Mes shows strong appetite
Mesaieed B is a significant milestone in the development of the Qatari power industry and is an indication of the strong appetite that international sponsors and funding institutions alike currently have for Middle East power deals. By Barry Marshall.
In the project, MPCL, a joint venture set up by Marubeni, Qatar Petroleum and Qatar Electricity & Water Company is to construct a 2,000MW natural gas-fired combined-cycle thermal power plant in Mesaieed Industrial City, located to the south of Doha, and sell its power to Qatar General Electricity & Water Corporation (Kahramaa) based on a BOT scheme.
The power purchase agreement (PPA) runs for 25 years and it is expected that there will not, therefore, be a need for a merchant tail on the asset financing. The loan tenor is 28 years. Marubeni has promised to deliver the first power by July 2008, an important point for the power-hungry country. The scheme required US$2.1bn of debt, which was split 60/40 between JBIC and commercial lenders. The debt/equity split will be 85/15.
Marubeni is the sponsor and Advisorum the financial adviser. The contract documents for the 2,000MW Mesaieed independent power project (IPP) were signed in Q1. Financial close with lead bank Calyon and direct lender JBIC has occured. The loan is priced at 90bp during constrruction. During operations it drops to 80bp before moving ip to 170bp. Fees are 65bp and the mininum debt service cover ratio (DSCR) is 1.2x. Marubeni owns 40% of the project company. GE is supplying the turbines and Iberdrola's Iberinco is the EPC contractor. Royal Bank of Scotland advised the Kahramaa, QEWC and QP team.
The syndication of the IPP loan closed in August with 31 banks coming into the deal. The loan totals US$1.2bn with a further US$836m coming directly from JBIC.
Under the terms of the deal, the plant will officially come on-stream in April 2010 and be operated by the joint venture company for a period of 25 years. However, the project is expected to be developed at top speed. The first phase of the new plant should be complete by the second quarter of 2008, with the second phase scheduled to come on-stream by September 2009.
Kahramaa and the Qatari government studied Marubeni's technical and commercial proposals before agreeing to proceed with the project. A spokesperson for the Japanese company said: "Marubeni believes its proposed competitive price, along with its abundant experiences as an IPP player and the reputation the company has in the Qatari energy field, were key factors in winning this bid. Marubeni sees overseas IPP business as its core business and the Gulf region as one of the key IPP and independent water and power [IWPP] markets."
Qatari energy and industry minister, Abdullah bin Hamad Al Attiyah described the project as "perhaps the largest of its kind in the region, when it is completely operational in 2010". At present, the biggest power plant in Qatar is the 1,025MW facility that is being built by Q-Power at Ras Laffan Industrial City (RLIC). The Marubeni plant will be built by Iberdrola Ingenieria y Construccion (Iberinco) of Spain. Iberinco has not developed projects in Qatar in the past but has some experience of power sector ventures in Syria.
The JBIC participation is particularly interesting. Amid the tightening demand for natural resources across the world, Japan is seeking to strengthen its relationship with the countries with reserves of natural resources. In this regard, JBIC signed a memorandum of understanding (MoU) on a comprehensive strategic partnership with Qatar Petroleum last November.
This loan, which is the first project following the signing of the MoU, will deepen the overall relationship between Japan and Qatar by increasing Qatar's power generation capacity and supporting this IPP project in which a Japanese firm has participated. The commercial banks which joined the deal are - Abu Dhabi Commercial Bank, AIB, Arab Bank, Bank of Ireland, Bank of Tokyo Mitsubishi, Bayerische Landesbank, BBVA, Commercial Bank of Qatar, CIC, Deka Bank, Dexia, DZ Bank, Fortis, GIB, HSBC, Hypo Public Finance, ING, KBC, KfW, Mashreqbank, Mizuho, NAB, Natixis, NordLB, QNB, RBS, Standard Chartered, SMBC, Sumitomo Trust & Banking and Woori Bank.
Demand for electric power has been increasing in Qatar itself due to sharp population growth and rising industrial demand, including in the petrochemical sector, and it is expected that electric power demand will increase by about 11% per annum by 2015, according to the IEA. The project will be expected to make up about 30% of the country's total electrical generation capacity in 2010 and play an important role as its major supply source of electricity.
