Gas drive
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Emerging Markets

Gas drive

The world’s largest gas field in Qatar has created unstoppable momentum in the Gulf project finance market

The pump is being primed again by commercial banks that have already injected tens of billions of dollars into Qatar’s liquefied natural gas (LNG) industry. A 16-year, $3 billion debt financing package for Shell and Qatar Petroleum’s (QP) Qatargas 4 project “should be signed by end-July” says a banker close to the deal, which is likely to see 30 heavy-hitting institutions each taking a massive $100 million hold prior to a general syndication, he anticipates.

“The next LNG-linked financing – for the Qatar Gas Transporting Company (Nakilat) – could happen in Q4 2007 or Q1 2008,” he predicts, referring to the proposed $2.5 billion debt package to bring the company’s fleet to 25 wholly-owned large LNG carriers. This follows a $4.3 billion debt package raised by Nakilat in December 2006, which included a benchmark-shattering 27-year, Rule 144A bond.

With a 22-year, $1.7 billion financing slotting into place in late April for the Mesaieed A independent power and water project (IWPP), few signs of any financing let-up are visible. Qatar’s capital investment requirements are pitched at around the $130 billion mark during the next six or seven years, the bulk of this covering gas projects, IWPPs and petrochemicals schemes that will take gas feedstock from the giant offshore North Field’s 900 trillion cubic feet of proven reserves.

Rising Costs

The enormous numbers are partially linked to spiralling raw materials and project costs – which saw the recent cancellation of a proposed $7 billion gas-to-liquids (GTL) project planned in Qatar by ExxonMobil and Qatar Petroleum – say bankers. “Even a figure of $2 billion seems a relatively small amount now for a major project,” observes Darren Davis, HSBC Bank’s head of project finance, Middle East and North Africa.

Qatar’s funding targets “will be reliant to a significant extent on the project finance industry”, said minister of finance HE Yousef Hussain Kamal at a February conference in Doha, suggesting that approximately $70 billion would be project financed, split roughly between syndicated loans worth $55 billion and $15 billion raised in bonds.

Qatar’s unending finance drive results largely from its push to build a production and distribution base that will lift LNG sales to a fiercely-cherished target of over 77 million tonnes annually by 2010. The tiny country became the world’s biggest exporter of LNG, overtaking Indonesia in 2007, and will be supplying one-third of the world LNGs in four years, “reaching all the important markets around the globe,” says deputy premier and minister of energy and industry Abdullah bin Hamad al-Attiyah.

“The huge amount of project work in Qatar is matched by an incredibly strong appetite in the bank market,” comments John McWall, head of loan syndications at Arab Banking Corporation, a participant in most major Qatari project loans. “We’re increasingly seeing new names added to the lenders’ list. Most of the players are now from outside of the immediate region, with Asian lenders featuring, and the European market is growing all the time,” he tells Emerging Markets.

Strong bases

Comfort factors for banks include first-tier sponsorship names, the universal popularity of LNG assets among project financiers, long-term sales contracts with a geographically diverse set of offtakers and significant levels of upstream and mid-stream infrastructure sharing. Not to mention Qatar’s staggering 20% annual GDP growth across the last decade, and a fresh rating upgrade on March 6 by Standard & Poor’s, from A+ to AA-. “The fundamentals are so strong,” stresses McWall.

Cheap gas is the “backbone” of Qatar’s investment programme, emphasizes foreign minister Sheikh Hamad Bin Jassem Bin Jabor Al-Thani, and helps to lift Qatar’s project economics “into a league of their own”, says a banker close to Qatargas. “Energy projects in Qatar are seen as being so safe, and so underpinned by economies of scale that people can’t go too far wrong,” he adds.

Qatar’s rating upgrades have allowed the use of capital markets as an additional capacity play. A $1.855 billion bond was issued in September 2006 for the Ras Laffan Liquefied Natural Gas Company’s (RasGas) second and third expansion phases, and a $1.3 billion bond was considered for Qatargas 4. Islamic money and export credit agency financing have comprised other financing sources.

This year, around $10 billion will be tapped from the markets, and a further $11 billion in 2008, the head of QP’s project finance group, Abdulrahman al-Shaibi, told the Doha conference. Qatargas 4 aside, other schemes moving down QP’s 2007 financing pipeline include a Qatar Fertilizer Company expansion scheme, and an estimated $2.5 billion package for the Qatar Aluminium (Qatalum) smelter, for which requests for proposals were issued to banks in late April. Financing for the RasGas 3 LNG project and the planned Honam petrochemicals complex will hit the market in the final quarter of 2007, al-Shaibi forecasts.

On the power front, money will be needed for the $3 billion Ras Laffan C IWPP, due to generate a weighty 2,600MW. Three new petrochemical schemes, including the ExxonMobil-sponsored Ras Laffan cracker and a proposed aromatics complex, are earmarked to close financing worth some $6 billion in 2009.

By that time, Qatar’s moratorium on new gas projects linked to the North Field will have come into play, allowing existing projects to bed down.

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