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Natural gas is quietly stealing the spotlight in the multi-billion dollar race for cash

  London, 11th Apr 2001

   Oil usually grabs the headlines in energy investment but low-profile, clean-burning natural gas is quietly stealing the spotlight in the multi-billion dollar race for cash.

A crippling shortage in the power-guzzling west coast of the United States and new investment opportunities in countries previously closed to outsiders has sparked a rush to finance gas projects, especially for capital-intensive liquefied natural gas developments, bankers say.

"LNG is the market for the next decade due particularly to environmental considerations and significant technological efficiency gains at LNG facilities. Gas's time has come," said Stephen Moore, vice president and senior credit officer at Moody's Investors Service.

Bankers agree that there are more project finance opportunities now in gas than in oil as producers seek to lessen their dependency on crude revenues.

"There are plenty of gas opportunities but limited oil opportunities. Many companies believe that the shortage of gas in the United States is real and will continue," said Robin Baker, head of oil and gas in Europe, Middle East and Africa at French banking group Societe Generale.

"Exploration has increased in North America but it has not yielded sufficient reserves to bridge the gap," said Baker. "It completely changes the game for natural gas. But a lot of the international gas projects depend on how you get the gas to the market."

Natural gas normally must be delivered by pipeline making it impossible for most producers to sell into the United States which explains the boom in LNG projects - where gas is frozen and shipped by tanker.

Qatar has been the pioneer among producers tapping the project finance market, most recently securing a $1.2 billion financing package for the NGL-4 project.
But bankers said the opportunities are impressive in other producing nations despite political risks. Nigeria, Angola, Algeria, Egypt and the former Soviet Union all are seeking finance for key projects.

"Since most of these projects are export-oriented and the fact that you are earning dollars and can place those earnings offshore mitigates political risk," said Mike Powell, head of project finance at investment bank CSFB.

Moves by Saudi Arabia, the world's largest oil exporter, to open up its prized hydrocarbon sector to foreign investment in upstream gas sent oil companies scrambling to draw up investment proposals.

Soon the kingdom is expected to announce which companies will participate in three core ventures and the race by banks to provide financing is expected to follow. "I think the Saudis realise they need to start being more fiscally prudent and they know they cannot count on high oil prices to keep them going. They really need to diversify," said Taimur Ahmed of Project Finance magazine.

Interest is there in the lending community. A place like Saudi is ripe ground. All it needs is a bit of legal and regulatory restructuring and then you have a perfect market." But the pace of oil project financing has disappointed some bankers, considering a prolonged rally sent crude prices to their highest levels in a decade last year.

Though activity has picked up since 1998 when oil prices fell below $10 a barrel, bankers say the demand for new financing is not as brisk as they had expected. "High oil prices have certainly increased capital investment in the industry, but not in direct proportion with the higher cash flows," said SocGen's Baker.

A merger wave which swallowed up a number of banks and oil companies also narrowed the playing field and diverted immediate attention away from investment. "We have seen consolidation in the industry which means that it has taken a bit longer for the companies to work out their priority projects and to figure out where they want to be in certain industries," said John Scott, senior vice president and director of oil and gas at Dutch bank ABN Amro.

The demise of some smaller independent oil companies, traditionally heavier users of project finance, means that banks rely more on business from majors and middle-tier oil companies who make more selective use of the product, bankers say. The conservative investment policies of oil companies and investment opportunity constraints have also modified the impact of the oil price boon.

"There's more optimism in the market in terms of getting projects out there, but the oil price is not the sole driver," said Moody's Moore. "History, and the current budgets of most Middle Eastern nations, highlight that the current oil price market is unlikely to be sustainable long term. Oil companies have always been long-term players looking through the cycles."

Source: Gulf News

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