EMethanex is just one of a spate of Egyptian gas-based project financings to come on the market in the past few years. It follows the two Egyptian LNG deals done in 2004 and 2005 and comes just before EAgrium fertiliser (which should close soon) and a refinancing for Damietta LNG that it is in the market now

The deal, which was signed on 15 May and closed on 31 May, followed a tried and tested formula trailed in the second of those Egyptian LNG transactions, ELNG 2 - and involved exactly the same banks and advisers in the lead roles with only one exception.

Pathfinder banks were appointed around a year before close was reached and the European Investment Bank (EIB) was brought in to provide guaranteed funding via its EuroMed and Article 18 programmes (as with both ELNG 1 and 2 and the initial Damietta corporate deal).

Syndication is now underway, with commitments due on 19 July.

The project and sponsors

EMethanex stands for Egyptian Methanex Methanol Company and is a joint venture led by Vancouver-based group Methanex, with participation from three subsidiaries of state-owned Egyptian General Petroleum Corporation (EGPC) and the Saudi investment group Arab Petroleum Investments Corporation (APICORP).

The shareholdings are:

• Methanex - 60 per cent
• EChem (Egyptian Chemicals Company) - 12 per cent
• EGAS (Egyptian Gas Company) - 12 per cent
• GASCO (Egyptian gas grid operator) - 9 per cent
• APICORP - 7 per cent
   

The project involves the construction and operation of a 1.265 million tonnes per year methanol manufacturing plant at the port of Damietta, in the Nile Delta region on Egypt's Mediterranean coast.

Egyptian national gas company EGAS will supply gas to the plant under a long-term contract, with volumes sourced from the Egyptian national grid operated by GASCO rather than specified fields. Methanex has a long-term contract for offtake from the plant, including an understanding that a portion of finished product will be supplied to EChem for domestic marketing.

The context for the project goes back to 2000, when the Egyptian Ministry of Petroleum put together a Petrochemical Master Plan, envisaging 14 projects requiring around US $10 billion of investment by 2020.  This led to the creation of EChem in 2002.

Egypt's reasoning for pursuing petrochemicals and fertiliser projects rather than extra LNG export facilities is to build up its economy and provide employment. Methanol may not be as lucrative as LNG but it has the potential to create more jobs and general wealth.

There is space on the EMethanex site for future expansions, and Methanex has also signed a memorandum of understanding (MOU) to investigate the development of a dimethyl ether (DME) facility there. Further methanol derivatives ventures are also possible.

Commercial production is expected in early 2010.

Security is provided in form of assignments, pledges, mortgages and direct agreements, the gas supply agreement and the methanol sales offtake agreement with Methanex.

Methanol - a volatile commodity

Unlike LNG, methanol is a commodity - and prices are remarkably volatile, as the following variations in North American contract pricing shows (taken from Methanex's website):

• 2002: US$120-206 per tonne
• 2003: US$226-273 per tonne
• 2004: US$249-316 per tonne
• 2005: US$299-339 per tonne
• 2006: US$339-599 per tonne
• 2007 (so far): US$309-599 per tonne

But, as the figures show, prices have been on a steady upward curve, buoyed by demand from China and the Far East in particular, but also by problems with some facilities around the world - including at Methanex's own plant in Chile, which has been experiencing shortages in gas supply.

Financing structure

As explained, this financing largely followed the pattern established by ELNG 2. However EMethanex involved much greater equity share - a debt/equity ratio of 56:44 compared to 80:20 on ELNG 2. Methanex alone is pumping in US$250 million from its own balance sheet, while US$138 million is coming out of the Egyptian state coffers.  

The total equity amount when including APICORP's share is US$418.26 million. Total costs are estimated at $948.43 million, around US$830 million of which is accounted for by EPC and owners' costs.

After the Egyptian loan facility was bumped up from US$150 million at the last minute, the total debt contribution came to US$530.1 million, divided up as follows:

• International Loan Facility: US$139.49 million
• Egyptian Loan Facility: US$168.38 million
• Guaranteed EIB EuroMed loan: US$145.6 million (US$152.88 million including guarantee)
• Guaranteed EIB Article 18 loan US$76.7 million (US$80.535 million including guarantee)

Each of the four tranches has a tenor of 15 years, with pricing as follows:

International Loan Facility

• Pre-completion:   LIBOR plus 120bp
• Post-completion: LIBOR plus 110-150bp

Guaranteed EIB EuroMed loan guarantee (commercial risk cover)

• Pre-completion LIBOR plus 100bp
• Post-completion LIBOR plus 90-130bp

Guaranteed EIB Article 18 loan guarantee (political and commercial risk cover)

• Pre-completion LIBOR plus 110bp
• Post-completion LIBOR plus 100-140bp

Banks and advisers

Just as the deal largely followed the structure used in ELNG 2, so the banking and advisory roles went out to the same parties as in that deal, except for HSBC taking the financial advisory position (Société Générale did ELNG 2) and National Bank of Egypt (NBE) joining the Egyptian bank tranche before the deal reached closed.

ELNG 2:

Pathfinder banks

• Bank of Tokyo Mitsubishi UFJ
• Calyon
• Commercial International Bank (CIB)
• HSBC
• Standard Chartered

Legal adviser to sponsor: Shearman & Sterling
Financial adviser to sponsor: Société Générale
Legal adviser to banks: Slaughter and May

EMethanex:

Pathfinder banks

• Bank of Tokyo Mitsubishi UFJ
• Calyon
• Commercial International Bank (CIB)
• Standard Chartered

Legal adviser to sponsor: Slaughter and May (led by Christopher Saunders and Helen Griffiths)
Financial adviser to sponsor: HSBC
Legal adviser to banks: Shearman & Sterling (led by Kenneth MacRitchie)

Getting the deal done

While on the face of it EMethanex is a reasonably straightforward project finance deal following a successful formula used previously in ELNG 2, there were some challenges that had to be dealt with. Perhaps the biggest issue was that of grid gas supply, as one banker involved in the deal explains:

'One important differentiator is that this is the first gas-based project in Egypt to be financed using international project finance which relies on the Egyptian gas grid. Previous deals did not take the risk of the grid on. In this project the lenders had to do due diligence of the whole of Egypt's gas reserves and infrastructure because they were taking on this grid gas risk.'

Methanex and its partners had wanted to close the deal sometime in 2006, having appointed pathfinder banks around May, but the necessary due diligence on the Egyptian gas infrastructure and safeguards on supply meant that it was delayed well into this year. There was then a further delay after signing on 15 May while the parties waited for Egyptian prime minister Ahmed Nazif to add his signature.

A source involved in the deal says: 'It was quite a tough negotiation. It was the first international project financing based on Egyptian gas infrastructure risk, and it was always going to be difficult to negotiate. So the delays possibly irritated the shareholders a bit.'

Another says: 'It was not a promising banking presentation to begin with, because there is a lot less money in methanol than in LNG for example. Given the somewhat precarious economics and the grid gas element, there are some features that the banks got bullied into accepting quite early on.'

Bank roles on the due diligence were divided up as follows:

• Bank of Tokyo-Mitsubishi: documentation bank and global facility agent
• Calyon: modelling, technology and the market
• Standard Chartered: gas infrastructure, gas supply, insurance and environment

Syndication of the international and EIB tranches is now underway, with a total of US$372.9 million on the blocks. All three international pathfinder banks are acting as bookrunners, offering tickets of US$30 million for a fee of 45bp. Equity sponsor APICORP has already been confirmed as participating in the syndication phase.

Commitments are due on 19 July.

The project at a glance