Kuwait Petroleum Corp. (KPC) signalled its intent in late May to continue to resort to debt finance for the host of major projects on the company’s upstream and downstream slate.
Financial close is belatedly nearing on a funding package for the country’s first permanent gas import terminal, more than two years after the award of the main construction contract.
With the parastatal’s previous multi-billion dollar project financing last year having likewise taken longer than anticipated to complete, a local investment bank was mandated to advise on a more coherent long-term funding strategy.
Kuwait Integrated Petroleum Industries Co. (KIPIC), the KPC subsidiary overseeing three major downstream projects at Al-Zour, was reported last month to be close to signing international and local bank loans worth a total of US$2.6 billion to fund the estimated US$3.6 billion project to install an LNG import terminal at the southern port.
The US$2.93 billion engineering, procurement and construction (EPC) contract was awarded in March 2016 to a South Korean consortium of Hyundai Engineering, Hyundai Engineering & Construction and Seoul-owned Korea Gas Co. (KOGAS), and the reason for the two-year delay in raising finance is unclear.
However, the wait may be related to the unforeseen length of time taken for fellow KPC subsidiary Kuwait National Petroleum Co. (KNPC) to conclude the US$4.245 billion international portion of a US$6.245 billion financing for the US$15.7 billion Clean Fuels Project (CFP), which was finally signed in May last year after more than two years in the market.The CFP will upgrade the state’s existing refineries near Kuwait City.
Kuwait is a rare user of project finance – with KPC typically funding schemes upfront – but has the advantage when doing so of enjoying the region’s highest credit ratings, of Aa2 and AA from Moody’s and Standard & Poor’s (S&P) respectively.
The KNPC loan was reported to have struggled when first floated to potential lenders in early 2015 over the borrower’s unrealistic pricing and tenor expectations – compounded by the novelty of the deal, which was the state firm’s first resort to international project finance this decade.
Both financings rely heavily on South Korean export credit agency (ECA) backing. This was alluded to in late 2015 by a memorandum of understanding (MoU) signed with Export-Import Bank of Korea (Kexim) calling for the agency to extend financial support of up to US$5 billion to KPC projects involving South Korean companies.
Sumitomo-Mitsui Banking Corp. (SMBC) was selected as financial adviser on the LNG project in late 2017. The package close to being signed includes a local bank portion, split between conventional and Islamic tranches, led respectively by the local titans of the two sectors, National Bank of Kuwait and Kuwait Finance House. This comes in addition to a 15-year, US$2.3 billion international loan co-ordinated by four banks, with backing from Kexim and Korea Trade Insurance Corp. (K-Sure).
On May 20, the two ECAs announced plans for each to provide US$1.15 billion of funding – with Kexim extending US$630 million as a direct loan and US$520 million in guarantees and its counterpart providing export insurance.
Kexim’s statement made reference both to the 2015 agreement and to the signature in January of an MoU between the two agencies to co-ordinate their support for local companies abroad.
Scheduled for completion in early 2021, the LNG terminal will have regasification capacity of 3 trillion Btu per day and will include eight 225,500 cubic metre storage tanks.
Despite being one of the world’s leading oil producers, Kuwait suffers from a severe shortage of gas and has been importing LNG from temporary facilities near the central port of Al-Ahmadi since 2009. While efforts are falteringly progressing to develop indigenous reserves, recognition of the likely long-term deficit was evident in the signing in December of a 15-year LNG supply agreement with Royal Dutch Shell, thought to cover purchases of 2-3 million tpy.
KPC announced plans earlier in the year to invest 35 billion Kuwaiti dinars (US$113 billion) over the next five years in upstream and downstream expansion while setting typically lofty and distant targets – of raising oil production from around 3.1 million bpd to 4.75 million bpd and gas output from 500 mmcf (14 mcm) per day to 2.3 bcf (65 mcm) per day by 2040.
The government has a history of missing such self-imposed deadlines through bureaucratic inefficiency and political logjams. However, in late May, KPC showed recognition of the need to develop a more coherent approach to funding the schemes by selecting Kuwait Investment Bank for a three-year contract to advise on a long-term financial strategy.
This also includes assessing the optimal balance between debt and equity, and between international and local borrowing, while looking at the potential role of ECAs.
Among the major projects on the drawing board are a greenfield 300,000 bpd refinery in the north, the 230,000 bpd refinery at Duqm in Oman that is being developed in partnership with Muscat-owned Oman Oil Co. (OOC), and the expansion of new 200,000 bpd Nghi Son Refinery being commissioned in Vietnam – in which KPC owns a 35.1% stake.
The company has in the past also mooted potential bond issues – a possibility rendered more credible by the sovereign’s successful US$8 billion debut Eurobond issue in early 2017. However, any international borrowing plans are likely to run into opposition from the combative parliament elected in November – dominated by MPs constantly suspicious of the government’s and KPC’s financial management.
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