Qatar General Petroleum Corporation and Mobil QM Gas Inc.

Qatar General Petroleum Corporation and Mobil QM Gas Inc.

Executive Summary

Qatar General Petroleum Corporation and Mobil QM Gas Inc. own Ras Gas, which in full is referred to as Ras Laffan Liquefied Natural Gas (LNG) Company Limited, with a stake of 70 and 30 percent respectively. Ras Gas has the right to develop 10 million tons every year of LGN, and it is currently constructing 5.2 million per year (Randolph & Schrantz, 1997). The initial cost of the project was set to be $3.4 billion. The role of capital market debt plays a significant role in financing the Ras Gas project. The funding of the project was expected to be divided into equity and debt. The debt was to form 70% of the total cost of the project, and the remaining 30% distributed to the two owners, QGPC and Mobil. The cost of the project increased from the initial $3.4 to about $2.5 billion. The cost was bid when there was tighter construction market, and as things continued to change in the market, prices were to be revised. Consequently, the plan was changed, and a new cost assumed a $5 billion instead of $3.4 billion that was earlier estimated.

The sources of cash flow include the sale of 4.8 mmta of LNG, and there is the 20-25% got from the sale of condensate. The financing of the project remains to be the most important aspect of the paper. Ras Gas was able to raise a bond offering of $1.2 billion, which was completed in 1996. This was very remarkable being that it is the first capital markets offering finances for the Qatari issuer, the first one for the LNG project, and the largest for any international project to the present date (Randolph & Schrantz, 1997). Capital markets played a crucial role in the financing of Ras Gas. It was not expected as the banks and ECA were seen to have been overwhelmed by the many projects they were undertaking. Besides, the amount of finance indeed was so high, and the maturity period is longer, making it more of a challenge. Other risks that made it look impractical to include the perceived risk of the countries in the Middle East (Randolph & Schrantz, 1997). There were fears that it would not be possible to raise the money because financiers were already overburdened by other projects, and other risks compounded the problem. The developments during the construction kept changing the costs, but the capital market proved flexible to the company, which would not have been practical with ECA and Banks. It is notable that the capital market is capable of providing an effective counterbalance in the role of banks and ECAs. The success of the company relies more on how well Ras Gas managed to present the project to important market participants. It is from proper planning that the company managed to get sponsors committed to ensuring successful financing.

Goldman Sachs offered valuable advice to Ras Gas, and his work was to help in developing the plan on how the state of Qatar, QGPC, AND Mobil was going to source for the 70% debt financing. He was able to make three important considerations, which included a large number of projects being done in Qatar, the expected return from the project, and lastly, the history of the bank and ECA concerning lending to the State of Qatar (Randolph & Schrantz, 1997). The company exhibited a high degree of coordination when it comes to the integration of the financing process and construction bidding. Joint construction and the financing bids that Ras Gas received in January 1996 for the onshore EPC had considerably lower cost, and this was due to the decrease in the interest during construction and financing fees, which eventually led to a reduced cost of the project to $3.4 billion from $5 billion. In this case, the 70 percent debt that was required for the project reduced from $3.5 billion to $2.5 billion (Randolph & Schrantz, 1997). All these demonstrate a high level of success in both the financial planning and the operations of the capital markets that ensured the project received the required finances and completed the work.

Questions

Question 1

Ras Laffan Liquefied Natural Gas Company Limited (Ras Gas) is structured based on ownership composition. It is a Gatari corporation with 60% ownership going for Qatar General Petroleum Corporation (QGPC), and Mobil Corporation owns the remaining 30%. The project of constructing 5.2 million metric tons per annum (MMTA) is to be financed by 75% debt and 25% equity, which will be contributed by Mobil and QGPC.

The purpose of the project of constructing the facility is to provide onshore storage facilities, offshore drilling platforms, a pipeline to shore, and finally, the port loading facilities. The project cost is estimated to be $3.4 billion, and the funding is supposed to be 75% debt and 25% equity (Randolph & Schrantz, 1997).

The customer is the company mandated to produce the required amount of gas, and the product being sold is the finances that are required to carry out construction. The finances required for the construction are to be issued by bank and export credit agencies (ECAs).

Question 2

The funding of the project has a debt to equity of 75 to 25. Debt is expected to be 75% of the total cost, which is $3.4 billion, and the remaining 25% is shared among the partners.

