CHAPTER 18 OBTAINING FINANCING FOR OIL AND GAS PROJECTS IN LATIN AMERICA
| Jurisdiction | United States |
(2001)
OBTAINING FINANCING FOR OIL AND GAS PROJECTS IN LATIN AMERICA
Clifford Chance, Rogers & Wells
Sço Paulo, Brazil
[Page 18-1]
INTRODUCTION
Last year (2000) saw the successful completion of three large oil and gas financings for Brazil's Petrobras — Petróleo Brasileiro S.A. In aggregate, in the vicinity of US$5 billion was raised from international private banks, Japan government institutions, Japanese trading companies and the Brazilian Development Bank, BNDES.
These three deals provide good and impressive examples of how finance on a grand scale can be obtained for oil and gas projects in Latin America. Moreover, they are a prelude to several years of high activity for Petrobras in the oil and gas sector in Brazil which is being driven by a number of factors including the strategic desire of the Brazilian government that Brazil becomes self-sufficient for its energy requirements, current high oil prices, Petrobras' own strategic objective of becoming a major player in the international oil market and the need to fuel the planned expansion of electricity generation capacity in Brazil. Petrobras' ambitious strategic plan calls for investments of US$32.9 billion in the period 2000-05, of which 68% is to be invested in upstream projects.
Because of the scale of these activities and their current relevance, this paper will concentrate initially on the issues that are pertinent to Brazil. A general discussion will then follow providing an overview of considerations which are of general relevance to oil and gas financings. It is hoped this general discussion will provide a background against which lawyers practising in Latin American countries can identify problems and solutions applicable to their respective jurisdictions. Section III contains a study of some of the issues relevant to the oil and gas sector in Colombia, where there are interesting contrasts with the concession structure generally adopted elsewhere. The paper will conclude with some observations on other Latin American jurisdictions.
The writer is an English qualified lawyer based in Sço Paulo and he has relied as to matters of local law in the jurisdictions covered on the helpful assistance received (and for which he is extremely grateful) from the following: Brazil-Daniela Ribeiro Davila of Ribeiro & Barreto, Rio de Janeiro; Argentina — Alejandro Candiotti of Martelli, Abogados, Buenos Aires; Colombia — Rafael Arenas and Sandra Rodriguez of Arenas, Lopez, Montealegre & Plazas of Santiago de Bogota; Peru — Miguel Ronceros Estudio Rossello; Lima and Venezuela — Adriana Vigilanza Garcia of Vigillanza, Colemenares & Torrealba, Caracas.
[Page 18-2]
I. THE IMPORTANCE OF THE BRAZILIAN CABIÚNAS, EVM AND BARRACUDA PROJECTS AND SOME BRAZILIAN LEGAL CONSIDERATIONS
During the period 1996-98, Petrobras was under severe regulatory restrictions on its budget. Capital expenditures were effectively capped at US$3.5 billion by the Federal Government and Petrobras' borrowing capacity was limited by other priorities on public sector indebtedness. While the National Constitution had already been amended in 1995 permitting privatisation of the oil industry, the law which regulated the activities of Petrobras and provided specifically for the new role Petrobras was to play as a competitive participant in the international oil market was only approved in August 1997 and implemented in 1998.
With the implementation of the stabilisation plan in Brazil in 1994, consumption of oil in Brazil increased from less than 1.3 million barrels per day in 1993 to almost 1.8 million barrels per day in 1998. New discoveries in the Campos Basin off the coast of Rio de Janeiro State such as the Roncador field and new records in deep water production depth, particularly in the Marlim field where development had begun in the early 1990s, could not, however, be used to increase domestic oil production as Petrobras was, due to the budgetary restrictions imposed upon it, effectively barred from investing with its own resources or from borrowing to finance its investments. In addition, the capital expenditure used by Petrobras for the strategic Bolivia-Brazil Natural Gas Pipeline had further reduced Petrobras' budgetary availability for any oil field development.
To undertake new oil developments, therefore, Petrobras was forced to investigate financing on the basis of a project financing style structure. The principal aim of the financing structures was to have each project fund itself without the need for Petrobras to divert any of its existing cash generation which, given that Petrobras is a Government entity, would have an adverse impact on the Brazilian public sector accounts. The secondary objective of the financing structures was to have the projects treated as being off-balance sheet for Brazilian private sector accounting purposes and thus avoid being treated as a liability on Petrobras' balance sheet.
