Record breaking project finance deals for gas projects

Qatar and Oman have tapped most of the gas project finance available thus far but other parts of the region, in particular Saudi Arabia, are likely to be more prominent in future. Yemen is developing a $3 billion LNG project. Iran's Pars gas field LNG project is expected to involve work amounting to $4 billion.

LNG projects present much bigger risks that other industrial or infrastructure projects due to the huge investments needed and involvement of so many elements and parties. Any project as well has to provide contracts and agreements that afford protection to investors with assurances on repayment of loans.

GCC projects easier

GCC gas projects are seen as having investment grade potential compared to more problematic areas in West Africa, South America and others. The attraction of Gulf-based LNG projects is illustrated by the large percentage of LNG financing and debt coming from or being guaranteed by international export credit agencies.

Existing and planned liquefaction trains and other multi-billion dollar facilities in the region are seen as likely to remain competitive even if the price of oil, to which LNG prices are linked, were to collapse below $12 a barrel.

Gulf projects too are seen as soundly based in technology and engineering terms. Any serious delay in implementation or worse an inability to achieve completion or produce as designed could set in train a series of other failures in the contractual train. The risk factors for banks in projects that have a tenor- contractual duration- of 10 to 15 years are high

A swathe of international banks including HSBC, Standard Chartered, BNP Paribas and Royal Bank of Scotland are leading recent financing operations. Others who veered away from project finance at the end of the 1990s such as Citigroup, JP Morgan Chase and ABN Amro have, or are considering, re-entering the market.

Regional bank support

Meanwhile the region's own banking sector is stepping up to meet the huge increase in demand for project finance. Local lenders such as Commercial Bank of Dubai, Abu Dhabi Commercial Bank, Mashreq Bank, Commercial Bank of Qatar and Qatar National Bank accounted for about a third of senior lenders in the arrangement for Qatargas 2.

Financing for the Qatargas 2 project also involved an Islamic tranche reflecting a growing use of Islamic debt instruments in the region's LNG project finance. While Islamic funding remains smaller than commercial debt it is beginning to play a significant role with $1 billion of Dolphin Energy's financial facility, for example, structured in an Islamic way.

Project opportunity in the Gulf has never offered more opportunities. Deals worth many billion of dollars are expected to come to the market over in 2006 and will likely continue at the same pace over next decade or longer.