Qatari LNG project Ras Laffan 3 $1.855 Bil. senior secured bonds rated 'A'; outlook stable

The outlook is stable.

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 Corp. (AAA/Stable/A-1+). 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.

The proceeds from the bonds, as well as up to $795 million of new shareholder loans from an affiliate of Exxon Mobil, will make up the $2.65 billion of new funding being raised under Tranche 2 of the $10 billion financing program launched in August 2005.

The proceeds from Tranche 2 will be used for the continued expansion of the RasGas LNG project. In particular, the funds will support offshore developments; the completion of train 5; ongoing construction of trains 6 and 7; the building of shared facilities such as condensate, liquefied petroleum gas (LPG) and LNG tanks, and LNG and liquid berths; and the repayment of intercompany loans from RasGas II to RasGas 3.

The 'A' debt rating on the bonds incorporates a range of weaknesses, including the potential volatility of LNG revenues, due to price links between sale and purchase agreements (SPAs) for LNG output and global oil price benchmarks (and some European gas benchmarks) and high counterparty risk, given that many SPA counterparties have lower credit quality than RasGas' senior debt. There also remains 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 can be used to meet debt obligations. The rating also reflects the limited credit support provided by the structural features of this financing, which are weaker than those of most comparable project financings.

These weaknesses are offset by a composite of credit strengths, including: the elimination of most potential sales-volume risk by the presence of long-term SPAs, which cover the majority of production from trains 3, 4, and 5; and the likelihood that RasGas 3 will sell the LNG produced from trains 6 and 7 under long-term SPAs.

"RasGas has a competitive cost structure, which results in forecast debt service coverage ratios greater than 3x under most stress scenarios," said Standard & Poor's credit analyst Karim Nassif. "In addition, the project's breakeven oil and gas prices for debt servicing are compellingly low, at less than $11 per barrel of oil, and less than $2 per million British thermal unit of gas, which will further limit default risk."

Standard & Poor's expects favorable natural gas fundamentals in RasGas' target markets over the next five years, good spot market sales potential over the next three years, and strong operational performance--all of which lead us to expect strong debt service coverage ratios. We expect the remainder of the 15.6 mtpa output of trains 6 and 7 not covered by contracts with Chinese Petroleum Corp. (A+/Watch Neg/--) and Petronet LNG Ltd. to be accounted for by a long-term SPA with an affiliate of Exxon Mobil, or other parties of reasonable credit standing.

"Ratings upside potential is limited over the short term, given the substantial amount of construction activity remaining, and the relatively weak creditworthiness of offtakers," said Mr. Nassif. "Any improvement in the ratings over the long-term will likely be limited by the project's weak structural and security arrangements."

The outlook could be revised to negative, or the ratings 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.