The Project Financing of Cross-Border Pipelines
a presentation to the
Energy Charter Workshop
Brussels
by
Rubin Weston
Chadbourne & Parke
17 October 2006
Regis House, 45 King William Street
London EC4R 9AN
Tel: +44 (0) 20 7337 8031 [email protected]
© 2006, CHADBOURNE & PARKE All Rights Reserved
Chadbourne & Parke: Legal Leaders in Energy
Representing EBRD on the $180 million and $170 million financings of LUKoil’s and SOCAR’s respective investments in the Shah Deniz gas field and the South Caucasus Gas Pipeline
Representing SOCAR on a $750 million loan facility in respect of the repayment of carry financing provided by TPAO and Exxon in respect of the ACG oil field and the financing of future cash calls
Representing IFC on a $82 million loan to SC Petrotel-Lukoil SA to finance the modernisation of its refinery in Ploesti, Romania
Represented Black Sea Trade and Development Bank and IFC on the financing of the Galata Gas Field, located offshore of Varna, Bulgaria in the Black Sea, the first limited recourse upstream project financing in the Black Sea
Represented Transneft on a US $150 million syndicated receivable based financing facility arranged by Raiffeisen, Transneft’s first syndicated loan
Represented IFC on the financing for a portion of LUKoil’s share of development of the Karachaganak field, the largest limited recourse petroleum project financing in Kazakhstan
Represented Nations Energy on a US $150 million syndicated financing arranged by CSFB for the development of the Karazhanbas oil field in Kazakhstan and the Mishovdag and Kelameddin oil fields in Azerbaijan
Represented Rosneft in connection with its participation in the Sakhalin 5 Project
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Overview of Presentation:
Challenges Presented by Cross Border Pipeline Financings Types of Financing What is Project Finance? What are the risks? Case Studies: BTC Oil Pipeline and the South Caucasus Gas
Pipeline
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Challenges Presented by Pipeline Financings
High initial investment and delay in revenue generation creates a significant completion risk
Number of parties involved, diversity of interests:
public sector divergent interests:
export country Ö high price transit country Ö high tariff country receiving hydrocarbon Ö low price and low tariff
private sector divergent interests:
- companies of
- - supply
- transportation - purchase
public sector v. private sector this diversity of interests creates an increased risk of conflict
History of vulnerability to disruption and of generating conflict
e.g. oil pipeline established by Iraq Petroleum Company in 1930s to establish an export route for Iraqi oil through Syria was closed for a substantial part of its operating life
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Types of Financing
Sovereign Sponsor Credit supported financing Project financing
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Sovereign/Sponsor Financing
Sovereign and/or sponsor can finance a transaction from its own resources or by raising finance by:
bank borrowing accessing the capital markets raising equity (sponsor only)
CPC Pipeline financed by 50:50 division between states (Russian,
Kazakhstan, Sultanate of Oman) and the project participants
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Credit Supported Loans
Possible sources of guarantees:
parent companies sovereign states
The underlying transaction must be fundamentally sound (i.e. cash flows should be sufficient to service debt)
Recourse to provider of credit support throughout the duration of the Loan.
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What is Project Finance?
Project Finance is non-recourse or limited recourse finance,
predicated primarily on the merits of the project rather than on the credit of the project sponsor(s)
Parties to a project financing:
Either:
A financing of the project vehicle
project sponsor(s): no/limited recourse in respect of the borrower's obligations to the lender
borrower/project company: special purpose vehicle (SPV) that owns the pipeline and has no obligations or liabilities outside the project
host governments: grant the concessions necessary for the project to be implemented
lenders
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What is Project Finance? (cont’d)
OR
A financing of a project participant
borrower: SPV, but constitutes a participant in the project, rather than the project company itself
project company: may be required to enter into a direct agreement with the lender with respect to certain matters (e.g. acknowledgement of the rights of the lender upon the enforcement of its security)
sponsor: the company which owns the borrower; no/limited recourse in respect of the borrower's obligations to the lender
host governments: grant the concessions necessary for the project to be implemented
lenders
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Project Finance: Financing the Project Vehicle
Host
Government
Direct
Agreement
Concession (Host Government Agreement)
- Bank
- Sponsor(s)
Project
Vehicle (SPV)
Limited Recourse
Security over Shareholding(s)
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Project Finance: Financing a Sponsor
Host
Government
Direct
Agreement
Concession (HGA)
Security over Shareholding in
Sponsor
Parent
Company
Project
Company
(SPV)
Bank
Shareholding in Sponsor
Loan
Sponsor
Direct Agreement
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Project Finance: Security Package
Security, may include the following:
Pledge of shares in borrower Assignment of rights under project agreements Assignment of insurance proceeds Charge of offshore bank accounts Charge over property
Guarantees and other support from the sponsor:
Guarantees
completion cost overrun
Support Agreements
share retention managerial support
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What are the Risks?
