Financing for Oil and Gas Projects Is Heating Up

Global Finance, Dec 2003 by Codrington, Erik

The global market fundamentals for oil-and gas-related projects are quite positive, pointing to a substantial increase in financing and advisory activity in 2004. Robust oil and gas prices on both a current and forward basis are generating increased upstream investment.

Another bullish factor is rising demand for natural gas, which is necessitating large midstream investments in pipeline and LNG assets. Finally, the current 'frontier' sources of hydrocarbon supply are generally in countries with substantial sovereign risk. This could further contribute to market activity, since project financing is viewed as a means of diversifying political risk and accessing attractive export credit and multilateral funding.

Much of the needed investment, particularly in the upstream sector, is likely to be funded by major oil companies and the state sector in developing nations. Nevertheless, the outlook is for increased project financing activity, primarily for joint ventures, sponsors that are more capital constrained, and for midstream assets with stable, utility-type returns. Although 2004 deals are likely to clear the market on cautious terms, due to the smaller number of banks and investors and recent adverse results in the power sector, more-conservative deal structures are only part of the story. Project sponsors should be in a good position as a result of low underlying interest rates.

Transactions in the OECD countries will continue using banks as a primary source of funding for projects in 2004, with US private placements and Rule 144A offerings playing an important supporting role for longer-term, investment-grade deals. Emerging markets' deals, however, will be primarily done 'old style,' by piecing together multi-tranche packages of funding from banks, export credit agencies and multilateral lenders.

For North America, the predominant theme appears to be increasing the supply of natural gas to the US market. A number of natural gas-driven transactions are slated for 2004, including the Cheyenne Plains pipeline, capital markets refinancing of the Gulf-stream pipeline, and construction financing for one or more LNG receiving terminals. The US thirst for natural gas is also driving a variety of LNG expansions elsewhere in the world and in deeper water in the Gulf of Mexico.

Despite the region's substantial potential, energy investment in Latin America and the Caribbean could continue to suffer from political instability. Financing of Trinidad and Tobago's Atlantic LNG Train 4 and supporting pipeline investments should be significant market events. Financing a portion of the upstream programs of Pemex and Petrobras may also be important. LNG-rclatcd activity in Uolivia, Fern, Mexico and Venezuela could result in some advisory activity in 2004, but few closed transactions.

The EMEA market (Europe, Middle East, and Africa) will be dominated by jumbo, multi-tranche project financings in the former Soviet Union. Such transactions will include the $1.2 billion Baku-Tbilisi-Ceyhan oil pipeline, the even-larger Sakhalin II gas project, and potential deals related to the Caspian Pipeline Consortium and Tengizchevroil. In the Middle East, substantial financing is expected for the UAE-based Dolphin natural gas project. A steady stream of deals is likely, based on export of the region's plentiful and inexpensive gas supplies, with Qatar remaining in the forefront of activity.

In Asia, the trend is for a moderate but improving level of activity, with lew landmark deals. Investment to meet China's demand for raw materials, including crude oil, natural gas and petrochemicals, will be the focus. Despite strong demand, few deals are expected to materialize this year, due to the difficulty of putting together satisfactory financial, legal and market structures in China.

Regional bright spots will include LNG-based transactions from Malaysia and Indonesia and possible pipeline refinancing in Australia.

By Erik Codrington, director, global specialized finance Americas, WestLB, New York branch