Jtb Steps on the Indonesian

FEATURES

JTB STEPS ON THE INDONESIAN GAS LATHAM & WATKINS, INTERNATIONAL LEGAL COUNSEL TO THE SPONSOR AND THE BORROWER IN THE FINANCING OF THE JAMBARAN-TIUNG BIRU PROJECT, PROVIDES AN OVERVIEW OF THE DEAL AND INSIGHT INTO SOME OF ITS NOTABLE FEATURES. BY CLARINDA TJIA-DHARMADI, PARTNER, TIM G FOURTEAU, COUNSEL, AND MEREDITH STRIKE, ASSOCIATE.

The Jambaran-Tiung Biru Project (JTB Project) is 315m standard cubic feet per day of raw among the largest upstream oil and gas projects gas, the designing and installing of gas to reach financial close in Indonesia in the past processing facilities with a maximum capacity decade, and marks several important milestones of 330m standard cubic feet per day and the for project financings in the region. development of gas flow lines from the wells The limited recourse project financing to the gas processing facilities and sales gas utilised a trustee borrowing structure (TBS) and pipelines from the gas processing facilities to is the first project financing in the region to the Gresik-Semarang pipeline. comprise conventional interest-bearing tranches PEPC and PT Pertamina EP (PEP), a wholly- with Islamic financing tranches. owned subsidiary of Pertamina, are sponsoring It is also the first limited recourse project the development of the JTB Project (though financing to feature a subsidiary of Indonesian PEP is not a party to the financing). PEPC will state-owned oil and gas company PT Pertamina operate and maintain the JTB Project, including (Persero) (Pertamina), namely PT Pertamina EP the gas fields, pipelines and gas processing Cepu (PEPC), as the anchoring sponsor. facilities. Containing extensive Indonesian participation PEPC and PEP own 92% and 8% of the unit throughout the structure, it is also the first oil interests in the unitised JTB field, respectively, and gas project financing in Indonesia to be and will share a proportionate amount of supported by an all domestic offtake, with no project revenues, capital costs and operating government support, solidifying the trend set expenditures. by the 2017 Tangguh Expansion Project TBS Apart from the offtake arrangements, under financing, which similarly featured a relatively which Pertamina undertakes to purchase all gas high degree of domestic involvement. production of the JTB Project on a 90% take-or- Before the 2017 Tangguh Expansion pay basis over the entire project life, Pertamina Project TBS financing, most large-scale oil indirectly holds a 100% unit interest in the JTB and gas projects in Indonesia were financed Project via its subsidiaries. primarily on the basis of export sales with The JTB Project secured more than US$1.84bn international banks. In contrast, the JTB in debt commitments, split into conventional Project is underpinned entirely by domestic and Islamic finance tranches. Each of the sales and financed by both domestic as conventional and Islamic finance tranches well as international financial institutions, consists of a 10-year tranche and a 15-year demonstrating the increasingly important role tranche. of local banks in major project financings in the The lender group comprises both republic. international and domestic financial institutions. The international banks Project overview participating in the conventional tranches The JTB Project involves the development of include two Malaysian banks, CIMB and proven gas reserves, as well as the construction Maybank; two Japanese banks, MUFG and and operation of a gas processing facility and Sumitomo Mitsui Banking Corporation; one pipelines. It is located in the unitised Jambaran- Chinese bank, Bank of China; one Singaporean Tiung Biru field (JTB field) in Bojonegoro bank, DBS; and one Italian bank, Intesa Regency, East Java Province, Indonesia. Sanpaolo. The JTB Project is supported by gas sales of up The domestic banks participating in the to 192 million standard cubic feet per day under conventional tranches comprise three state- a long-term, fixed-price and fixed-volume take- owned Indonesian banks – Bank Mandiri, or-pay gas sales agreement with the offtaker, Bank Negara and Bank Rakyat Indonesia Pertamina. Project completion is scheduled to – and one private Indonesian bank, Bank occur in 2021. BTPN. MUFG (Malaysia) Berhad participated The development scope covers the drilling as Wakala investor for both Islamic finance of six development wells that will produce tranches.

