Securing financing for gas-to-liquids (GTL) projects is no easy feat, especially as many of the major projects worldwide face delays, cancellations and spiralling costs. For World GTL, securing project finance for its 40-year 2,400 barrel-per-day venture with Petroleum Company of Trinidad and Tobago (Petrotrin) at the existing Pointe-a-Pierre plant - the first GTL plant in the western hemisphere - was vital.
World GTL develops small-scale projects through joint ventures with state oil companies. The oil companies supply the gas as their equity, and World GTL applies its patented techniques for converting old methanol reactors into a working GTL plant. It was Credit Suisse who shared World GTL's vision of success for the Trinidad and Tobago venture, stepping up with a $125 million 15-year project finance loan, having heard about it through their Trinidad and Tobago partner Republic Bank.
"When I got the first description of the project it was intuitively very attractive to me," says Rafael Borja, a director at Credit Suisse who co-heads client coverage for the Caribbean and Central America with Wendell Mottley, a managing director.
Wendell Mottley had worked with Petrotrin since the 1990s, and Borja's familiarity with both the sponsors helped to affirm his faith in the deal. "Knowing Petrotrin and its credit rating, it was clear that this was going to be a strong project and, unlike other projects, World GTL will be basically refurbishing the equipment and reactors, making it less expensive."
As only the second project finance deal to be struck for a GTL plant (after Sasol's Qatar plant), and the first GTL project that Credit Suisse had been involved in, the deal was ground-breaking in many ways. Several key elements made the transaction possible. To mitigate construction and completion risk, a joint and several completion guarantee, which holds each party responsible for the whole amount of the loan, was signed by both the sponsors. "That was crucial to make the transaction financeable," says Borja.
However, even with a construction guarantee, there was a long-term exposure to the output of GTL diesel at market prices. When the transaction was closed in January 2007, oil prices were falling and stood between $50 and $60 per barrel (bbl). "From today's point of view, with prices at or around $90/bbl, things seem much more comfortable, but at the time there was a strong commodity risk," says Laurent Quelin, associate in the global project finance group at Credit Suisse. "What is ground-breaking here is to apply that derivatives technology to provide a project finance solution."
To mitigate this commodity risk, a team of three derivatives structurers led by Wil Harris, a director in Credit Suisse Energy, designed a hedge in co-operation with the project finance team. "When we dug deeper into how the prices of the GTL diesel were calculated, it became apparent that it was at a very strong correlation with WTI," says Borja. The team designed a 10-year hedge that pays out to the project when oil declines below an average of $50/bbl. "Those strikes were obviously chosen very carefully based on our models," says Borja. "This hedge is designed to provide certain minimum coverage ratios to the lenders."
The teams worked round the clock for four months, through the Christmas holiday season and into early 2007 to make sure the deal closed on time. "It was intense, but everything went smoothly because everybody was focused on getting to the finish line," says Emeka Ngwube, director in the global project finance group at Credit Suisse. "To pull off a deal like this you really have to have the bankers, the commodity derivatives structurers and the coverage guys working hand in hand." Ngwube points to the oil majors with "very deep pockets" who have seen their GTL projects stuck on the drawing board. "This deal made it through, closed and is now being constructed, so that's testament to the hard work of everyone and the underlying vision."
World GTL plans similar joint venture projects globally, and it seems likely that Credit Suisse's success in this deal may be replicated in future projects. "We would love to do a transaction with World GTL any day of the week," says Borja. "We'd like nothing more than to follow their success all over the world."
The week on Risk.net, March 10-16 2018Receive this by email