IFR Mid East 2006 - Aramco structures its first

IFR Middle East Report 2006
12 min read

On March 29 2006 PETRORabigh (a 50:50 joint venture between Saudi Aramco and Sumitomo Chemical) closed financing facilities totalling US$5.84bn to fund the development of an integrated refinery and petrochemicals complex at a cost of approximately US$9.9bn at the site of the existing refinery at Rabigh.

On completion, Rabigh will be one of the world's largest refinery and petrochemical complexes, producing 17.2m tons per annum (tpa) of high-value petroleum products and 2.4m tpa of ethylene-based and propylene-based petrochemical derivatives.

Strategic rationale

The joint venture between Saudi Aramco and Sumitomo Chemical is underpinned by aligned objectives of the two sponsors. The key drivers from Saudi Aramco's perspective are to:

  • Establish a strategic partnership with a leading international chemicals company;
  • Leverage the existing infrastructure at the Rabigh site;
  • Upgrade refinery capacity to produce higher value petroleum products;
  • Create a platform for further expansions at Rabigh; and
  • Support wider national initiatives of attracting foreign investment into the Kingdom's oil and gas sector and creating new employment opportunities through the development of an industrial city at Rabigh.
Sumitomo Chemical's strategic rationale for investing the project is to:
  • Secure access to a stable and cost-competitive source of feedstock;
  • Leverage a well established marketing network in Asia to sell more product;
  • Mobilise advanced proprietary technologies in world-scale petrochemical operations;
  • Provide a platform for further investments at the Rabigh site; and
  • Support a wider national initiative of strengthening the relationship between Japan and Saudi Arabia.

Project description and configuration

The project is located on the west coast of Saudi Arabia with excellent access to the European and Asian refined product and petrochemical markets. The project will utilise secure and abundant supplies of indigenous feedstock (Arabian light crude oil, ethane gas and butane gas) provided by Saudi Aramco and will be a key step towards the development of the downstream plastics conversion industries at the Rabigh industrial site.

The existing facility at Rabigh, a basic topping refinery located 165km north of Jeddah and 185km south of Yanbu on the Red Sea coast of Saudi Arabia, was commissioned in 1989. Originally designed to process 325,000bpd of Arabian light/Arabian medium crude oil, a debottle-necking exercise in 1998 resulted in an increase in capacity to 400,000bpd, making it the largest single train crude distillation unit refinery in the world. The principal objectives of the upgrade are to maintain the existing crude throughput of the refinery; to reduce the production of heavy fuel oil and to produce propylene as feedstock for the downstream petrochemical units.

The addition of new refining units, specifically the high olefin fluid catalytic cracking unit, is a logical expansion of the processing capability to upgrade low-value heavy oils to valuable lighter products. Integration with the ethane cracker for the production of ethylene and derivative petrochemical units for polymers production is a further logical extension of the upgrading to valuable products. The new processes are based upon proven operations and have been used in combination in other plants around the world. Certain of the Rabigh process units represent major capacity increases in terms of unit size.

The diagrams below outline the technical configuration of the project and the product slate - Figures 1 and 2.

Contractual structure

Figure 3 provides an outline of the contractual structure for the project, which follows a typical format for projects of this nature.

Saudi Aramco and Sumitomo Chemical have entered into a joint venture agreement governing the development of the project through PETRORabigh, the project company. There are plans for an IPO of up to 25% at a later date.

The project company has entered into a suite of EPC/EPCM contracts for the erection of the plant. Foster Wheeler is the project company's project management contractor. The project company will enter into a number of contracts with Saudi Aramco, including an asset transfer agreement that governs the sale of the existing refinery; feedstock supply agreements governing the sale of crude oil, ethane and butane; a land lease; and various other agreements governing the provision of pipelines, utilities and port facilities at the Rabigh site.

Lifting agreements govern the sale of refined products to Saudi Aramco and petrochemical products to Sumitomo Chemical. Sumitomo Chemical and others provide licenses and catalysts to the project. PETRORabigh has entered into a water and energy conversion agreement (WECA), structured as s tolling arrangement, for 25 years from COD with Rabigh Arabian Water & Electricity Company (RAWEC).

This is a consortium comprising Marubeni Corporation, JGC Corporation, Itochu Corporation and ACWA Power, which are providing third-party equity amounting to 20% of the IWSPP project costs. The balance of the funding is a senior loan provided by the project company. The RAWEC funding structure was designed to simplify the financing structure by creating a single lending platform, thereby circumventing the requirement for complex intercreditor arrangements between lenders to the project company and the third-party lenders to RAWEC. Senior lenders benefit from several completion guarantees from Saudi Aramco and Sumitomo Chemical with respect to the project debt.

