Financing of Downstream Projects in Oil & Gas Sector


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  • Financing of Downstream Projects in Oil & Gas Sector

    1. 1. FINANCING OF DOWNSTREAM PROJECTS IN OIL& GAS SECTOR Presented by Mr Girish Ghildiyal Chief Manager Finance, HPCL-Mittal Energy LtdNational Conference on Project Finance Management for Energy Sector by UPES Dehradun & ISPe India in 2010
    3. 3. Petroleum – Value Chain Upstream Midstream Downstream • Refinery processes• Exploration & crude oil to Production (E&P) • Transportation of produce different• Firms explore new oil and natural products hydrocarbon fields gas • Petrochemical• Discovered fields • Shipping plants developed and • Pipelines • Polymers, Plastics petroleum • LNG Terminals and other produced products
    5. 5. KEY CONSIDERATIONS- REFINING − Location − Inland - for domestic consumption − Proximity to demand centre − Inland Freight economics, refinery gate pricing formula ( TPP etc.) − Coastal –export oriented refineries/petrochemical complex − Proximity to demand centre & crude source − Logistic − Inland refineries- crude & product pipelines, rail transport − Coastal refineries – Ports ( Capable of handling VLCC), SPM, pipelines − Feedstock and Product prices depend on global demand supply situation
    6. 6. KEY CONSIDERATIONS- REFINING − Product Offtake − Inland refineries- Own marketing ( for OMCs/ refiners with marketing capability) ; Tie-up / offtake agreement with marketing companies (for standalone refineries) is crucial − Coastal refineries - Higher marketability( access to global market), hence lower offtake risk − Complexity − Measured by Nelson Index − Allows production of value added petrochemical products − Processing of cheaper heavy crudes , light/ heavy crude differential − Long construction time - change in market dynamics, project costs − Cost and Complexity of refinery is key in determining future profitability
    7. 7. KEY CONSIDERATIONS-PETROCHEMICALS − Location − Proximity to demand centre − Naphtha, the major feedstock is a traded commodity and obtained from refineries directly / imported − Proximity to other feedstocks like Gas ( c2-c3 ) − Logistic – proximity to port, roads, train ( Petrochemical products are solid/ liquid ); higher freight costs − Product Offtake – − Lag between movement in feedstock prices and product prices − tie-up with further downstream petrochemical units/ exporters/traders; − Market defined sale price ( vis-à-vis pricing formula for refinery products)
    9. 9. FINANCIAL EVALUATION Downstream projects − Part of company (balance sheet funding) − Better pricing − High management control − SPV − Risk mitigation − Other partners can provide additional expertise Debt: Equity – − D:E of 60:40 preferred; Equity through promoter contribution/IPO/convertibles etc. − FDI upto 100 % in refining, 49% if along with PSU Debt Service Coverage Ratio (DSCR) of around 1.5 GRM is analyzed as key parameter for profitability Cost per refining capacity , complexity Other incentives like VAT deferral, etc. Capability of marketing partner to offtake products
    10. 10. Chart of Regional Refining MarginsRegional refining marginsUS dollars per barrel BP Statistical Review of World Energy - 2009
    11. 11. LENDER CONSIDERATIONS Sponsors experience and capability to bear market risk and cost overruns Demonstrating marketing arrangement Demonstrating market demand cost competitiveness of the products Statutory and Regulatory approvals esp. w.r.t. land and environmental clearances Credit strength and experience of project sponsors Sponsor support undertakings Creation and enforceability of security Governance structures, information reporting and transparency Project technology and experience/capability of executing contractors Project operator’s technical expertise and credit strength Product marketing arrangements and credit strength of offtaker Price risk and hedging arrangements Reliable transportation arrangement for feedstock and products Financing is available for well structured projects oil & gas sector Quality and credit strength of project participants is important
