"The Omani government has been a leader in taking a grown up stance on projects like this." Andrew Rae, Trower & Hamlins, 2003

The Oman LNG project in Central Oman will take natural gas from Petroleum Development Oman's (PDO) upstream gas complex at Saih Rawl, and will supply gas to the Oman LNG Qalhat Project near Sur, where it will be transported to different European, Asian and Northern American markets.

Inaugurated on 1 December 1999, the plant was completed ahead of schedule and for US$1.25 billion- around 20 per cent less than originally budgeted for. In June 2001 the project had achieved financial completion, and, by the start of December 2002, 12 banks and a number of credit agencies had signed on to refinance it with a US$1.3 billion term loan facility and US$64 million of a Debt Service Letter of Credit Facility. The refinancing which will allow the development of a third train at the Oman LNG plant.

Paving the Yellow Brick Road

In 1989 and 1991 significant volumes of non-associated natural gas- gas that is not found in crude oil- were discovered in Central Oman. A year later Shell carried out a preliminary feasibility study on establishing an LNG project. It was greenlighted by the Government of Oman, and a MoU was put together between Shell and the Omani Government.

The planned output would be over 900 million cubic feet per day of gas from Petroleum Development Oman’s (PDO) gas plant in central Oman, transporting it 360 km to a liquefaction plant in Qalhat near Sur. The gas would then be transported in liquid form to long-term customers around the world via a fleet of cryogenic tankers.

In June 1993, shareholders’ agreement between the Government of Oman and other private shareholders was signed. In 1994 Shell and the Government of Oman created Oman LNG LLC, Oman LNG’s (OLNG) operator.

In late November 1997, 27 Arab and international banks financed a deal to fund a US$2 billion project finance facility for the 6.6m tonnes/yr capacity Oman LNG project. The multi-tranche package included facilities of up to 12.5 years. Some of the loans were guaranteed by export finance agencies from the EGCD, Italy’s SACE,  the Netherlands’ NCM, and the US EXIM bank.

Although customers can transport liquefied natural gas to terminals dotted around the globe, in late December 2002, there was news that the Omani government was looking at planning to raise US$660 million from international and local banks to buy four LNG ships in 2003. Oman LNG was looking to secure the supply route because it would guarantee LNG delivery and ensure that products would find customers even if there had been problems with the original LNG buyers.

In the joint venture, Omani government had a majority 51 per cent stake in the company. Shell owned 30 per cent, Total 5.54 per cent, Korea LNG (Kogas) 5 per cent, Partex from Portugal 2 per cent, and Japanese companies Mitsubishi and Mitsui, who both took a 2.77 per cent share. Japanese company also has a 0.92 per cent share.

"It is a condition for most LNG projects that the government has a majority stake," says Khali Al Salmi, Head of Structure and Project Finance at the Ministry of Oil and Gas in Oman, to IJ. "Shell and Total were very supportive of our project because they’ve been partners [in Oman] for a long time. Kogas and the Japanese companies were also very happy [with becoming part of the consortium].

SPA heaven

Oman LNG had signed its first take or pay SPA with Kogas as early as 1996. The deal was for 4.1 millions of tonnes per annum (mpta) on a 25 year contract, starting in April 2000. In November of the same year the Government of Oman and Oman LNG signed a gas supply agreement.

In October 1998, Osaka Gas of Japan signed a SPA for 0.7mtpa of LNG over a 25 year stretch starting November 2000.

Indian company Dabhol Power Company (DPC) would sign on the dotted line, agreeing with the company for 1.6 mtpa of LNG, something that would last 20 years, commencing early 2002.

By the time the first production train was ready for start-up in December 1999, three long-term SPA customers had been signed up, and in February 2000 the first LNG was produced. In May of the same year the second LNG production train started up.

But the Dabhol deal was not without its problems. OLNG’s chairman, Salim bin Mohammed Shaban, admitted that his company had invoiced Dabhol for gas it did not take after the construction of the LNG terminal in Maharashta, India, was stopped. DPC had run into trouble, mainly due to the remarkably swift collapse of Enron, and decided not to lift any LNG. OLNG reported in its annual report of 2002 that the LNG had been sold to European buyers.

Spot sales have been successful, with Oman LNG demonstrating 1-1.6 mtpa in the spot market over the last few years. "We’ve had huge short-term sales," says Al-Salmi, citing a recent deal for 0.7 mtpa deal with Shell Western over five years in 2002. "Some of our spot sales go to all corners of the world".

In June 1999 an NGL agreement had been signed with Total of France (formerly TotalFinaElf), to whom they sold 130 tonnes of Natural Gas Liquids over an 18 month period starting April/May 2000.

It was in the same year that OLNG got their first short-term SPA. In November 1999 Coral Energy bought two 125,000 cubic metre cargoes- each for delivery during 2000.

In 2000 itself, Spain’s Enagas also signed an LNG deal for 17,125.000 cubic metre cargoes each delivery between late 2000 and early 2002.

Gas de France bought 9 LNG Spot cargoes in June 2002, and in November last year Spanish company Union Fenosa signed up for 1.8 billion cubic metres of LNG, which will be delivered 2004 to 2005, on the Omani-owned ship the Lakshimi, the first of its kind to be owned by the Sultanate’s government.

