VOL. XLV

No 22

3 June 2002

 

ENERGY FINANCE

 

 

Apicorp Reviews Prospects For Financing Arab Energy Projects

 

The question of how to finance investments totaling some $84bn required for the oil, gas, refining and petrochemicals sectors in the Arab countries over the period 2002-06 was raised in a paper presented by the OAPEC-sponsored Arab Petroleum Investments Corporation (Apicorp) to the 7th Arab Energy Conference held in Cairo on 11-14 May (MEES 27 May). Apicorp notes that although investments in Arab energy projects are rewarding, the region’s ability to remain attractive is a function of political and international factors. In any case, Apicorp maintains that the Arab countries are becoming more conscious of the need to allow the private sector – local or foreign – to invest directly in the oil and gas sector or to participate in joint ventures with the national oil companies to develop the sector. The entry of international oil companies (IOCs) into the oil and gas sector will help attract international banks to fund projects through the issue of bonds or other facilities.

  

Apicorp expects that $35bn, or 42% of the total investment requirement in 2002-06, will be raised through project financing as outlined below:

 

·         Expanding Production Capacity: About $2bn, or 10% of the total project investment requirements of $21bn over the five-year period, will be in the form of project financing. Apicorp notes that capacity expansion projects are usually self-financed by the national oil companies. However, as more IOCs enter into joint ventures with national oil companies, the tendency to resort to commercial financing will increase.

·         Gas Projects: About $19bn, or roughly 55% of total project investment requirement of $36.4bn, will be raised through project financing (see Table 1). Apicorp points out that local gas projects in individual countries are usually self-financed, and only export-oriented projects with foreign participants are commercially financed.

·         Refining Projects: About $2.5bn, or roughly 40% of total project investment requirements of $7.2bn, will be raised through project financing (see Table 2). Again Apicorp notes that investments in domestic oil refining are usually self-financed and only export-oriented projects will resort to commercial financing.

·         Petrochemicals: About $11.2bn, or roughly 60% of total project investment requirements of $19.8bn, will be raised through project financing (see Table 3). With the exception of some small-scale projects which are intended for domestic markets, most petrochemical projects are large and are export-oriented, and these are considered suitable for project financing.

 

Based on the experience of the last five years, Apicorp projects that  Arab financial institutions are expected to raise some $10-15bn, or 30-40% of the total $35bn that are likely to be funded through project financing. This low ratio is due to the limited capital available to local banks and the lack of sophistication of regional capital markets. As for financial instruments, Apicorp notes that in the 1980s lending was in the form of sovereign loans to the region’s governments. This was followed in the early 1990s by corporate finance loans, while in the mid-1990s project finance took over.  

 

Demand for project financing has increased with the growing role of the private sector in oil and gas projects and the formation of joint ventures. Project bonds have been issued to fund major projects such as Ras Laffan LNG in Qatar − but this was a one-time affair. Apicorp says that the guarantee of export credit agencies is necessary for financing projects. Four Arab regional financial institutions – Apicorp, Arab Banking Corporation, Gulf International Bank and Arab Investment Company – have played an active role in recent years in organizing loans for project financing. As for participation by international financial institutions, Apicorp is concerned that these banks tend to reduce their participation when there is a political or economic crisis, such as the Asian economic downturn of 1997-98. In such circumstances projects are postponed or developers have to pay high fees and rates to attract international banks.

  

Looking ahead, Apicorp notes that international banks will continue to play an important role in financing regional projects because Arab financial institutions have limited capabilities and resources to meet the funding needs of the future. At the same time it warns that dependence on international banks is not risk free. To address this situation Apicorp calls for the evolution of Arab banks along the following lines:

 

·         Merger of Arab Financial Institutions: The relatively small size of Arab banks is a source of weakness and their undercapitalization could deter them from competing with international banks. So there is a case for the merger of some Arab institutions, which will improve their ability to compete for projects. With a broader capital base, the enlarged banks would be in a position to operate not only in their home country but in other Arab countries.

·         Development of Islamic Banking: For Islamic banks and institutions to play a role, they should have the means and willingness to enter into long-term deals and be ready to commit larger amounts of funds than at present.

·         Development of Arab Capital Markets: The scope of expanding regional capital markets will remain limited until reforms are introduced which provide for an increase in basic information on companies in the region, transparency and investment tools. This could help make capital markets more liquid and create conditions for the issue of IPOs.

