Project finance for the oil industry is anything but crude

How Intesa Sanpaolo has made a niche area its own, becoming a true first port of call.

03/05/2016


Over the past decade, Intesa Sanpaolo’s team in Hong Kong has built a valuable business in shipping finance, especially structured project finance for floating production, storage and offloading (FPSO) vessels.

These specialist oil-industry ships, which can cost more than US$1 billion each, are often used in relatively new fields where there is no pipeline infrastructure.

They are designed to receive crude from one or more wells, then process and store it until it can be transferred to tankers for transportation.

Intesa Sanpaolo took part in its first FPSO arrangement in 2007 and has helped to finance vessels for use on projects from Western Australia to India and Brazil, operated by leading oil and gas companies such as BHP Billiton, Woodside, Petrobras, ONGC and Eni. During that period, it has worked with leading FPSO operators including Modec of Japan and Bumi Armada from Malaysia.

However, during 2015 Intesa Sanpaolo significantly stepped up its activity in the FPSO project-financing market, working as mandated lead arranger on a number of large structured financings, including its first in partnership with Yinson Holdings of Malaysia, another of the world’s largest FPSO operators.

In particular, two major deals in 2015 marked an important breakthrough, extending the bank’s activities into the deep-water fields off West Africa: the US$780-million debut transaction with Yinson Holdings to build an FPSO vessel for use in oil fields about 50km off the coast of Ghana; and a US$1.1-billion deal with Bumi Armada – Intesa Sanpaolo’s second with the company in less than a year – for a vessel to be deployed off the coast of Angola.

In both cases, the lead field operator that will charter the vessels is Eni, the Italian oil and gas major that is one of Intesa Sanpaolo’s largest corporate clients.

In assessing the economic and credit profiles of these FPSO projects, the Project & Acquisition Finance team in Hong Kong has demonstrated its extensive knowledge and experience in the FPSO/offshore marine financing sector.

Simon Dodd, who heads the Asia Pacific Hub for Intesa Sanpaolo, says the important areas the bank looks at as a financier include:
  • The charterer’s experience in the offshore sector and the countries concerned as well as its support in the event of termination and force majeure;
  • The FPSO operator’s record in certain offshore environments, and the scope for redeployment in case of early termination. The FPSO operator’s credit profile is also important in supporting any potential cost overrun;
  • Potential government support to mitigate political and in-country risks;
  • The structure of the various project contracts and agreements including the O&M contract, the charter and the insurance cover;
  • The recoverable reserves and production life of the fields compared with the FPSO vessel’s economic life and the charter tenor;
  • The shipyard’s experience and record in construction quality and meeting delivery deadlines.

Dodd says these recent deals have given Intesa Sanpaolo strong commercial links with three of the world’s top five FPSO operators, as well as extending its relationship with Eni, one of Intesa Sanpaolo’s largest corporate clients.

“Although Intesa Sanpaolo is already an important corporate lender to Eni, we have so far had little opportunity to work with them on structured project finance – so the deals in Ghana and Angola widen our relationship with important clients as well as broadening the countries that the bank operates in”, he explains.

 

Photo: Simon Dodd, head of the Asia Pacific Hub for Intesa Sanpaolo.


In addition, securing its first deal with Yinson should give Intesa Sanpaolo increased access to the attractive, long-term market for FPSO structured project financing, adds Patrick OuYoung of the Hong Kong-based team. “Yinson is a growing company that acquired an existing FPSO operator, Fred Olsen of Norway, in 2013 and they intend to keep working with Eni as well as other oil majors on further transactions. So this is an important relationship for us that we hope will lead to further opportunities”.

 

Finally, the recent deals enabled Intesa Sanpaolo to demonstrate its strength and flexibility. For example, the borrower in the Yinson transaction was a Singaporean special purpose vehicle, meaning that the loan had to be booked in Singapore or risk being subject to Singaporean withholding tax.

 

Intesa Sanpaolo’s spread of operations across Asia, from its Asian Hub in Hong Kong, meant that it was able to book loans in jurisdictions that fitted the sponsor’s requirements and therefore meet an important condition for providing finance to the deal.

“We are now actively exploring other opportunities with our existing customers as well as other FPSO and offshore operators”, says Dodd.

How does FPSO financing work?

In FPSO project-financing deals, banks such as Intesa Sanpaolo provide long-term funding to enable an FPSO operator such as Yinson Holdings, Modec or Bumi Armada to commission a FPSO vessel and then charter it to an oil-field operator. Large oil companies send out invitations to tender to FPSO operators, which then begin discussions with banks over the financing of their bid.

 

Normally, the FPSO operator will appoint a financial adviser, or mandated lead arranger, to co-ordinate the lending banks and structure the financing, including details of the term sheet and the security to be provided against the loan.

 

Once the lending banks have provided their indicative financing packages, the FPSO operator will submit a bid to the oil major, containing the project details and economics, the technical specifications of the vessel as well as the related financing package. The oil-field operator will then select a preferred bidder and finalise terms.

 

After the vessel is built, which can take two or three years, the FPSO operator will sign a charter contract with the oil-field operator for an initial period of 10-20 years, normally with an option to extend the term depending on the expected life of the oil field.



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