In January 2003, a short-term LNG sale was signed with Tractebel. In June of the same year, OLNG penned a short-term deal that would supply shareholder Mitsubishi with 180,000 MT of NGL over a period of two years.

Mr Al-Salmi also informed IJ that there have been spot sales to Spanish and US companies too, as well as other buys from the spot shelf by Total and Shell. "Excess capacities are being utilised too."

The Head of Structure and Project Finance at the Omani Ministry of Oil and Gas has no worries that all the LNG will be sold, despite the competition from other LNG projects in Nigeria and Qatar. Although he admits there are a lot of producers now selling their product on the LNG market street, "the market’s opening in Europe, and it’s increasing in Spain and Italy. The USA’s got a need for it. The Far East’s picking up- it seems to be coming out of its recession. Japan’s moving from nuclear and gas, and Taiwan and China are interested. There is more demand for gas."

Refinancing

Oman LNG, already with two trains functional, was looking to construct a third one. Oman LNG, at the start had raised US$2 billion of limited recourse facilities representing 80 per cent of the original project cost of US$2.5 billion. From their original raising it only utilised US$1.35 billion due to lower than projected costs.

"The project was completed on time and the capital costs were much lower than the original financing base case," says Bill Pierson, head of project finance at Shell. He has been heading the division for the last three years.

Not only that, but its SPA numbers were excellent- something that would be favourably looked on by lenders.

"There was a lot of positive feedback from banks when OLNG commenced the refinancing process," said Pierson, "OLNG were looking to take advantage of an extremely positive credit story and achieve better terms (e.g. longer tenures, better pricing, and more operating flexibility."

However, 9-11 would sent jitters through banks thinking of lending money to Middle Eastern projects.

"We had to focus on banks being comfortable doing the deal and that it would sell in the market as the syndication markets were a bit jittery and uncertain," Pierson says, "Banks were very concerned underwriting risk even though the underlying credit was extremely strong."

Oman LNG postponed the deadline for bids for the lead arranging mandate. There was a rumour that the Oman LNG project would not go ahead. According to Pierson, 9-11 delayed the refinancing, but never totally deadened the deal. Luckily for Oman LNG, it was not the only project put in jeopardy by the attacks. There were also projects in Abu Dhabi and Kuwait that were having problems. Banks involved in the lending process "didn’t seem to have a clear picture on how [they] were going to syndicate a loan and other banks’ appetites for deals in the region" he says to IJ.

In November 2001, a syndicate of ANZ, Arab Petroleum Investment Corporation, Arab Banking Corporation, Credit Agricole Indosuez, Credit Lyonnais, Gulf International Bank, HSBC, Bayerische Hypovereinsbank, AG Mizuho (comprised of Mitsui and Industrial Bank of Japan, and Sumitomo came on board as the Lead Arrangers to underwrite the term loan and the LC facilities. Citibank advised Oman LNG on the deal, but surprisingly was not a Lead Arranger.

The rest of the financing was a success, with the time between mandating the lead arrangers to executing all the facilities and agreements and other related finance documents just under a month.

On 9 January 2002, the Oman LNG LLC announced the signing of a US$1.3 billion Term Loan Facility and a US$ 64 million of a Debt Service Letter of Credit facility. These were to refinance the company’s original debt raised in 1997 to fund the plant’s construction.

The loan is over 16 ½ years with an 11 years’ average life, and was given highest true project finance rating outside the USA, UK, Australia, and Canada from two well-known credit agencies. Citigroup acted as Financial Advisors, and Allen & Overy acted as Legal Advisors to OLNG.

In 2002 Trowers & Hamlins acted as local counsel to Mitsubishi and the other lead arrangers on the refinancing deal. Slaughter and May was international counsel for OLNG.

Loans for Oman LNG were guaranteed or insured by the EGCD, Italy’s SACE, the Netherlands’ NCM, and the US EXIM bank. A commercial bank facility comprises the rest of Oman LNG’s financial facilities.

Train 3

In 2001, buoyed by high volumes and an increased oil & gas price, the company saw profits leap to over US $800 million. Profits should be up in the billions very soon indeed, particularly if Train 3 opens at the predicted time of 2006.

Production was up too, with Oman LNG loading a total of 96 LNG ships- 13 ships more than their target of 96 ships in 2001. In 2002 that number increased to 105 ships- or 6.5 million tonnes.

The capacity of Oman LNG, with the added 3.3 mtpa that a third train would give it, would see capacity widen to about 10 mtpa.

Union Fenosa in the already-discussed SPA bought half of train 3’s first year output, and the balance will be marketed in Europe, the Far East, and the USA.

Not only that, but the Omani government are putting a lot of their efforts behind this LNG project. At the time of writing, Oman LNG are in the process of borrowing US$600 million from a consortium that includes Mitsubishi, who will have their loan guaranteed by the JBIC to buy two ships, which will increase their fleet to four. "Two will play a role in the spot market with Oman LNG, and then two ships will help train 3’s off-take of Union Fenosa" says Al-Salmi.

"The future is rosy", says Rae on location in Oman, where he was trying to get the loan guaranteed for Mitsubishi.IJ