Aramco, Total sign Jubail refinery financing
Our friends across the pond at Petroleum Economist put together this analysis of the financing for the Jubail refinery in Saudi Arabia that is supposed to be operational by 2013. You can read the report below and thank Petroleum Economist for its efforts by visiting its site, www.petroleum-economist.com.
The Jubail export refinery has attracted the Middle East's biggest-ever project financing, reflecting the robust appetite among international banks for Saudi Arabian energy projects, Miles Lang reports
SAUDI Aramco and Total have closed a low-cost, $8.5bn project financing for Saudi Arabia's Jubail export refinery. Signed in late June, the deal – the first project financing in Saudi Arabia to feature an Islamic bond – was comfortably oversubscribed, receiving commitments for over $13.5bn. The financing covers 70% of the total project cost; the remainder will be funded directly by the sponsors, working together as Saudi Aramco Total Refining & Petrochemical's (Satorp), of which Aramco holds 62.5% and Total the remainder.
Scheduled to become operational in 2013, Jubail will make a big contribution to the country's long-term plan to boost refining capacity from 2.1m b/d to 3.8m b/d. It will process Arabian Heavy crude from the 0.9m barrels a day (b/d) Moneefa field, maximising production of diesel and jet fuel, and producing 0.7m tonnes a year (t/y) of paraxylene, 140,000 t/y of benzene and 200,000 t/y of polymer-grade propylene. Fuel oil will be used locally for electricity generation, reducing the amount of crude oil that Saudi Arabia burns in power plants and enabling it to boost exports of high-value petroleum products.
A complex deal. The project took four years to reach financial close – Credit Agricole and Banque Saudi Fransi were mandated as financial advisers in 2006 – mainly because of the deal's complexity. There were 27 banks on the term sheet. This style of financing, known as club lending, has prevailed in project financings since the onset of the financial crisis in 2008.
Before that, it was more common for financings to be syndicated loans – in which one lender underwrites the entire loan and then sells pieces of it down to other banks – which are quicker and less complicated for the borrower, but became too risky for small numbers of lenders during the financial crisis. In the case of big, multi-tranche deals such as Jubail, club elements have always been present, but often combined with alongside syndicated facilities.
Slow progress was also partly a result of decreased liquidity because of the banking crisis: the shortage of funds has resulted in debt arrangers structuring deals that comprise a broader range of financial products. As well as dollar-denominated debt being provided by international banks, the package features lending from a sovereign wealth fund, co-lending from the project sponsor, conventional riyal debt from local banks, both dollar and riyal debt in the form of sharia-compliant instruments from local banks, a sukuk issue (an asset-backed sharia-compliant instrument similar to a bond – PE 6/10 p12) later this year, and direct loans and debt cover from a group of Asian and European export-credit agencies (ECAs).
The apparent delay in the issue of the sukuk is not, as has been speculated, because of problems raised by Saudi Islamic scholars, but because the bonds will have a longer tenor than the usual five-to-seven years. Project sukuk have not been used on Saudi deals before, because no deal has been big enough to require the additional funding stream. Once this precedent has been set, however, project sukuk are likely to be used in other project financings in the kingdom.
The $8.5bn debt package breaks down as follows: $1.3bn from the Public Investment Fund, a Saudi Arabian sovereign wealth fund; $1.6bn of 16-year dollar debt from a club of 19 international banks; a $1bn sponsor loan; $0.5bn equivalent of conventional 16-year riyal debt from 12 local banks; $1.4bn equivalent of both dollar and riyal 16-year sharia-compliant debt from local banks; and $2.7bn in direct loans and cover from a group of seven ECAs.
The refinery's output will be sold on the spot market rather than under long-term off-take agreements, which raises refinery-margin risk. Yet the debt pricing is low, reflecting the financial robustness of the borrowers, Aramco and Total. International banks are lending not far above their cost of funds: 150 basis points (bp) over Libor in the pre-completion period, during which lenders benefit from sponsor completion guarantees, rising to 170bp and then 190bp during operation. The conventional portion of the riyal-denominated debt is priced below banks' cost of funds, starting at around 75bp over Libor and rising to around 130bp during operation.
While there are few deals of this size in the market to compare this deal to, a borrower without Satorp's reputation and credit rating would pay at least 100bp more for its loans.
International spread. A broad international spread of ECAs reflects where project equipment and expertise is coming from. The financial advisers took an innovative approach to building the group, starting with a pathfinder team featuring the Japanese and Korean agencies and broadening it out to include the Spanish, French and German agencies. The ECA group features Korea Export Insurance Corporation; Export-Import Bank of Korea; Japan Bank for International Co-operation; Nippon Export and Investment Insurance; Compañía Española de Seguros de Crédito a la Exportación; Compagnie Française d'Assurance pour le Commerce Extérieur; and Euler Hermes Kreditversicherungs.
Credit Agricole CIB and Banque Saudi Fransi acted as financial advisers to Satorp, and Allen & Overy was international and local legal counsel. Société Générale acted as documentation bank on the conventional tranche, and Crédit Agricole CIB as documentation bank for the Islamic tranche. Linklaters acted as lenders' international legal counsel and Abdulaziz H Fahad as the lenders' local legal counsel.
The other big Saudi export-refinery that has been in process since 2006 is the 400,000 b/d Yanbu project, on the Red Sea, which will also refine crude from Moneefa. Progress on Yanbu was set back in April when ConocoPhillips, Aramco's partner in the project, pulled out, saying it wanted to shift its attention from refining and petrochemicals to exploration and production opportunities (PE 7/10 p16).
Although various companies, including Asian firms, have made proposals, Aramco is still in the market for a partner. This setback makes it unclear when Yanbu will sign, or which banks might feature on the deal. What is very likely is that it will feature a sukuk issue, as Jubail's financing will set an important precedent for the region, and other big deals, such as Yanbu, will need to tap as many types of liquidity as they can.
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