Crucially, it is also a major LNG industry player with liquefaction interests in Trinidad and proposed projects in Peru, Algeria and Nigeria.

Trifon says: 'Right now we're are developing a trading and marketing organisation, and we are already in discussions with the major end-users in the New England and New York areas, discussing contracts, terms and conditions. The market has expressed a good interest in our project.'

Irving is a private company local to New Brunswick and owned by the influential Irving family. It already operates the Canaport oil refinery (Canada's largest, with a capacity of 300,000 barrels per day) around 9km from the site where Canaport LNG is currently under construction.  The company is seeking a partner to build another refinery there with an estimated cost of around US$6 billion.

Canadian engineering firm SNC-Lavalin is overseeing construction, with Foster Wheeler: alongside providing project management consultancy and technical advisory services. SNC Lavalin's SNC-CENMC joint venture with Saipem is responsible for onshore facilities and jetty topsides, while the Kiewit-Weeks-Sandwell Partnership is dealing with offshore element, including the receiving pier.

In terms of the financing, Citigroup was financial adviser to the sponsors, led by Erik Codrington, while Linklaters provided legal advice (its team was led by Matthew Hagopian). A Shearman & Sterling team led by Cynthia Urda Kassis provided counsel to the lender group.

The five mandated lead arrangers for the deal are:

• Banco Santander
• Bank of Montreal
• BBVA
• La Caixa
• RBS

The financing

Total construction costs for Canaport LNG are estimated at around US$1.1 billion (an increase from the original US$650 million estimate). With US$756 million having been raised in senior secured project debt, that makes for a debt/equity ratio of around 70:30.

The package has been sitting on the table waiting for close since June and finally went through on Monday 20 November, with first disbursement taking place on 22 November.

The MLAs appointed show how the sponsors leveraged on European banks' appetite for relatively lowly-priced project debt. Three of the five MLAs shown above are Spanish. Bank of Montreal, as the sole American bank involved on the lending side, was really only on board because of its status as relationship bank to Irving. Realistically, it would not have been there if this had not been the case.

That is because the pricing was tight. Very tight in fact, as can be seen from the grid below.

Pre-completion:  LIBOR plus 75bp
Years 1-7:          LIBOR plus 70bp
Years 8-14:        LIBOR plus 80bp
Years 15-21:      LIBOR plus 90bp
Years 22-24:      LIBOR plus 105bp

As a result of this pricing, syndication - which is being handled by Santander and is due to take place early next year - will almost certainly be exclusively a European affair. US and Canadian banks simply do not have the appetite for debt priced this low and are not afraid to say so.

Parties close to the deal say that the financing is structured so most of the risk is attached to Repsol, which is itself likely enter into hedging contracts to further minimise its risk exposure.

There is also considerable flexibility enabling the loan amount to be raised if and when Repsol decides to go ahead with an expansion project for the terminal.

The project at a glance