    13. 13. RUPEE FUNDING Domestic currency Easy availability in adequate volumes − Available even at initial stages of construction/planning Flexibility in disbursements, covenants Long tenor Financing available for well structured projects Quality and credit strength of project participants is important Pricing linked to PLR of lead bank, sub-PLR loans possible Do not require compliance to equator principles Allow flexibility in cancellation of loan without penalty − Refinancing through ECB/ ECA of undrawn portion − Refinancing through internal accruals
    14. 14. EXTERNAL BORROWING (ECB) Governed by regulations of FEMA, RBI − Upto USD 500 mn p.a. can be raised under automatic route for meeting capital expenditure ; permission for additional amounts − Ceiling on all in cost is LIBOR + 500 bps Revenues in USD, most capital imports in USD; hence natural hedge for currency Lower all-in pricing ( due to saving of hedging cost) for refineries Interest rates linked to LIBOR − Lower interest rates compared to rupee loans − Option to convert to fixed rate through derivatives Tenors of upto 12 years also available Not as flexible as domestic lenders regarding covenants, prepayment In case of SPV funding , ECB available only when project is nearing completion Factors deciding pricing − Sovereign rating − Withholding tax
    15. 15. ECA Finance – Essentials Most OECD countries have a government sponsored Export Credit Agency (“ECA”) to support their export of capital goods ECAs provide insurance cover/guarantees to lending banks to mitigate both political and commercial risk entailed in export transactions Commercial banks structure cost-effective financing packages against ECA cover OECD Consensus guidelines dictate inter alia that ECAs may provide cover: − For up to 85% of the value of the eligible goods / services being exported from the country concerned; and − Local costs may be financed up to a value of 15% of the export content ECAs charge a premium for providing cover Fixed rate financing is available (Commercial Interest Reference Rate) Some ECAs provide direct lending
    16. 16. EXPORT CREDIT AGENCY ( ECA) Government sponsored Export Credit Agency (ECA)- support the export of capital goods and services Funding amount is function of the actual sourcing from the country of the ECA, hence country specific ECA financing is largely insulated from market volatility compared to ECB Interest rate options – Both fixed and floating rate options available with most ECAs Withholding Tax exemption in most cases Credit enhancement − ECAs extend guarantees representing a sovereign risk against which commercial banks structure financing packages. Guarantees are provided in return for the payment of a premium charge − commercial banks can bundle funding from multiple ECA’s , where sourcing of equipment is from multiple countries ECA’s funding visi-a-vis ECB − Lower interest rates − amount not a constraint − longer tenors − Tedious process for availing loan ( ~ 6-12 months) − High upfront payment, hence pre-payment not a good option
    17. 17. EXPORT CREDIT AGENCY ( ECA) Loan Agreement Canada Borrower Lender Japan Principal Repayment & Interest Germany DenmarkCommerc Goods & ial Services Guarantee / Contract Support Agreement Drawings for Contract Premium United States Payment China Application Exporter Documentation ECAs KEXIM/KEIC France United Kingdom Italy
    18. 18. DEBT FUNDING OPTIONS-COMPARISONInstrument/Feature RTL* ECB ECAAvailability Normal High Credit Country Rating Cos. SpecificTenor (years) 10-14 5-7 8-12Interest Rate Basis PLR LIBOR LIBORHedging Cost - High HighCommitment Fee Nominal High HighFlexibility in Drawdown High Low LowTypical Tie-up time 3-6 months 3-6 months 6 -12 months
    19. 19. OTHER SOURCES Notes/ Bonds − Domestic & Foreign currency − Various options like Zero coupon, deferred coupon, convertibles etc − Usually available at advanced stages of construction for SPV Project company IPO ( eg. Reliance Petroleum) OIDB (Oil Industry Development Board) funding − Interest rates linked to G-Secs − Tenors of upto 10 years at low interest rates − Disbursement mechanism governed by − OIDB loans to non-Navratna Oil Companies and Joint Ventures Companies, interest rates on case to case basis