Financing structure

Project costs amount to approximately US$9.9bn, including senior funding up to a maximum debt-to-equity ratio of 65:35. Projects costs include the funding of a loan from PETRORabigh to RAWEC in an amount equivalent to 80% of the IWSPP project costs.

PETRORabigh's senior debt comprises a JBIC overseas investment loan; a loan provided by the Public Investment Fund of Saudi Arabia; a loan facility provided by international, regional and local commercial banks; and an Islamic facility provided largely by Islamic financial institutions. The amounts provided by each funding source are as follows - Table 1.

The facilities' principal repayments (or their Islamic equivalent) are sculpted and based on an annuity style repayment profile. The JBIC overseas investment loan and PIF loan will have a maturity of 16 years and the commercial facility and the Islamic facility 15 years. The sponsors have provided completion guarantees on a several basis in favour of the lenders. The sponsors appointed 17 banks as mandated lead arrangers and were extremely pleased with the strong and geographically diverse bank group, which includes many of the sponsors' strongest relationship banks - Table 2.

General syndication was closed in August. Commitments were received in general syndication for a total of US$450m, over twice the amount required to reduce the MLAs to their target final hold levels and making it one of the most successful ever for a project financing in the region. Banco Bilbao Vizcaya Argentaria, Royal Bank of Scotland, Samba Financial Group, Arab National Bank, Arab Banking Corporation and the Saudi Investment Bank joined the commercial facility. Bank Al Jariza and ABC Islamic Bank joined the Islamic facility, thereby adding two more Islamic financial institutions to the Islamic facility.

Project schedule

Saudi Aramco and Sumitomo Chemical pursued an aggressive financing timeline, requiring the issuing of notices to proceed to the construction contractors in early 2006, in order to achieve ready for start-up in October 2008. Key milestones in the project development are in Table 3.Financial close was achieved within 22 months of signing of the MoU – a major achievement given the scale of the project. Commitments from commercial lenders were obtained within 16 months of the appointment of SMBC as financial adviser. The rapid progress from signing of the MoU through to financial close reflects the excellent co-operation between many parties, including the financial, commercial and technical teams of the sponsors; their financial and legal advisers; and the lenders and their advisers (please refer to end of the article for a list of advisers). The sponsors would like to make a special mention of the role that JBIC and PIF played in making the PETRORabigh financing such a successful one.

Reasons for success

The PETRORabigh financing has been an outstanding success in many ways:

  • It represented the first time that Saudi Aramco has procured project finance;
  • It is one of the largest project financings ever;
  • Japan Bank for International Cooperation's loan of US$2.5bn is the largest it has ever made on a project finance basis and the first transaction in which it has provided funding alongside Islamic financing;
  • The Islamic facility of US$600m was, at the time, the largest ever Islamic project finance facility;
  • The sponsors set a benchmark for the lowest pricing in the region for a project finance transaction of this type; and
  • The transaction included an innovative financing of a third-party independent water, steam and power project (IWSPP) awarded to a consortium led by Marubeni Corporation of Japan.
These achievements were built on, inter alia, the following:
  • Both Saudi Aramco and Sumitomo Chemical are strong sponsors and leaders in their respective fields. Lenders are confident that they will deliver the project to budget and on schedule and operate it to the highest standards in the industry;
  • The project is underpinned by a strong strategic rationale for both sponsors, with Saudi Aramco upgrading the refinery capacity to produce higher value petroleum base products and Sumitomo Chemical developing a cost-competitive petrochemical production site;
  • The sponsors have demonstrated their commitment to the project through the amount of their equity contributions, their completion support, and their long-term obligations to lift and market the product of the plant;
  • The sponsors are building a world-scale facility that will benefit from substantial economies of scale and the favourable ethane feedstock supply arrangements, making it one of the lowest cost producers in the world;
  • The size of the commitments provided by JBIC and PIF demonstrate to commercial financiers the importance that the governments of the Kingdom of Saudi Arabia and Japan attach to the project;
  • The project demonstrates robust economics and debt service coverage ratios on the basis of a favourable outlook for refined petroleum product and petrochemical product prices and favourable ethane feedstock supply arrangements;
  • The project is the first of many new initiatives to expand the Rabigh site and develop a downstream plastic conversions industry in the nearby industrial area;
  • The sponsors and their advisers built the momentum of the financing through initial market soundings, a detailed project information package, including a fully-developed term sheet and one-on-one meetings at which banks had the opportunity to discuss the project with senior management of the sponsors.