Qatari LNG Project entities RasGas II and RasGas 3 'A' debt ratings affirmed; outlook stable

The outlook is stable.

The $1.4 billion Series A bonds and $850 million Series B bonds rank pari passu with other senior debt at RasGas II and RasGas 3 (collectively, RasGas). This includes a bank facility of about $970 million, due 2020, and $1.38 billion in shareholder loans, due 2020, from an affiliate of Exxon Mobil Corp. (AAA/Stable/A-1+).

RasGas II is a three-train (trains 3, 4, and 5) liquefied natural gas (LNG) company in the State of Qatar (A+/Stable/A-1), with a reported production capacity of about 14.1 million metric tons per year (mtpy). It is about 70% owned by Qatar Petroleum (QP; foreign currency A+/Stable/--) and about 30% owned by Exxon Mobil RasGas Inc., a wholly owned subsidiary of Exxon Mobil.

RasGas 3 is a two-train (trains 6 and 7), 15.6 mtpy-capacity LNG company in Qatar, 70% owned by QP and 30% by Exxon Mobil Ras Laffan (III) Ltd., another wholly owned subsidiary of Exxon Mobil.

For the year ended Dec. 31, 2005, RasGas II had planned to ship 88 cargos and achieve revenues of $1,218 million. The former target was met, and revenues of $1,569 million were achieved.

"This stronger-than-expected result reflects the high prevailing crude oil price environment, which particularly benefited condensate sales and spot cargos," said Standard & Poor's credit analyst Karim Nassif. "Furthermore, the project offtakers are all paying on time, and there are no reported technical or operational problems affecting the production or delivery of LNG."

Construction works on trains 6 and 7 are on track, despite slightly higher-than-expected costs. Management expects these higher costs in the initial phases to be offset through greater efficiencies in the later stages of construction.

A transaction update, "Transaction Update: Ras Laffan Liquefied Natural Gas Co. Ltd. (II) and Ras Laffan Liquefied Natural Gas Co. Ltd. (3)," was published on RatingsDirect, Standard & Poor's web-based credit analysis system, today. A postsale report, "Postsale: Ras Laffan Liquefied Natural Gas Co. Ltd. (II) and Ras Laffan Liquefied Natural Gas Co. Ltd. (3)," providing full details of the transaction, published on Oct 13, 2005, is also available on RatingsDirect.

The 'A' long-term debt rating on the Series A and Series B bonds reflects a number of weaknesses, including: the potential volatility of LNG revenues; high counterparty risk, as many counterparties have lower credit quality than RasGas' senior debt; a lack of sale and purchase agreements (SPAs) for the entire output of trains 6 and 7; and the threat of a conflict in the Middle East that could disrupt LNG production and delay deliveries beyond six months--the period for which the debt-service reserve could be used to meet debt obligations.

The debt rating incorporates a range of strengths, including: the presence of long-term SPAs, which cover the majority of production from trains 3, 4, and 5; good geographic diversity of revenues; strong sponsor support; the projects' location in Qatar's North Field (the world's largest nonassociated gas field, with more than 900 trillion cubic feet of proven reserves); and RasGas' competitive cost structure, which results in forecast debt-service coverage ratios (DSCRs) greater than 2x under most stress scenarios.

"In addition, the project's breakeven oil and gas prices for debt service are compellingly low, at less than $11 per barrel of oil and less than $2 per million British thermal units of gas, which will further limit default risk," said Mr. Nassif.

Construction at RasGas, and of associated third-party terminals and ships, is on schedule. Natural gas fundamentals are likely to be favorable in RasGas' target markets over the next five years, spot market sales potential is strong over the next three years, and the companies' good operations will lead to good DSCRs.

We expect the 15.6 mtpy output of trains 6 and 7 to be covered by long-term SPAs with affiliates of Exxon Mobil or other parties of reasonable credit standing. An improvement in the ratings is unlikely over the short term, given the substantial amount of construction activity outstanding and the relatively weak creditworthiness of offtakers.

"A longer term improvement in the ratings will likely be limited by the project's weak structural and security arrangements," added Mr. Nassif. "The ratings could be lowered if construction problems delay the commissioning of RasGas infrastructure or related works, offtaker credit declines, SPAs come under pressure, or global LNG markets deteriorate."