Debt components can be classified as Bond offerings and banks. Bonds were expected to be $1.2 billion split up in $400 and $80 that runs for 10 and 17 years, respectively. On the other hand, Bank/ECA financing is $1.35 billion, which are split in $450, $465, $250, and lastly, 4185 million all given by commercial banks and maturity period 12.5 years (Randolph & Schrantz, 1997). The enhancements were supplied for the debt finance provided by commercial banks. For instance, $465 million was guaranteed by USEXIM, $250 million by ECGD, and $185 million by SACE.

Bank and bond financing has been structured differently based on their maturity levels. For instance, the bond worth $400 million has a maturity of 10 years and an average life of 7 years. The bond worth $800 million has a maturity of 17 years and an average life of 15 years. On the other hand, the bank finances are all having a maturity period of 12.5 years with an average life of 8.5 years except for a $450 million bank loan that has an average life of 9.0 years.

Question 3

Gold started his role as an advisor to Mobil before the plan to develop the Ras Gas project was initiated. His first assignment was to develop a financial plan for the LNG project that had a cost of $5 billion.  There was great importance to realize 70% of non-recourse debt for Ras Gas increased projects. The greatest concern by the investment bank was whether the commercial banks would be able to manage to issue $3.5 billion is that they were already weighed down by other projects (Randolph & Schrantz, 1997). Goldman Sachs made a recommendation for $1 billion to be put on one or multiple bond offerings during the period of the project.

The initial estimation for the cost of the project was $3.4 billion, and the estimation was based on the early projects similar to LNG. However, it was noted that the projects were bid at a time when there was a tighter construction market. Consequently, the plan was changed, and a new cost assumed a $5 billion instead of $3.4 billion that was earlier estimated. The cost was to be $4,200, and the interest of the entire construction is 800 (Randolph & Schrantz, 1997). The cost was further revised back to $3.4 to $3.5 to about $2.5 billion. The earlier costs were based on the capital costs of constructing LNG in the recent past.

International capital markets became attractive to the Ras Gas project because it could be financed even before meeting the set conditions precedent to ECA and bank loans. Early year distribution to shareholders will be improved based on the longer maturities. Lastly, the international capital market was preferred because it appeared cheaper than ECA and bank loans.

Standard & Poor’s rated Qatar BBB+ and Moody’s, on the other hand, set a credit rating of Baa2. The strength of the project based on rating gave Ras Gas the opportunity to get finances from the international capital market, and that was the main objective, which was largely achieved.

Question 4

The funding objective was to ensure that the Ras Gas project was completed within the desired time. The contractor arranged financing for this project could be said to have some little flexibility, and the presence of enhancement.

The contractor arranged financing results in a competitive bidding process. This is essential as it makes use of the company’s leverage with contractors. This ensures that banks experience the pressure, and they become aggressive. The outcome was that four contractors were prequalified and were intended to hire financial advisors.

LNG played a crucial role in the funding process by ensuring that its valuation was used to determine the source of finance and the estimated costs. The strength of LNG was taken as an assurance to the lender.

Debt securities are important because they have a longer maturity period. Cost-saving is another reason as to why debt financing is important. Lastly, it is readily available from financial institutions that are less likely to lack finances due to the high level of deposits they receive.

Question 5

Underwriters are important in determining the cost involved. As such, Rass Gas picked the lead underwriters based on their level of competence and historical experiences.

The targeted investor base was domestic and foreign investors. The mix of investors was considered viable for the company. The maturity structure was designed based on the nature of the debt and the debt type. The marketing theme was the strength of the Ras Gas and LNG project that lured investors.

Bond structuring was in Shorter Trance and longer tranche that had a maturity period of 1o and 17 years (Randolph & Schrantz, 1997). The company benefited from the offering.

Question 6

The major lenders to Ras Gas are the banks, ECAs, and the bondholders (Randolph & Schrantz, 1997). The total number was 70 investors, with 80 percent being from US accounts. Lenders were prevented from exercising control through negotiation with banks and Ras Gas as they were placing their bids. The voting decision was classified into fundamental, material, and administrative and required lender approval. Another method was to reduce the thresholds for lenders required.

The cost of control includes lenders taking over the project and dictating its management. The owners lose control when lenders become more powerful. However, when there is control, the company is able to conduct its activities without external interference.

References

Randolph, G. G., & Schrantz, A. (1997). The use of the capital markets to fund the ras gas project. Journal of Structured Finance, 3(2), 5.