On 29 December 2006 a Cayman Islands entity called Blueprint Trading closed a US$440 million refinancing with ABN AMRO and Société Générale

The deal replaced and extended a previous deal agreed in September that refinanced an EBRD project loan to Azerbaijan's state oil company SOCAR.

What the December facility and its US$175 million predecessor achieved was to allow SOCAR to benefit from oil produced in the giant Azeri-Chirag-Guneshli (ACG) fields in the Caspian Sea without directly pledging its assets - something that would breach a World Bank covenant.

To evade falling foul of this World Bank Negative Pledge as it is known, the parties used a special purpose vehicle called Blueprint Trading - an 'orphan' company in the Caymans - to enter into a forward sales agreement with SOCAR subsidiary AzACG and sell the oil on to offtakers including Glencore and SET Select Energy.

It is an ingenious structure. And it is very definitely not a standard project financing, though the original US$170 million loan from the EBRD (European Bank for Reconstruction and Development) was - having been closed in late 2004 to finance work on the Shah Deniz gas fields in the Caspian and the South Caucasus gas pipeline (SCP).

Background

On the financing side, the background to the two facilities agreed in September and December respectively was a US$750 million facility arranged by BNP Paribas for SOCAR/AzACG in December 2005, based on its share of what is known as 'cost oil' from the ACG fields.

BNP syndicated this five-year loan to 14 banks in March 2006 at LIBOR plus 170bp - a substantial improvement on the LIBOR plus 400bp that SOCAR was paying to ExxonMobil and Türkiye Petrolleri (TPAO) under a previous loan agreement with AzACG.

But drawing the focus back further, the key to that deal and the two more recent refinancings is obviously the ACG group of fields, which have been gradually coming on stream under a 30-year production sharing agreement (PSA) signed in September 1994, with the following shareholders:

• BP (operator - 34.1 per cent)
• Chevron (10.3 per cent)
• SOCAR (10 per cent)
• INPEX (10.0 per cent)
• Statoil (8.6 per cent)
• ExxonMobil (8 per cent)
• TPAO (6.8 per cent)
• Devon Energy (5.6 per cent)
• Itochu (3.9 per cent)
• Amerada Hess (2.7 per cent)

The US$4 billion Baku-Tbilisi-Ceyhan (BTC) pipeline that opened for operations last year is handling much of the oil from the ACG fields.

The parties

AzACG was set up to manage SOCAR's share of the oil from ACG and enter into financing agreements based on it. With those fields now producing 400,000-500,000 barrels a day and the international investment community becoming more confident about Azerbaijan, it now has considerable clout to arrange such deals and get rid of expensive previous loans.

Nabil Khodadad led the Chadbourne & Parke legal team advising SOCAR on the deal. Calvin Walker was in charge of the Allen & Overy team advising the lenders.

ABN AMRO and Société Générale were joint mandated lead arrangers for the financing and are joint bookrunners for a syndication process that should be launched within the next two weeks. Société Générale is account bank for the financing.

The financings

The EBRD's original US$170 million project-based facility to help with SOCAR's share of Shah Deniz and SCP costs was priced at LIBOR plus 400bp. Blueprint Trading's first refinancing of this in September secured LIBOR plus 85bp without a state guarantee, and the second refi apparently tightened margins even further on an effectively identical structure.

Inna Oleinik, a director of global commodity finance at ABN AMRO, explains how the financings work: 'The money does not go to SOCAR and SOCAR is not the borrower. The idea is to isolate the financing from SOCAR. The borrower is the SPV, whose role is to pre-pay for oil delivered by AzACG, a company owned by SOCAR.'

She adds: 'It is very important to stress here that SOCAR is not an obligor in the facility, neither does a facility have any support from the government of Azerbaijan. The facility is based and secured solely by profit oil stream of AzACG.'

On the other hand, SOCAR itself, reporting the signing of the first loan in a press release dated 22 November, said:

'The credit agreement between SOCAR and "Societe Generale'' and ''ABN AMRO'' banks was signed on November 21 in Baku. The credit was borrowed in total of 175.000.000 $ on the degree LIBOR +0, 85% without state guarantee. This amount will be spent for repayment of the debt to European Bank for Reconstruction and Development which have been borrowed for realization of works in the framework of ''Shahdeniz'' project.'

The whole reason the deal was done as it was was to avoid The World Bank Negative Pledge, which commits countries to not pledging state assets as a part of financings of this or any other type. For, at least officially, the Blueprint Trading SPV has no direct connection to SOCAR and is just trading oil with it.

The two refis involving Blueprint were done using the 'profit oil' stream from AzACG, which is divided from the 'cost oil' that the BNP facility is based on.

Société Générale's head of reserve-based lending Kevin Price says: 'In a production sharing contract (PSC) the concept is when a company develops an oilfield, some of the oil the companies are extracting comes to pay the capital costs, and the rest comes as profit. In terms of modelling cash flow, this financing is based on the profit oil component.'

Given the two 'profit' and 'cost' oil streams going into AzACG, there were a lot of intercreditor issues to be ironed out in the deal.

There is also the issue of what AzACG/SOCAR uses the proceeds for. Some parties to the financing are adamant that the financing is totally disconnected from what it is used for. Oleinik for example says: 'What AzACG uses it for is there business. The purpose of our facility is to make a pre-payment to AzACG.'

However others admit that the whole reason the second refinancing took place so soon after the first was that SOCAR saw an opportunity to make the strategic acquisition of an oil terminal in Georgia, and wanted to use this low-priced facility to do that, while covering other general corporate purposes.

The deal at a glance