Rising costs and looming competition from US gas exports has gone some way towards dampening the enthusiasm of LNG producers in Australia in recent months, but that has not completely stopped the flow of capital into new production ventures. Australia still has an ideal position as a reliable, efficient and convenient LNG exporter to Asian markets further north.

There are more than 20 LNG projects at varying stages in Australia, from conceptual design to approaching first gas. The Australia Pacific LNG project is one of several projects under development and one of three coal seam gas to liquefied natural gas ventures to reach financial close. The other two were financed using blunter methods, tapping sponsors’ balance sheets for their entire capital expenditure.

Conversely, APLNG is the first limited recourse debt financing for an unconventional liquefied natural gas project. Developers have had little difficulty in accessing project debt for conventional LNG projects, but APLNG provides a model for other sponsors seeking to attract project lenders to a less well-known type of gas supply.

“This was the first coal seam gas LNG project to be project financed and still the only one,” says one participant in the deal. “There were various things we had to consider to take into account the perceived risk profile, in contrast to conventional gas to LNG. The biggest area of challenge from a lender’s perspective was looking at the technical characteristics of a coal seam gas project, because there are ongoing capital costs for the life of the project.”

“Whereas for a conventional gas project you generally have one or two huge gas fields and you have an upfront capex to put in your wells, in coal seam gas, the gas is embedded within coal seams across vast gas fields and so in order to get the gas out you have to drill a lot wells. There are over 10,000 wells to be constructed across the length of project, which means that there is constant capital expenditure.”

The financing supports the construction of an 18 million tonnes-per-year liquefaction plant on Curtis Island, off Queensland’s coast and the development of associated facilities, including a 450km pipeline from the coal seam methane reserves in central Queensland. The sponsors, Conoco Phillips, Origin Energy and Sinopec, are funding the upstream and midstream elements on balance sheet.

The sponsors closed the financing in November 2012 through a mixture of ECA and commercial bank debt. US Ex-Im is providing a $2.879 billion direct facility on the back of Bechtel’s role as engineering, procurement and construction contractor, as a loan with a tenor of 15 years and 10 months. Chexim is also providing a $2.759 billion direct facility with a tenor of 16 years and 10 months, on the back of Sinopec’s role as both equity sponsor and offtaker

The financing has an umbrella common terms agreement and separate facility agreements for the different tranches. The ECAs participation allowed the sponsors to attract funding from a wide pool of lenders and persuaded banks to go out to a longer tenor.

Sixteen lenders – ANZ, BBVA, BOC, BOSI, BTMU, CBA, DBS, DNB, EDC, HSBC, Mizuho, NAB, SMBC, Societe Generale and Westpac – are providing $2.875 billion in debt, which has a tenor of 15 years and 10 months. Out of the sixteen banks, ANZ has the largest ticket, at $350 million, followed by EDC and Westpac, which wrote $300 million tickets each. Another four banks – CBA, Mizuho, NAB and SMBC –have ticket sizes of $250 million each, and then HSBC, which has a $200 million position and BTMU, which has a $150 million ticket. BOSI has a ticket of $125 million and four lenders – BBVA, DBS, DNB, Societe Generale – have $100 million tickets each. Bank of China has the smallest ticket, at $50 million.

The pricing, although unconfirmed by the sponsors, is rumoured to start at 250bp pre-completion before stepping up 25bp every 4 years to 325bp after operations. Bank fees are roughly 200bp. Rounding off the financing is $4.393 billion in equity from the sponsors, which are also providing recourse to their balance sheets during the construction phase.

The APLNG transaction was not Australia’s first-ever LNG project financing, but it was the first-ever limited recourse financing to support a coal seam LNG project, and provides a possible template for other sponsors seeking to improve return on equity on LNG projects and to reduce the strain on their balance sheets when raising funding for less conventional projects.

The deal was only made possible through the support of a wide syndicate of banks, but also the strong ECA presence and offtake agreements that were in place before the sponsors approached the bank market at the start of 2012. Sinopec’s support, in particular, was crucial in attracting Chinese funding. The Chinese energy giant is said to be in talks about increasing the size of its stake in the project, by using its Arrow Energy joint venture with Shell to buy additional project equity from Origin.