MIDDLE EAST ECONOMIC SURVEY …a weekly review of regional Energy, Finance & Politics. The Impact Of The Credit Crunch On Energy Project Finance By Melanie Lovatt, Finance Editor, Middle East Economic Survey. The Credit Crisis.
MIDDLE EAST ECONOMIC SURVEY
…a weekly review of regional Energy, Finance & Politics
The Impact Of The Credit Crunch On Energy Project Finance
By Melanie Lovatt, Finance Editor,
Middle East Economic Survey
It’s impact on all bank lending, and even on energy project finance, is profound.
But why can dodgy US home loans impact an energy project in, for example, Saudi Arabia?
Especially if some of the failed institutions were not big project finance providers in MENA?
Global interbank lending ground to a halt driving up interbank offered rates (Libor, etc). This cut complex links between chains of banks.
Banks became reticent to lend because they faced losses or feared their fellow banks would fail
Customers took deposits out of banks, further reducing the amount they are able to loan – laws govern percent of deposits that can be loaned.
These banks (mostly European and Japanese, with a few notable US players like Citibank) have provided the bulk of energy project finance over the last decade…
…Awash with liquidity (2004-early 07), they were aggressively competing for business
As bankers were eager to take on Gulf risk due to the climbing oil prices and strong economic outlook for the region
Margins were so thin that some bankers were shunning deals citing low returns that even undercut corporate financings (which have shorter pay back period).
They also complained about reduction in covenants (completion guarantees, etc).
And the ‘commoditization’ of deals – sign the term sheet, turn it around, onto the next one…
…but the old axiom – to be careful what you wishes for – is applicable here.
Higher margins were on the horizon, but so was the credit crunch.
But in late summer 07-early 08 Gulf project finance appeared shielded as financings proceeded in orderly manner:
Oman – Sohar/ORC $1.37bn from banks
Saudi – NCP petchem project $1.8bn, $10bn Kayan petchem project was closed.
Qatar – Qafco 5 fertilizer project $1.6bn
And Emirates Aluminum, Fujairah 2 IWPP were funded
But there were hopes that with high crude prices, energy project sponsors would continue to attract funding
With Bear Stearns’ (founded 1923) collapse and fire sale to JP Morgan.
But deals continued to get done, Yemen LNG secured funding, QP completed financing for Ras Laffan C power project at (100-160 bps), also Nakilat LNG ships (110-125 bps).
Margins had edged up and ‘Clubs’ were favored over underwrite/syndicate.
Anyone who had thought energy companies would ride out the ‘hiccup’ had to admit that the impact would be far-reaching and ALL COMPANIES looking for a loans would be impacted by crisis, which was now stifling global economic growth.
Abu Dhabi Water & Electricity Co (ADWEA) $2bn Shuweihat S2 underwriting morphed into 20-plus year loan to a 10-month $1bn bridge loan.
Hasdrubal (gas – Tunisia) using Afr. Devel Bank, local banks, international bank component reduced
Market events led to material adverse change clause (MAC) and market disruption clause (MDC) discussions.
For short term loans, banks are servicing regular customers, but taking on little new business
With capital injections around world, Libor rates (and Gulf interbank rates) had eased slightly from record highs seen in Sept.
But changes this month to the Bush Administration’s plan to buy distressed assets caused more nervousness, and rates had stopped declining.
Depends on how much more money banks lose, success of bailouts and capital injections. And the impact this has on confidence.
Confidence may be helped if Hasdrubal, Shuweihat, get their financings completed.
But there will be some important changes…
A smaller bank group will emerge, with increased government ownership, strategy may be different.
ECAs & multilaterals will be increasing providers of PF (ie JBIC can provide up to $3bn on Ras Azur IWPP, provided $2.5bn to PetroRabigh)
Local banks, Islamic banks relatively unaffected (exceptions GIB, ABC) but they are small compared to internationals
Margins higher, tenors shorter, fine print scrutinized
Sponsors will need to increase equity investment
Capital market funding, when markets reopen, will increase
Aforementioned Hasdrubal, Shuweihat S2 delayed, also:
Bids for Saudi IWPPs (SEC Rabigh, Marafiq Yanbu)
Bids for multi-billion ($15bn) Saudi oil refineries (JVs Saudi Aramco, ConocoPhillips and Total)
Where possible sponsors are deferring projects, and refinancings. Although regional gas project – Dolphin must refinance $3.5bn bridge loan in 09
66% world’s crude oil, only produces 37%
46% of natural gas, only produces 17%, and was counting on new projects.
For 2009-13 MENA proposed energy capital investment is $650mn. Partly due to credit crunch projects in progress are now 80% of this ($520bn), according to APICORP.
Saudi was proposing ($163bn) but 13% have been shelved mostly in the petchem sector
Iran needs $96bn but 30% postponed due to sanctions
Qatar was expected to need $76bn, but due to moratorium on North Field shelved projects (ie GTL) are now up to 37%
Oil investment will be:
Upstream $79bn, midstream $11bn, downstream $153bn
Gas investment will be:
Upstream $62bn, midstream $24bn, downstream $79bn
Power generation $112bn
This investment could fall dramatically:
If banks restrict lending over a long period
If the economic downturn is severe and lengthy (affecting oil consumption)
If oil prices continue downwards, and stay low for a protracted period
…Prices of raw materials used to construct these projects, such as steel, copper, concrete have fallen dramatically.
Project sponsors are already haggling with contractors for a reduction in price, and this could have a big impact on viability and help to counterbalance rising bank costs.
The interplay between the bank crisis, volatile crude oil price (which dropped by over half since it hit $147/B in July) and the shift in construction materials prices makes it very difficult to assess the outlook for energy projects in the years ahead.
There have been calls to hike infrastructure spending to reinvigorate economies, and have them better poised when they emerge from crisis, but it remains to be seen if GCC governments take on board this advice.