Oil, gas firms turn to int'l capital markets

Oil, gas firms turn to int'l capital markets

LONDON (Reuter): Oil and gas companies will increasingly turn to international capital markets for the huge sums needed to fund mammoth energy projects in the world's emerging economies, industry financiers say.

The pace of such innovative financing will pick-up after the success of Qatar's Ras Laffan liquefied natural gas (LNG) project bond issue last December, participants at an oil and gas finance conference were told on Monday and Tuesday.

The US$1.2 billion issue, part of a $2.5 billion debt package to fund LNG production from Qatar's North field, was vastly oversubscribed, said Gregory Randolph of investment bank Goldman Sachs, the bond's lead underwriter.

The capital markets were less concerned with the political risk of investing in the Middle East than anticipated, said Randolph, confirming a growing appetite for slightly more adventurous debt.

The expanding use of bonds to finance oil and gas infrastructure work in less developed countries has pivoted on the ability to win a higher credit rating for the project than the sovereign debt of the country where it is located.

Ras Laffan was rated an A3 investment grade project by Moody's Investor Services, whereas Qatar's sovereign debt is a lesser Baa2, said Ted Izatt, head of Moody's oil and gas group.

Projects in all sectors of the oil industry, from refining to petrochemicals, have been rated higher than the debt of their hosts, with deals done in Indonesia, across South America and in Nigeria.

The strategic value of the commodity to the country involved was essentially what secured the higher rating, said Izatt. Some 25 energy projects, worth $7 billion in debt, went to the capital markets for funding last year.

"The number is growing because capital markets are more familiar with the complexity of such deals and in many cases they can go over the sovereign rating," said Izatt.

But capital market investors appear still unwilling to go it alone on energy projects, looking for the presence of export credit agencies and commercial banks in financing packages as evidence deals have been judiciously appraised.

British, U.S. and Italian government loans and bank investment of around $450 million made up the remainder of the Ras Laffan project's debt financing.

The breakthrough at Ras Laffan was the ability to sell debt with longer maturities, said Randolph. The second tranche's 15- year span doubled the previous longest term for a Middle Eastern debt issue.

A critical test for such financing will be in the countries of the former Soviet Union which need massive energy spending but do not have the political and economic stability needed to attract general investors.

Izatt predicted it would be very hard for projects to win the above-sovereign debt rating they need in Russia. Others believed the correct precedent and careful reform would open the way to massive capital market involvement.

"With their natural resource wealth, particularly their oil and gas wealth, which is going be exported, it's logical, it's a question of time," said Randolph.