 

In a comment on the Apicorp paper, the CEO of National Bank of Kuwait, Ibrahim Dabdub, points out that because Arab markets are still not adequately developed and governments are reluctant to be more transparent, the issue of bonds to fund projects may not be feasible at present. Some companies in the Arab region would rather deal with banks with limited facilities because they fear transparency and do not wish to be rated in the prevailing difficult political and economic conditions. In particular, they fear that a negative rating could be expensive and result in having to accept less favorable terms when they go out to borrow in the market.

 

Table 1

Gas Projects In Arab Region To Be Implemented In 2002-06

 

 

 

 

 

 

Capacity

    Cost

    Start

 

Country

Company

 

Location/Project

 

(Mn Cu Ft/Day)*

    ($Mn)

      Up

 

UAE

ADMA-OPCO

Umm-Shaif -  Gas Extraction

600

1,200

2005

 

 

ADMA-OPCO

Zakum         - Gas Extraction

210

100

2004

 

 

Atheer

Habshan      - Gas Production

1,350

1,300

2005

 

 

Atheer

Asab            - Gas Extraction

743

800

2005

 

 

 

 

 

 

 

 

Jordan

Private Company Being               Jordan, Syria, Lebanon - 370km Gas Pipeline

Formed

300

300-400

2004

 

 

 

 

 

 

 

 

Algeria

Sonatrach/BP

In Salah -  Development of 7 Fields

900

2,700

2004

 

 

Sonatrach/BP

In Amenas - Gas Treatment

700

900

2004

 

 

Sonatrach

Hasi R’Mel - Gas Extraction

2mn t/y LPG

950

2005

 

 

Sonatrach/Petrocanada

Tinrhert - Gas Development

400

500

2004

 

 

 

 

 

 

 

 

Oman

Oman Gas

Al-Ghalilah  -Third Train

4mn t/y

980

2005

 

 

 

 

 

 

 

 

Qatar

Ras Gas

Ras Laffan – Third & Fourth Trains             

  each 4mn t/y

2000

2004-06

 

 

Qatar Gas

Ras Laffan – Expansion of Train Capacity

1.5mn

90

2004

 

 

Qatar Gas

Ras Laffan- Fourth Train

4.8 t/y

1,000

2005

 

Qatar

Dolphin

North Field - Gas Extraction

2000

3,500

2005

 

 

Qatar Petroleum

North Field - Gas Extraction

1,750

1,600

2005

 

 

Qatar Petroleum

Bu al-Hanin - Gas Extraction

300

400

2004

 

 

Qatar Petroleum/Sasol

Ras Laffan - GTL

34,000 b/d

800

2005

 

 

 

 

 

 

 

 

S.Arabia

Gas Initiative

Gas Extraction – Three Packages

each 500-1,500

25,000

Under         Negotiation

 

 

 

 

 

 

 

Syria

Syrian Petroleum Company

Central Province - Gas Production

150-200

200

Under     Study

 

 

 

 

 

 

 

 

Libya

NOC/ENI

West Libya - Gas Production

1,000

4,500

2004-05

 

 

 

 

 

 

 

 

Egypt

EGPC/Union Fenosa

Damietta - Gas Train

5mn t/y

1,000

2004

 

 

EGPC/BG/Edison/Gas de France

IDKU - 2 Gas Trains

each 3.6mn t/y

2,000

2005

 

 

EGPC/BP/ENI

IDKU- Gas Train

4mn t/y

1,500

2006

 

 

EGPC/Shell

Damietta - Gas Train

4mn t/y

1,000

2006

 

 

             -

GTL

80,000 b/d

1,500

2006

 

 

Gasco/BP/ENI

Port Said - Production of LPG

1,100

300

2004

 

 

Orient Gas Company

'Arish-'Aqaba - Export of Egyptian Gas

300

300

2004

 

______________

* Unless otherwise stated.

   Source:  Apicorp paper to the 7th Arab Energy Conference, Cairo, 11-14 May.

 

 

Table 2

Refining Projects In Arab Region To Be Implemented In 2002-06

 

 

 

 

 

 

 

   Cost

    Start

Country

Company

 

Location/Project

 

Capacity

   ( $Mn)

         Up

UAE

Takreer

Ruwais - Base Lube Oil Production

300,000 t/y

400

2005

 

 

 

Ruwais - Umm al-Nar Refinery Upgrade

-

500

2005

 

 

 

 

 

 

 

 

Bahrain

Babco

Sitra - Refinery Upgrade, Hyrocracker

40,000 b/d

600

2005

 

 

 

 

 

 

 

 

Oman

Oman Refinery

Sohar - New Refinery

75,000 b/d

870