    20. 20. RISK MITIGATIONType of Risk Risk Allocated to Mitigation MetricManagement Risk - Operating Risk Sponsor Experience/O&M contractor Sponsor ND Undertakings - WithdrawalPre-completion Risks - Land Availability Project Co/Govt. Notification/Sale Deeds/Lease EPC Contractor Fixed time, Fixed Price contracts - Time Overrun EPC Contractor - Cost Overrun Sponsor Equity & Debt Agreements - FundingPost-completion Risks - Feedstock Supply Feed Supplier/Project LD Provisions/Alternate sources Co. LD Provisions - Feedstock Tpt. Supplier/Transporter Requisite Approvals - Environmental Project Co. Penalties - Plant Availability O&M contractor LD Provisions - Evacuation Project Co./Off-taker
    21. 21. RISK MITIGATIONType of Risk Party Mitigation MetricMarket Risks -Off-take Project Co./Off-taker Suitable agreements Off-taker/Guarantor Credit Enhancement - Payment.Technology - Availability EPC Contractor Continuing Support EPC Contractor Guarantee, Warranty - Facility Design & Performance Project Co. Insurance - DamageFinancial - Interest Rate Project Co. Continuing Support Project Co. Guarantee, Warranty - Inflation - Fx Fluctuation Project Co. InsuranceForce Majeure Project Co. Insurances Back to back clauses of Agreements
    22. 22. Project Financing
    23. 23. What is PEF?Project Finance is financing to an existing company or a newly formedentity wherein lenders are satisfied with:− the cash flow projections as the primary source of repayment, and− the specific project assets (fixed assets, contracts) providing collateral for the loanA successful project financing is viewed:− by the client, as a financing structured with limited recourse to the sponsors and,− By the lenders, as having sufficient credit support through the financing structure and/or sponsors’ undertakings.Project finance transactions could include major expansions of existingfacilities or refinancing of existing term loans.
    24. 24. Project Risks Supply risk Market risk Infrastructure & Utilities  Availability, sourcing and  Demand/ supply situation  Access Roads transportation strategy/  Guaranteed offtake  Logistics (port, evacuation) flexibility  Price, demand, taxes  Water (Environmental  Waterflow risk impact)  Land (Social impact) Construction risk Technical risk Independent review EPC/ Project Management  Technology vendor, use of  Market demand approach proven technology  Project cost  Contractor (top tier)  Proven design  Environmental issues  LD (delays/ cost)  Train/ unit configuration  Guaranteed operational  Adaptibility to local parameters conditions
    25. 25. Project Financing Sponsor support Financing & Syndication Pre-completion Post-completion  Robust Capital structure  Equity commitment/  Stabilisation of project  Liquidity and credit appetite adequacy of internal parameters  Shareholding and accruals  Plant Management management control Shortfall in raising up Debt  Cost overrun support Debt-service due to delay in startup
    26. 26. Typical CovenantsFinancial Covenants Other Covenants• Debt Service Cover Ratio (DSCR) • Draw-Stop provisions• Loan Life Cover Ratio (LLCR) • Restrictions on sale of sponsor equity without prior approval of lenders• Maximum Debt/ Equity • No modification of key contracts• Debt to EBITDA • Non-disposal of assets• Asset Cover Ratio • Restrictions on nature of investments• Completion tests (for release of completion guarantees) • Restrictions on additional debt • All environmental approvals to be kept current • Material Adverse Change • Reporting requirements
    27. 27. Typical Sponsor Obligations Part funding of sponsor equity, prior to debt being drawn down; subsequently, pro-rate drawdown of debt and equity Cost overruns to be financed through either − Sponsor guarantees, or − Standby Letter of Credit − Standby sponsor equity + standby senior debt EPC wraps, in the event that this is not adequately covered through the EPC contract (levels of Liquidated Damages) Subordination of any sponsor debt, until senior project debt has been repaid Dividend restrictions − Dividends to be paid on a pre-agreed basis, subject to, inter alia − Fully funded DSRA − No covenant default − No default on debt service
    28. 28. THANK YOU