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EBRD wins Project Finance prize for "vanguard" SeverTEK deal

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Related links Russia homepage Natural resources homepage SeverTEK [Project Summary Document] EBRD, HypoVereinsBank in major Russian oil investment [Press Release] Syndications showcase [EBRD - Syndications]

South Shapkino fields - SeverTEK's test site seen from the air.

A nomadic family of reindeer herders.

Project pushes the envelope of what constitutes bankable risk in Russian oil and gas

Banking usually brings its own rewards but the EBRD's $200 million SeverTEK deal, to develop oil reserves in Russia's Arctic, has also earned the Bank accolades from Euromoney's Project Finance magazine.

The magazine has awarded its European Oil and Gas 2002 Deal of the Year prize to the Bank and its SeverTEK partners: HypoVereinsbank (HVB) of Germany, the Russian oil company LUKoil, and Fortum, a Finnish state-controlled oil firm. In an article published last year when the joint venture was launched, Project Finance said the EBRD and its partners were "at the vanguard of the vanguard" in organising the SeverTEK deal.

SeverTEK will develop oil reserves estimated at 130 million barrels onshore in the South Shapkino fields. These are roughly 2000km north-east of Moscow, 70km above the Arctic Circle.

Setting an example

According to Project Finance Magazine, "this deal is a prime example of the EBRD doing what it should be doing - pushing the envelope of what constitutes bankable risk in Russian oil and gas, and setting a template for future projects without multilateral support."

"SeverTEK was, in fact, the first project finance deal in Russia's oil and gas sector since the 1998 Russian financial crisis," said Paul Shapiro, principal banker in the Bank's natural resources unit. "This was a very complex transaction with two high profile sponsors and a number of new issues requiring a real team effort. Being above the Arctic Circle, it is also in a technically demanding and environmentally sensitive area. For this, Fortum, a Finnish company with strong 'green' credentials and LUKoil, which has extensive experience in the region, were ideal project sponsors."

In announcing the award, Project Finance magazine said what set the SeverTEK deal apart was the fact it is not built on a production sharing agreement (PSA).

Investment risks

Many multinational oil companies, worried about unpredictable government, refuse to invest in the ex-Soviet bloc unless they are granted PSAs. These agreements establish long-term legal and tax regimes for oil projects. Said EBRD associate banker Olwyn Buldhoo: "PSAs have been successful in other former Soviet republics such as Azerbaijan, providing a certain degree of comfort to foreign investors. However, foreign oil and gas investment in Russia has stagnated because of the difficulty in reaching agreement and finalising PSAs."

"The Russians argue other countries may need PSAs to attract investment but Russia has existing legislation in place to protect companies' interests," said Mr Buldhoo. "There are situations in which PSAs may be preferred but in the case of SeverTEK, given the project structure and quality of the sponsors, a PSA was not necessary."

The market seems to have agreed. So attractive was the SeverTEK deal that syndication of the $100mn 'B' loan underwritten by HVB was substantially oversubscribed. "To ensure the success of the syndication, we worked closely with both LUKoil and Fortum to bring in a bank of their choice as an underwriter before general syndication," said Sabina Hampel, senior syndications manager. "This was important given the nature of the project and the fact this was one of the largest B loans ever syndicated for a Russian borrower. This approach meant the client could be assured of his money early in the process, and the bank market also took great comfort from the fact that a major bank was ready to commit up-front to the total B loan."

Satisfying the Bank's project goals

Another factor in winning the award was that SeverTEK mounted the project without an 'offtake' agreement - a pre-arranged export contract for the oil with receipts going into a pledged account offshore. This is in recognition of LUKoil's and Fortum's strengths in oil marketing and the benefit of flexibility in being able to choose the most profitable among the many domestic and international options for selling oil at any time.

"Even though the lack of offfake agreements and PSA was a major departure from market practice, we went ahead because of our confidence in the sponsors and the business environment," said Mr Shapiro. "This deal speaks highly of all involved in that we were able to go beyond the usual tangible supports and focus on intangibles such as the companies' long term interest in the region and in making a successful joint venture to foster further such joint ventures. We were also able to specifically value LUKoil's local experience with both technical and socio-political issues in the area."

The project is soundly in keeping with the EBRD's central goal of promoting Russia's transition to a market economy. It could be said the 'transition impact' in this deal is on the international investment community as much as on the recipient country. With this deal the EBRD has set the foundations for further investment in this sector and region.

Photos by Paul Shapiro

25 February 2003