Potential lenders will evaluate various types of risk, including the following risks:
Upstream Completion Operation Market
Political Legal Tax Regulatory Environmental
Price / Tariff
Conflict
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BTC and SCP: Project Summaries
- Baku-Tblisi-Ceyhan (BTC)
- South Caucasus Pipeline (SCP)
- Integrated, one pipeline
- Integrated, one pipeline
company - South Caucasus Pipeline Company company - BTC Company
1,768 km pipeline from Baku to
- Ceyhan
- 690 km gas pipeline connecting
the Shah Deniz gas field to markets in Azerbaijan, Georgia and Turkey. Pipeline runs from Sangachal terminal through Georgia to Turkey
One million barrels per day capacity; capable of expansion
Provides capacity for the ACG
PSA participants plus other founder investors from the North Caspian area
20 bcm per annum design capacity
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BTC/SCP: Pipeline Routes
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BTC/SCP: Contractual Framework
The contractual framework can be divided as follows: Inter-Governmental Agreements / Host Government Agreements
grant the rights and privileges necessary for pipeline construction and operation
BTC/SCP documents provide a framework for future cross-border pipeline projects
Commercial Agreements
Organisational (constitutional documents and shareholders’ agreement)
dictate relationships between participants in the project vehicle, including,
financing obligations (i.e. basis pursuant to which cash calls are paid) process by which shares can be transferred appointment of operator voting requirements for specific decisions return on investment, payment of dividends consequences of default
Third party
dictate relationships between the project vehicle and third parties
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BTC: Contractual Framework
IGA
Turkey
Georgia
Azerbaijan
HGAs
BTC
Third Party Agreements
Organisational
Documents
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SCPC: Contractual Framework
IGA
IGA
- Georgia
- Azerbaijan
HGAs
SCPC
Turkey
Third Party Agreements
Organisational
Documents
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BTC/SCP: Financing Arrangements
- BTC Financing Arrangements
- SOCAR/SCP Financing Arrangements
- $2.589 billion of debt (up to 12 year
- EBRD provided $60 million of
- financing to Azerbaijan (South
- term)
Caucasus Pipeline) Limited
Approximate debt amounts
(AzSCP), a wholly-owned subsidiary
of SOCAR, and $70 million to Lukoil Overseas Midstream Shah Deniz Ltd (Lukoil Midstream), a wholly-owned subsidiary of Lukoil Overseas. Each borrower is a 10% shareholder in South Caucasus Pipeline Company, the owner of the pipeline
($millions):
IFC/EBRD A/B Loans 500
- ECA facilities
- 766
JBIC Overseas
- Investment Loan
- 300
- 100
- OPIC PRI Loan
Sponsor Senior Loans 923
Commercial bank (15) participation
EBRD is syndicating a portion of
around $1 billion its loans to commercial lenders
Security included
Security included:
completion guarantees
completion guarantee / debt service undertaking
share pledges in SCP and AGSC
assignment of agreements including revenues under the Transportation Agreement
assignment of AzSCP’s and Lukoil
Midstream’s rights under project agreements
pledge of AzSCP’s and Lukoil
Midstream’s offshore bank accounts
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BTC/SCP: Risk Analysis
Upstream
Azeri-Chirag-Gunashli field is expected to yield in excess of 5bn barrels of oil; peak production of 1 million barrels/day; additional production expected from North Caspian
Shah Deniz is estimated to have sufficient reserves and production
Completion
financial commitment from sponsors – SCP: Substantial Equity
– BTC: Substantial Equity and
Sponsor Loans
high level of confidence in sponsors
BTC: BOTAS entered into a lump sum (fixed price) turnkey contract for the Turkish section of the pipeline, which the Turkish government guaranteed
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BTC/SCP: Risk Analysis (cont'd)
Operation
quality of sponsors shipper commitments
Market
BTC/oil: western markets SCP/gas: BOTAS (Turkey)
Price / Tariff
a minimum return is guaranteed, regardless of volumes shipped
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BTC/SCP: Risk Analysis (cont'd)
Legal
IGAs and HGAs override local laws and address key legal risks HGAs provide for international arbitration
Tax
favourable regime established by HGAs
Regulatory
facilitated by HGAs
Political risk
lGAs and HGAs provide a forum for co-operation and dispute resolution
Environmental
IFIs stringent requirements (including Equator Principles) met
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BTC/SCP: Risk Analysis (cont'd)
Conflict
common interest in success of pipelines
Countries:
Azerbaijan: export markets Georgia: cheap gas Turkey: allows tankers to bypass the Turkish Straits
SCP: contractual arrangements in place to ensure that a party cannot default upstream whilst its sister company benefits midstream and visa-versa
Azerbaijan and Turkey have taken 25% and 6.7% shareholdings in BTC;
Azerbaijan (via a commercial affiliate of SOCAR) has a 10% shareholding in SCPC
IGAs and HGAs attempt to establish a fair balance between all parties
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