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