RasGas's bond sale was oversubscribed by energy-thirsty investors

RasGas Managing Director Alexander Dodds told Oil&Gas Middle East in an interview that Qatar’s commissioning of mega gas plants Trains 3 and 4 hit technical problems due to quality control challenges.

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By  Alex Forbes Published  November 14, 2005

RasGas's bond sale was oversubscribed by energy-thirsty investors|~|Photo-3-Fuwairit-ship200.gif|~||~|O&GME: You’re in the process of completing a huge financing package for RasGas 2 and RasGas 3. Can you describe how that package has been put together?

AD: We went out to the market looking for a $10 billion financing package for RasGas in two tranches. Basically, we wanted access to funds from the financial community that would allow us to complete the development of Ras Laffan 2, which is Trains 3, 4, and 5, and Ras Laffan 3, which is Trains 6 and 7.

The first tranche of that financing has been captured. We went out to a combination of banks and bondholders to canvass for interest. In fact, the whole offering was over-subscribed. We’ll be coming out with the results very soon. Our first tranche of around $4.6 billion will take us through the end of next year.

The unique aspect of this financing package was that we were basing the sell on the fact that repayment of the loan would come from existing revenues from Trains 3 and 4. We’re expecting RasGas’ revenues–come 2010 when all seven trains are online–to exceed $10 billion/year, based on conservative oil price and gas price assumptions. That presented a significant opportunity for the financial community to participate in a very healthy business.

The finance community is very interested in analysis of all the various risks involved before fronting up such huge sums of money. What are the main risks that have concerned potential investors?

During the road show, the question that I was asked most often was, “What’s the single biggest concern that you have now? What keeps you awake at night?” We’ve adopted a comprehensive strategy on risk mitigation around cost escalation, and around contractor selection, and making sure that we had qualified, capable, competent people that could build this stuff that we’ve contracted.

What I need to pay most attention to is making sure that we’re able to recruit the people we will need to operate these trains through 2010 and beyond. The market for qualified, competent people to work in the LNG business is very tight. We’ve focused a global recruitment strategy, east and west of Suez, to make sure that we get the 1,500-employee workforce we need long-term.

The other question that came up frequently was around security.

In Ras Laffan City, we benefit from state-of-the-art physical security, with regards to the fences, the security guard force, and the audio-visual monitoring. We’ve replicated that within our own facilities. So there are two levels of physical security.
We’ve designed the plants with the trains spaced physically far enough away from each other that, were there to be an event that caused a vessel or a line to rupture, there would be very little collateral damage. And were there to be a catastrophic event, which is highly unlikely, we would be able to re-build the facilities within a reasonable timeframe. We believe we’ve got as secure a facility and procedures as we can have.

What about technology risk? The leap from 4.7 mtpa liquefaction trains to 7.8 mtpa trains is huge. Given that you have had some problems with commissioning Trains 3 and 4, how confident are you that the technology will work?

The issue with Train 3 wasn’t technology; it was quality control. We learned a significant number of lessons with the start-up and commissioning of Train 3 around the quality control required as you’re building these trains. We’ve adjusted our view as a result of those lessons. As you mentioned, Train 4 is now up and running. We have had a number of what I would call normal process related upsets in the streaming of the LNG train, but nothing that would be classified as a technology concern.

We’ve had the usual issues associated with the start-up and cooling down of the process: things expand and contract, you get leaks here and there, and that shuts the plant down. But the train’s up and running, and running smoothly today.
The 7.8 million metric ton trains are a significant step out from the 4.7 million metric ton trains–but our shareholders, Qatar Petroleum and ExxonMobil, did an extraordinary amount of due diligence on the technology research prior to making the commitment to go for these larger trains.

Qatargas Train 4 will be the first 7.8 million metric ton train to come on line. RasGas Train 6 will be the second. As Qatargas 2 brings up its train, we’ll get the benefit of all the start-up and commissioning experiences that they go through. And vice versa. When they start up their second Qatargas 2 train, Train 5, we’ll have had Train 6 up and running.

Qatar has ambitious LNG targets: 77 mtpa by 2010. This is an astonishing number, three times what Indonesia produced in 2004. What has made Qatar so successful in developing LNG production capacity?

Qatar has three advantages over other, more traditional LNG ventures. The first is that the reservoir risk in the North Field is relatively low. And the reservoir is relatively homogeneous, which provides significant advantage in our approach to risk.
The second thing is that the state of Qatar’s vision, as described by His Highness the Emir, is very clear. There’s incredible clarity with regard to just what the tactics are going to be to get Qatar to reach its vision in the 2010 timeframe. That’s overlain with a business environment that has clear procedures and processes.

