Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
Financing of Downstream Projects in Oil & Gas Sector
1. FINANCING OF DOWNSTREAM
PROJECTS IN OIL& GAS SECTOR
Presented by Mr Girish Ghildiyal
Chief Manager Finance, HPCL-Mittal Energy Ltd
National Conference on Project Finance Management for Energy Sector by UPES
Dehradun
& ISPe India in 2010
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. 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. 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. 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 feedstock's 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. 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. Chart of Regional Refining Margins
Regional refining margins
US dollars per barrel
BP Statistical Review of World Energy -
2009
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. 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. 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. 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. 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. EXPORT CREDIT AGENCY ( ECA)
Loan Agreement
Canada
Borrower Lender Japan
Principal Repayment &
Interest
Germany Denmark
Commerc 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. DEBT FUNDING OPTIONS-
COMPARISON
Instrument/Feature RTL* ECB ECA
Availability Normal High Credit Country
Rating Cos. Specific
Tenor (years) 10-14 5-7 8-12
Interest Rate Basis PLR LIBOR LIBOR
Hedging Cost - High High
Commitment Fee Nominal High High
Flexibility in Drawdown High Low Low
Typical Tie-up time 3-6 months 3-6 months 6 -12 months
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
23. What is PEF?
Project Finance is financing to an existing company or a newly formed
entity 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 loan
A 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 existing
facilities or refinancing of existing term loans.
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. Typical Covenants
Financial 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. 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