The initial projects chosen to be financed in this way were Marlim, Cabiúnas and Barracuda. Marlim was financed in the domestic market at the end of 1998. EVM was later arranged as a further project by lumping together the Espadarte, Voador and Marimba fields.
Out of all of the oil production projects to be financed, Cabiúnas was of particular importance to Petrobras for a number of reasons. Firstly, natural gas' share of Brazilian energy consumption is projected to increase from slightly over 2% to over 10% in the next five years, mainly to fuel industrial and thermal-electricity generation to complement existing hydro-electric generation. While Petrobras' role in the natural gas sector was assured by its earlier construction of the Bolivia-Brazil Natural Gas Pipeline, the associated gas from oil production in the Campos Basin is expected to be required to meet this increased demand before 2005. Secondly, there have been environmental concerns raised over pollution caused by gas flaring from Petrobras' oil fields in the Campos Basin. One of the key aims of the Cabiúnas investment is to cut the amount of gas flared off and thus substantially reduce the pollution produced as a result. Thirdly, the effective use of the associated gas in the Campos Basin will permit a higher level of oil production and
[Page 18-3]
over-all better utilisation of hydrocarbon resources. Finally, Petrobras decided that the Cabiúnas financing structure be used as the template for the later EVM and Barracuda projects.
All the oil production projects are, however, important to Petrobras to meet Petrobras' own production targets and Brazil's demand for oil which still relies on the international market to supply over 30% of its requirements.
The first of the three deals to close was the Cabiúnas Gas Flare Project (Cabiúnas) which signed on 1 March 2000. This project is focused on reducing current gas flare from oil producing platforms in the Campos Basin and increasing throughput in the Cabiúnas pipeline and compression system. Funding for this project, including interest during construction, is being provided by a number of sources with Japan Bank for International Co-operation (JBIC) providing US$459 million of debt, a syndicate of commercial banks led by Bank of Tokyo-Mitsubishi, Ltd. providing US$306 million of debt and "trading" Mitsui & Co., Ltd. and Sumitomo Corporation providing US$85 million financing in the form of equity and subordinated debt.
The substantial Japanese investment in Cabiúnas, (and EVM and Barracuda) is a reflection not only of the strong relationship between Japan and Brazil at a state, business and cultural level but also of Japan's desire to secure reliable sources of energy for the future. It also demonstrates the great confidence that Japan has in the future development of Petrobras and the Brazilian oil and gas sector. To be involved on such a large scale was a deliberate strategic Japanese Government decision. This country made similar strategic decisions in the 1960s, assisting the development of (and assuring its sources of supply from) iron ore mines in both Brazil and Australia.
In addition to political risk insurance (PRI) provided by Multilateral Investment Guarantee Agency (MIGA), the commercial syndicate of banks also had the benefit of PRI and partial commercial risk insurance provided by the Japanese Ministry of Trade and Industry (MITI). The availability of this insurance also benefited the project by lowering the lending spreads charged by the commercial lenders.
It was Petrobras' intention that the Cabiúnas transaction should be used as a template for its future oil and gas project financings (principally EVM and Barracuda). Great care was therefore taken to ensure that the commercial deal agreed and the structure and terms of the documentation for Cabiúnas were an appropriate basis for the agreements to be entered into on each of the later deals. In structuring the documentation for Cabiúnas, some difficult legal and commercial issues needed to be addressed, the principal issue being that since Petrobras was subject to strict Brazilian government restrictions on its borrowings, the transaction had to be treated as being off-balance sheet for Petrobras under Brazilian accounting rules. Cabiúnas was one of the first off-balance sheet deals financed by Petrobras.
Off-balance sheet treatment for the project was achieved by structuring the financing on an operating lease basis. The bulk of the project assets are to be constructed and procured by a leasing vehicle (established in the Cayman Islands by Mitsui & Co., Ltd. and Sumitomo Corporation) and then leased to Petrobras. Rentals paid by Petrobras under the lease are to be used by the leasing vehicle to pay debt service and dividends. Particular care was taken to ensure that the lease would be viewed under Brazilian accounting rules as being
[Page 18-4]
an operating lease (and hence off-balance sheet)...
To continue reading
Request your trial