The scheme was originally intended as an IWPP but in July 2006 the water component of the scheme had been dropped. Qatar Electricity & Water Company would now undertake the 40m gallons a day desalination plant itself. The water had been removed due to uncertainty over the civil part of the water element.
In October 2006, Marubeni had won the Mesaieed independent power project (IPP), beating a Suez team. Shearman and Sterling advised Calyon and Allen & Overy acted for JBIC. Royal Bank of Scotland acted as financial adviser to Qatar Petroleum and Qatar Electricity and Water Company while Advisorum provided financial advice to Marubeni Corporation.
Despite the success of the Mesaieed IPP, Qatar Inc is adopting a slightly different procurement model for its next large cale power scheme - the larger Ras Laffan C independent water and power project (IWPP). The scheme involves 2600MW and 55m gallons a day of water. While the scheme will remain a proejct financing, QEWC has decided to split the developer bids from the financing bids. So three teams - led by International Power, Marubeni and Suez - have bid for the developer role and Royal Bank of Scotland has been appointed to put the debt financing in place. HSBC is advising offtaker Kahramaa.
The idea is to get the more competitive bids by effectively having a funding competition among the banks. However now the bank market has changed due to the global credit crunch, the bank competition will not be as redhot and a more bookbuilding type exercise might be needed - especially for such a massive deal.
Bank demand for Qatari power and water deals is currently being tested on another scheme, the US$575m Ras Abu Fontas A1 desalination plant. This deal, the desalination plant project spun out of the Mesaieed scheme, offers another funding variation. It will be wholly owned by QEWC. The utility is providing a 180 day backstop guarantee on the credit if the scheme runs into problems. This means the deal is effectively guaranteed by Qatar Inc. However it is still a structured credit.
QEWC and its adviser Bank of Tokyo Mitsubishi went out to the market with US$500m 20 year loan priced at 60bp rising to 120bp. The market response was cooler than before the crunch but still positive. It is expected the deal will be tweaked with higher pricing. It coulkd either include a market flex or be transacted as a club deal with underwriting risk thereby negated. The deal should be wrapped up very soon.
Qatar still requires alot of new energy productive capacity to power its expanding gas, petrochemical and downstream industrial complexes. But another way of increasing capacity could be regional co-operation. The Gulf region is particularly attractive for IPPs because of ongoing power sector integration. New interconnectors are being put in place to connect the transmission infrastructure of all the GCC states, so that it will he possible to trade electricity across the region.
A large number of legislative and regulatory changes need to be implemented in all GCC member states before regional trade in electricity becomes both easy and responsive to localised demand. At present, all trade in electricity across the Middle East and North Africa region is based on bilateral deals, which are generally fixed term in nature, rather than through a competitive cross-border power pool.
Electricity generation shortfalls led the Qatari government to encourage greater foreign investment through independent power projects (IPPs) and to begin restructuring of the country's power sector. In May 2000, the Qatari government transferred assets owned by the Ministry of Electricity and Water (MEW) to the Qatar Electricity & Water Company, a semi-public body 57% controlled by local investors and 43% by the government.
QEWC is responsible for adding new electric generating capacity and is working on several large-scale power projects with foreign companies such as AES and International Power. State-owned Qatar General Electricity & Water Corporation retains control of electricity transmission and distribution activities, and is the sole purchaser of electricity generated in Qatar.
The government has considered plans to privatise transmission and distribution functions, but Qatari nationals currently receive free electricity and water supplies, which poses a significant barrier to complete privatisation.
Qatar itself is an enticing prospect for upstream power sector investment because of the rate of industrial and economic growth in the country. The Qatar Ministry of Energy predicts that electricity consumption will increase by at least 15% a year over the next five to 10 years. This will probably be the fastest rate in the region and one of the fastest in the world, and will provide a local market tor IPPs that can also target neighbouring markets through the emerging GCC power grid.
The biggest source of new power demand in Qatar will come from a new aluminium smelter that Qatar Petroleum and Norsk Hydro are developing at Mesaieed. Electricity consumption makes up such a large proportion of the cost of producing aluminium that exporting aluminium is often equated with exporting power. The new smelter is predicted to produce its full capacity of 570,000 tonnes a year and has been developed on a site with sufficient room to double production capacity. It is likely that most of the power plant's output will be consumed within Qatar.