GPCA: Keys to project financing

22 November 2012 16:27  [Source: ICB]

Project financing plays a fundamental role in the development of energy and chemical projects. Investments have increased in cost over time, not only because they are larger, but also because equipment, steel, manpower and infrastructure have increased in cost, driven by higher energy costs. Project finance offers the opportunity to secure debt to fund projects without risking the entire company in the event of failure to meet loan agreements. It also enables joint ventures a method of finance whereby the project can be ring-fenced.

building work Rex Features

Rex Features

Joint ventures are frequently set up for energy and chemical projects with partners, in addition to equity, often contributing features such as feedstock, technology or market expertise. In this context, companies rely more and more on project financing to develop their investments.

But what are the factors that are key to success in project financing? This article will explore some of the issues that are important in this area.

Project finance is now widely used in energy and chemical projects. This is because offering debt with limited recourse by lenders is attractive to protect the balance sheet of the parent company. It is also attractive to joint venture companies regardless of the credit ratings of the partners, in effect "decoupling" the cost of capital of the parents and supports the project based on its own virtues. It is true that the interest rate is above corporate debt, but provides higher leverage (typically between 50-70%) and longer-term tenors.

Project finance requires an experienced financial advisor, which will in turn appoint independent market, technical, environmental and insurance advisors. Commercial banks have reduced their participation since the liquidity crisis, but part of this gap has been filled by export credit Agencies (ECAs) which offer funds for loan at lower interest rates. However, they typically take longer as they are public or governmental organisations operating at different time-frames compared to private investors. In Saudi Arabia, projects can also benefit from soft loans from the Saudi Industrial Development Fund (SIDF).


Any type of lender will require a reasonable business plan, a robust market outlook and sound economics in order to test project viability.

Opportunities are analysed on the basis of the following drivers:

  • Feedstock availability - driven by country and regional policies and as an outcome of large exploration and infrastructure initiatives. Feedstocks will typically influence the choice of products, the technology and the capital expenditure
  • Market opportunity - driven by market size, demand growth and project competitiveness. This driver will impact the product selection, the capacities and the product netbacks (revenue)
  • Technology - this will be influenced by the extent of licence availability and in some occasions will not be accessible except through joint ventures
  • Capital investment - driven by the capacities, technology and the number of units to be built as well as by external factors such as the engineering, procurement and contracting (EPC) market, the location factor and costs of steel and other materials
  • Profitability - the project netbacks will be a result of many of the factors mentioned above, and will influence the decision to invest, the type of financing and the debt service.

The market environment needs to be clearly understood by reviewing market dynamics, price forecasts under different scenarios, delivered cost competitiveness and the market entry strategy. It is important that adequate supplies of feedstock are available, secured by a long-term supply agreement and, similarly, a long-term off-take agreement is preferred.

In the case of the technology, lenders will want to understand the costs of licensing, the operating costs of a particular technology and the experience of a specific process (eg proven scale, number of existing plants, reliability records, etc). In case a technology offers novel elements not proven at large scale before, the risks versus the rewards need to be clearly understood and mitigated.


The EPC market plays a crucial role in project implementation. The best plans and intentions can be derailed by poor execution. Therefore, the contracting strategy is a key decision but the motivations for the companies and the lenders will be different.

In broad terms, the range of options has two boundaries: reimbursable and lump-sum turnkey (LSTK). Reimbursable offers a shorter implementation period and flexibility should needs change and may deliver lower project costs but with less certainty. LSTK projects, on the other hand, are preferred by lenders, but they have a cost premium because they shift the risk to the EPC contractor. There are a number of other options between those two boundaries; for example "convertible" LSTK, where the front-end engineering design (FEED) shortens and then the price is fixed. In general terms, large financed projects rarely favor reimbursable because of its open-ended nature, while LSTK is usually preferred but no longer essential for project finance.

It is interesting to note that the period of time to build a plant or a complex can have an enormous impact on the overall economics of the project. For example, if a plant is supposed to be commissioned after 36 months but it takes 48 months because of delays in construction, the real internal rate of return (IRR) may drop by one or two points versus the projected IRR, simply because - in net present value terms - delayed revenues in the beginning of the project have a significant impact; and this is only in terms of revenues, let alone the extra costs. The opposite is true if a project comes on-stream before the planned start-up date, which is not always possible, but can improve the economics of the project significantly.


The main factors that can ensure success in project development and financing are:

  • Ensure secure feedstock supply and select optimum portfolio of products, markets and technologies;
  • Determine feasibility of the selected products and projects through detailed analysis to make sure the plan is robust;
  • Evaluate and select market and technology partners if required;
  • Select an appropriate contracting strategy to implement the project; and
  • Select an experienced financial advisor and ensure that project risks are clearly understood with mitigation actions in place.

Nexant has acted as a lenders' independent market, technical and environmental consultant since 1977, with a team of highly qualified experts with extensive experience advising on investments.

It is fully familiar with project implementation, from initiation of financing through to monitoring project performance during construction and operation, and has experience supporting export credit agencies complete their market, technical and environmental due diligence.

Nexant's track record includes acting as advisor in over $60bn (€47bn) worth of successfully financed engagements.


Borouge is on track with its expansion project at the company's petrochemicals complex at Ruwais in Abu Dhabi. It is expected to come fully on stream by mid-2014, according to Wim Roels, CEO of Borouge's marketing and sales company in Singapore. The project, named Borouge 3, will boost the site's overall production capacity by 2.5m tonnes/year to 4.5m tonnes/year of polyolefins.

Wim Roels

 Confident: Wim Roels

"It is progressing safely as planned and we have already completed approximately 70% of its construction works by July 2012," says Roels, who adds that the project "is fully integrated and the olefins and polyolefins units will be started up simultaneously at the end of 2013."

Borouge 3 includes the construction of a third ethane cracker, two polyethylene (PE) plants, two polypropylene (PP) plants and a low-density polyethylene (LDPE) unit. The site of the project is adjacent to the company's existing facilities in Ruwais.

The new ethane cracker of the Borouge 3 project will produce 1.5m tonnes/year of ethylene and is being built by engineering and construction firm Linde.

The other units of the project include two additional Borstar PE units with 1.08m tonnes/year of capacity, two additional Borstar PP units with 960,000 tonnes/year of capacity as well as a 350,000 tonne/year LDPE unit.

Borouge 3 will also include an 80,000 tonne/year cross-linkable polyethylene unit that will complement the low-density polyethylene (LDPE) unit for high-value wire and cable applications.

"Borouge's long-term [2020] strategy in the polyolefins industry is based on growing its business in infrastructure, automotive and advanced packaging throughout the Middle East, Asia-Pacific, the Indian sub-continent and Africa," Roels explains.

"Borouge 3 is a commitment to expanding Borouge operations to meet the demand and expectations of the market. A major driver behind the increasing demand is the trend towards urbanization and growth of cities," he notes.

"As more urban expansion projects are implemented with significant investments in infrastructure there will be greater demand for materials like water and gas pipe systems and wires and power cables," Roels adds

Apart from the Borouge 3 project and the planned expansion at the Shanghai compounding facility, the company does not have any other specific plans for capacity expansions right now, he notes.

  • Graham Hoar is director, Middle East at Nexant, based in Bahrain, and Manuel Asali is a principal at the consultancy.

Author: Graham Hoar and Manuel Asali

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