Reproduced from Project Finance International September 11 2019 © Refinitiv

PFI 656 Pages 54-56 reprint.indd 52 30/09/2019 14:21:35 JAMBARAN-TIUNG BIRU

Trustee borrowing scheme for future financings in Indonesia and the First developed and employed by Pertamina region. and its production-sharing contractors in • Pertamina subsidiary as sponsor – In addition to 1984, the TBS is a proven and tested financing the novel inclusion of Islamic finance tranches, structure with a track record of successful the JTB Project is the first TBS project to be implementation in Indonesia for over 30 years. sponsored by a Pertamina subsidiary rather than Lenders draw comfort from this well-established Pertamina. PEPC is a wholly-owned subsidiary structure, without the need for a traditional of Pertamina, established in 2005 to engage security package. in the upstream oil and gas sector, including Under the TBS, loans are repaid by a trustee exploration, exploitation and production. from an agreed portion of proceeds under PEPC is an experienced, creditworthy sponsor identified revenue contracts. Lenders look solely with an established track record of oil and gas to this source of debt service for payment, project development in Indonesia, and PEPC with no recourse to the project and no security is considered to have strategic importance to interest in the project assets or contracts. Pertamina. The credit aspects of the JTB Project The trustee (HSBC Bank USA, i n the case are considerably enhanced by PEPC’s provision of the JTB Project) is the borrower under the of robust contingent support. PEPC’s position as loan agreements with the lenders, and debt sponsor in the JTB Project provides a basis for service payments are made from trust accounts other Pertamina subsidiaries to play major roles or accounts held in the name of the trustee in future TBS financings. on trust for the lenders and PEPC as the trust • Loans with multiple tenors, Day 1 IRS beneficiaries, in New York. hedging – The JTB project is among the first In the JTB Project, Pertamina as offtaker will TBS financings to feature loan facilities with pay PEPC’s portion of the gas and condensate different tenors and day-1 interest rate hedging. revenues to the trust accounts directly. These Specifically, the JTB project includes 10-year revenues will be paid by the trustee to the tranches and 15-year tranches, with several lenders for repayment of principal and interest banks separately procuring political risk (or fixed investment return in the case of the insurance coverage to participate in the 15-year Islamic finance tranches). This source of debt tranches. The borrower hedged 50% of its Libor service functions as the primary security for the exposure shortly after financial close, which lenders. is uncommon for TBS financings where Libor risk exposure has often been fully assumed by Notable features projects. • Islamic finance tranches– The JTB Project is • Domestic offtake and bank participation – In the first limited recourse project financing in addition to the milestones described above, the region to include Islamic finance tranches the JTB Project financing is noteworthy alongside conventional interest-bearing for its relatively high degree of Indonesian tranches. The JTB Project’s Islamic finance participation in the offtake and project debt. tranches are based upon a Wakala structure, The JTB Project financing is the first oil whereby the principal (the muwakeel) and gas project financing to be supported contributes capital to the agent (the wakeel) exclusively by domestic sales, with no to transact on its behalf when investing in an government support, and demonstrates the identified asset or business. international bank market’s growing comfort The economics of the conventional tranches with domestic revenue risk, confirming the are substantively mirrored in the Islamic trend set by the 2017 Tangguh Expansion tranches. Under the Wakala structure, the Project, which was primarily financed on the investors mandate the trustee to invest amounts basis of sales to PLN. advanced by them in the identified business, ie, Before 2017, most large-scale oil and gas the engineering, procurement and construction projects in Indonesia were underpinned contract and the gas sales agreement. The almost exclusively by export sales. Further, trustee then sub-delegates this agency role the participation of four Indonesian banks to PEPC, which receives the funds from the underscores the growing comfort of the investors and injects them into the JTB Project. domestic banking sector with project financing. The Wakala investors specify an expected profit rate, which is benchmarked to Libor and Conclusion subject to an applicable margin. The principal As the first limited recourse project financing of each investment is redeemed by the trustee in the region to feature conventional interest according to a pre-determined schedule, which mirrors the principal repayment schedule under the conventional financing agreements. The inclusion of Islamic finance tranches alongside conventional tranches in the JTB TBS is a proven and tested financing structure with a Project reflects the growing role of Islamic track record of succesful implementation in Indonesia financing in South-East Asian projects. The project’s Wakala structure will serve as a model for over 30 years

Reproduced from Project Finance International September 11 2019 © Refinitiv

PFI 656 Pages 54-56 reprint.indd 53 30/09/2019 14:21:35 FIGURE 1 - JTB PROJECT’S TRUSTEE BORROWING SCHEME

Sales proceeds Gas after deduction Utilised JTB sales Pertamina of Gol FTP (”A”) Trustee Field (as offtaker) (offshore)

FTP entitled PEP’s share of SDS (PEPC’s share of by Gol remaining sales remaining sales proceeds (8% of A) proceeds, 92% of A) Domestic PEP’s share of Fund providers OPEX, cost, Paying Agent recovery etc (offshore/onshore)

Gol Net proﬁts for PEP’s share of OPEX, cost, (FTP) PEP and Gol recovery etc

Net proﬁts for PEP and Gol

bearing tranches alongside Islamic finance It is a critical part of Pertamina’s gas value tranches as well as a Pertamina subsidiary as chain, supporting power plants and industrial sponsor and multi-tenor loans, and the first oil end-users in East Java. Given the value of the JTB and gas project financing to be supported by Project to the Indonesian economy, the Indonesian an all domestic offtake with no government government has justifiably, and unsurprisingly, support, the JTB Project is a landmark financing designated it as a National Strategic Project. that will serve as a template for other oil and Latham & Watkins represented PEPC as gas projects in Indonesia. sponsor and HSBC USA as trustee borrower. It will bring employment and gas needed Milbank was the international legal counsel to for Indonesia’s national energy plan, and spur the lenders. UMBRA Strategic Legal Solutions domestic consumption – at least 40% of the was Indonesian legal counsel to PEPC and engineering, procurement and construction Ali Budiardjo Nugroho Reksopdiputro was contract will utilise domestic content. Indonesian legal counsel to the lenders. n

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