Energy Risk Deals of the Year 2012: SG CIB's Russian gas field financing

Société Générale Corporate & Investment Banking arrange €1.1bn financing for gas field in northern Russia

Energy Risk - Deals of the Year 2012

Russia, with its capricious bureaucracy and periodic outbursts of hostility against foreign energy companies, can be a challenging country in which to do business. But the bankers at Société Générale Corporate & Investment Banking (SG CIB) believe they have forged a model that will make it easier for multinationals to participate in energy projects in Russia.

In May 2011, SG CIB closed a €1.1 billion financing deal aimed at developing the Yuzhno-Russkoye Gas Field (YRGF) in northern Russia, which contains recoverable gas reserves of more than 600 billion cubic metres. The deal – almost four years in the making, and which was nearly derailed by the 2008 financial crisis – brought together 12 international banks and one Russian bank in raising the funds. The project’s total cost is estimated at €2 billion.

Adding to the complexity of the deal, the licence for developing the YRGF is held by a joint venture owned by three shareholders. The venture, called Severneftegazprom (SNGP), is 50% controlled by Russian state energy giant Gazprom, while Germany’s Wintershall and E.on Ruhrgas E&P each own another 25%. “All three sponsors had different objectives, constraints and policies,” says Christophe Roux, SG CIB’s head of reserve-based finance for Europe, the Middle East and Africa as well as the former Soviet Union. “Allowing them to achieve their respective objectives in an incorporated joint venture, with one single project finance deal where they all took risks on each other through the contractual structure, was quite a challenge. But I think we managed to do it successfully.”

In a unique twist, SG CIB structured the financing as a multi-currency facility that uses the Russian ruble alongside dollars and euros; the mix is 43% euros, 43% dollars and 17% rubles. The tenor of the financing is eight years, which is relatively long for Russian project finance, although in the event of unexpectedly high profits, the lenders can get their money back early under a cash sweep mechanism.

Unlike previous energy deals in Russia — such as the Sakhalin I and II production-sharing agreements of the 1990s, which were concluded between foreign oil majors and the Russian state using international arbitration clauses — the contractual framework for the YRGF financing is grounded in Russian law. This is because SNGP’s gas will actually be sold domestically, with Gazprom as the final domestic buyer. To share the profits with the two foreign shareholders, portions of the gas will be sold from SNGP to Gazprom via two Russian trading companies, who will then funnel their profits to Wintershall and E.on Ruhrgas E&P. All that required an intricate web of contracts and lengthy negotiations to hammer out the counterparty risk issues.

SNGP was essentially a Russian midcap sitting on top of one of the biggest gas assets in the world

Relying on Russian law created a number of difficulties. Certain legal constructs commonly used in energy deals internationally, such as take-or-pay provisions in a gas sales agreement, are invalid under Russian contract law. To get around such problems, SG CIB and its lawyers crafted a separate set of contracts under English law, in addition to the Russian-law contracts, to create a framework that met the expectations of the foreign shareholders and lenders.

Obviously, it was not easy to assemble such a complex deal, but Roux thinks his team has invented a model that can be used to bring foreign financing to other domestic Russian projects, ranging from oil and gas developments to power-generation plants.

His counterpart at Gazprom agrees. “The finance for the YRGF is a ‘first’ in many ways,” says Igor Golenitshev, head of Gazprom’s debt and project finance directorate. “It is the first onshore upstream project financing in Russia with reliance upon revenues in the national currency and Russian-law contracts, and so sets the precedent for limited-recourse financing for energy projects in Russia that would be replicated for other projects in future. SG’s technical, modelling and structuring skills and its experience in combining them to achieve the best possible outcome was instrumental in creating a finance structure for this unique project that served our objectives and was attractive to the bank market.”

The process of arranging financing for YRGF started half a decade ago, with an initial bridge loan in 2007. Various factors made it a long and arduous journey. The 2008 financial crisis threatened to kill the project altogether, as credit dried up and lenders abandoned risky projects, and Russia’s bureaucracy added to the delays. It took two and a half years for authorities to declassify internal SNGP documents about its gas reserves, which international lenders needed to perform their due diligence.

Looking back, Roux says his team’s biggest accomplishment was helping transform SNGP to bring it in line with the requirements of international lenders. “SNGP was essentially a Russian midcap sitting on top of one of the biggest gas assets in the world,” Roux says. “We spent considerable time explaining the requirements of international project finance, raising the company’s profile to the standards we recommended, and bringing it to the market. If there’s one thing we’re really proud of, that’s what it is.”

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