a global energy strategy the ras laffan project finance 570 – spring ‘09 dr. joe greco...

A Global Energy StrategyThe Ras Laffan Project

Finance 570 – Spring ‘09Dr. Joe Greco

California State University, Fullerton

Present by:Mark Skrenes

Chris McMartinEduardo Gutierrez

Trung NguyenChun Lin 1

About Us

• We are the financial analysts at Broadway Value and Growth Fund

• Our objective is to find investments with an attractive risk vs. reward profile

2

Project Background

• A liquefied natural gas (LNG) joint venture

• Exclusive rights to the world’s largest undeveloped natural gas reserve 6,000 square kilometers 9% of the world’s proven reserve

• A 30-year, $3.75 billion budgeted project

• Already have committed buyer (Kogas)

3

LNG

• A clean alternative energy source

• Made by freezing natural gas to -2600F, reducing it to a liquid 1/600th of its original volume.

• Stored under pressure and can be transported safely worldwide via tanker

• LNG facilities are cost intensive

4

LNG

5

The LNG Industry

• Most LNG is sold to utility companies

• Utility companies need a stable LNG supply to support electrical generation and/or natural gas delivery

• LNG demand growth rate:• Worldwide: about 3% a year since 1980• Japan: about 6% a year since 1980• Korea: over 20% a year since 1987

6

The LNG Industry

• There is no spot market for LNG • Pricing is determined using the market prices for

competing commodities (e.g. oil)

• Comparable LNG prices for delivery to Japan & Korea

7

Borneo $3.20/MMBTU

Australia $4.60/MMBTU

Alaska North Slope $4.80/MMBTU

Indonesia (Natuna) $5.90/MMBTU

Ras Laffan $3.88/MMBTU

Project Status

• Construction is underway

• Contracts were awarded to top-notch contractors at low cost

• Issuing bonds to finance the project• $400 mil. mature in 2006 at 7.6%• $800 mil. mature in 2014 at 8.3%

8

Project’s Structure

9

Equity Investors (30%)

State of Qatar

Qatar General Petroleum

Ras Laffan LNG Co.

Mobil Corporation

Mobil QM Gas

(fully-owned)

(66.5% ownership) (26.5% ownership)

10

$704M $302M

(fully-owned)

Creditors (70%)

France

ECA

Commercial Banks

Bonds Due 2006

11

Italy ECA

U.K. ECA

U.S. ECA

Japan ECA$764M

$383M

$400M

Bonds Due 2014$800M

Major Customer

(35% ownership)

Republic of Korea

Korea Electric

Power Corp.

Korean Municipaliti

es

Korea Gas Corporation

(51% ownership) (50% ownership) (15% ownership)

12

Product Flow

Ras Laffan Facilities

Korea Electric Power Corp.

QatarGas LNG Tanker Terminal

KoGas LNG Tanker Fleet

Korean Homes and Businesses

North Field Gas Reserves (Qatar)

KoGas LNG Tanker Terminal (Korea)

13

(note - QatarGas ownership: Qatar 88%, Mobil 12%)

Cash Flows

Commercial BanksRas Laffan

Trust (New York)

Mobil Corp (Debt Facility)

Export Agency Credit Facilities

(5)

(“take or pay” guaranteed)

Bond Trustee

Bond Holders

Ras Laffan LNG Co.

14

Delivery Timeline

4.8 MMTA/year from 2002

0.6 MMTA in 1999

15

Decision Criterias & Risks

16

Major Alternatives

17

Invest

Not Invest

Our Decision Criteria

• Proven Commodity

• Vested Project Sponsors

• Strong Demand

• Well-structured Project

• Well-mitigated Risks

• Risk Premium

18

Basic Issues

Force Majeure

Risk

Qatari Legal

System

Infrastructure

Default Risk

Low

Low

High

High

Importance

Urgency

19

Immediate Issues

Foreign Exchange Risk

Joint Venture

Risk

Oil PriceCash Flow

Low

Low

High

High

Importance

Urgency

20

Default Risk

Default Risk

Regional InstabilityProduction Capacity

Breach of ContractNo Perfected Interest

21

Risks Mitigation

22

Basic Risks Mitigation

• Force Majeure– Qatar dependent on U.S. military support

– Transportation – no tanker ever lost at sea, proven transportation methods

23

Basic Risks Mitigation

• Qatari Legal System– Off-shore New York Trust account held by Credit Suisse

24

Basic Risks Mitigation

• Infrastructure– Currently on schedule

– Experienced, Leading international construction team

– Mobil human capital

– Proven technology

– 5 year natural gas production history

25

Basic Risks Mitigation

• Default Risk– KoGas owned 50% by Republic of Korea, 34.7% by Kepco

– Need to insure reliable and continuous supply as its needed for power generation

– Korea greatly expanding LNG consumption

– Vested interest by project sponsors, ECAs

– Both customer and supplier have invested Billions

– Intercreditor Protection Agreements

26

Immediate Risks Mitigation

• Foreign Exchange Risk– If Korean Won depreciates against the U.S. Dollar, utility

prices can be raised to cover U.S. dollar payments

27

Immediate Risks Mitigation

• Joint Venture Risk– Mobil strategic objective is to increase its LNG market

share

– Qatar is seeking to diversify its economy

– Huge capital investments by all parties in Billions of U.S. Dollars

28

Immediate Risks Mitigation

• Oil Prices– Minimum quantity SPA

– Mobil $200 million loan fund

29

Immediate Risks Mitigation

• Cash Flow– Project is strategically important to all parties

– Take or Pay SPA (SPA becomes a bankable asset)

– Long-term contract of up to 25 years

– Debt Service Coverage ratio is strong even if oil prices fall

– Mobil Experience

– Increased quantities purchased by Kogas result in economies of scale

30

Projection - Reduced Market Price2001 2002 2003 2004 2005 2006 2007 2008

Price $2.48 $2.53 $2.58 $2.63 $2.69 $2.74 $2.79 $2.85

Revenue

$645.60

$811.60 $825.80 $838.40 $855.50 $867.50 $881.40 $899.30

Cash Flow

$295.34

$527.30 $533.89 $529.60 $545.19 $552.25 $544.04 $561.28

Debt Coverage Ratio

1.16 1.30 1.36 1.40 1.49 1.56 2.02 2.14

31

Conclusion

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Our Decision Criteria

» Proven Commodity» Vested Project Sponsors» Strong Demand» Well-structured Project» Well-mitigated Risks» Risk Premium

33

Conclusion

• Object of the project: North Field

• Sponsors of the Project

• Kogas

• Long term supply & Purchase Agreement

• Demand for LNG

34

Conclusion

• Security Trust

• Intercreditor Protection Agreements

• Contractor for the project

35

Conclusion

Inherent Risks

• Geopolitical location of Qatar

• Qatari Legal System

• Breach of contract by Kogas

• Expose to currency risks

• Contractual Incompleteness

36

Bonds Comparison

37

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6

7

8

Interest rate comparison10 year term

T BondRass Laffan Bond

Source: Treasury Department

Bonds Comparison

38

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080

1

2

3

4

5

6

7

8

9

Interest rate comparison 20 year term

T BondRass Laffan Bond

Source: Treasury Department

Questions?

39