The last thing I would say that has helped Qatar raise the bar in terms of competition is the fact that it has high quality shareholders in the joint ventures–competent operators with lots of experience in the LNG business. In RasGas we have ExxonMobil, the largest multinational oil company in the world.

You commissioned one of the largest-ever liquefaction trains in early 2004, and a second identical one just now in September, with a third due in early 2007. A couple of years after that we’re looking at 7.8 mtpa trains, bigger than many of the multi-train projects that we see today. The ships you’ll be using are also much larger than those used today. What has kept RasGas at the forefront of technology innovation in LNG?

The company has a vision to be the pacesetter in the LNG business. It has focused on ensuring that there are technically competent people in our organisation across the spectrum of work. And that goes from the reservoir engineering, the drilling, the construction, the process engineering, the operations, the accounting, support services, and human resource development, through to the marketing side of the business. There’s been an incredible focus on maintaining a competitive edge.

ExxonMobil brings a perspective to the table that, along with Qatar Petroleum, allows us to take advantage of global best practices in just about everything we do. We also share a lot with and learn a lot from our sister company Qatargas. We develop together. Qatargas and RasGas should be viewed as equivalent in terms of their technology advances and capability.

Ras Laffan City will be the largest concentration of natural gas-based industry in the world pretty soon, if it isn’t already. And all the projects are based on the resources in the North Field. Earlier this year, a moratorium was announced on further development beyond the already-firm projects that have been announced. Why?

There are three sides to this. The first is that, with the projects that have been approved, we’ve met the objective that Qatar had to reach--77 mtpa of LNG.
Secondly, it’s prudent reservoir management to pace development to make sure that we’re using the information that’s coming out of the reservoir to be clear that we’ve got the right development strategy for the four zones in the Khuff reservoir. It’s important to calibrate the production history with the reservoir models to ensure that the models are predicting what is actually happening.

What has been a blessing as a result of this moratorium is that the planning for the development of RLC is now clear. We now have a clear picture on the number of ventures in this phase of the North Field development. So we’re able to tie down how many roads we need, how many construction camps, how many shared services in terms of electricity, cooling water, and so on.

Going back to innovation, it’s not just in train size and in ship size that we’ve seen innovation, there have also been innovations upstream in the North Field, haven’t there?
There are three key ones. The first relates to the well bores that we’re using. We’ve adopted the utilisation of large-bore completions for the wells–and I believe that all future ventures are going to do the same. That allows you to have much higher well bore rates which reduces the number of wells that you need, which presents significant savings.
We’re also applying state-of-the-art drilling techniques, thanks to our access to ExxonMobil technology. We’re using a technique called “Fast-Drill” which is allowing us to drill these wells in record time.

On the facilities side, for Trains 1 and 2 the design included offshore dehydration of the gas. For trains 3,4,5,6, and 7, the dehydration modules are onshore. That has saved costs at the front-end, and it will save us operating costs.

Downstream, our work with ExxonMobil and Qatar Petroleum on the development of the Italian offshore Regas terminal at Porto Levante is going to be a world first. The terminal will be a gravity-based structure that sits on the seabed, about 17 km offshore Italy. We did that to overcome some of the issues associated with the siting of regasification terminals on the coastline.

RasGas and Qatargas have a policy of integrated project development, with involvement at all stages in the chain. What are the key advantages to doing that?

Contributing to parts of the value chain downstream of the liquefaction plant gives you the opportunity to negotiate the best, most competitive deals and to have the confidence that everything’s going to come together at day one, and that LNG’s going to reach the customer.

If you look at sales to the US, we will probably elect to sell our LNG to the US, and therefore we’ve entered into shipyard slot agreements for all the ships that are required for the LNG from Trains 6 and 7 that will be going to the US. We’re also working with ExxonMobil and Qatar Petroleum on the onshore terminal that they are going to build there–Golden Pass on the Louisiana/Texas state border.

We’ve also negotiated a capacity agreement in the Zeebrugge terminal with Fluxys in northwestern Europe.
Our Asian customers in South Korea, and now Taiwan, have their own terminals already, and those deals are FOB, with some potential ex-ship spot sales.

There’s so much LNG construction activity going on, not just in Qatar but around the world, that there is a lot of competition now for EPC contractors. Moreover, China’s rapid economic growth has affected the costs of commodities such as steel. You’ve just awarded the EPC contract for Trains 6 and 7. Have you found those factors to be a problem?

Yes, the market is tightening and costs have started to increase as the global economy develops.

But prior to the signing of the EPC with Chiyoda-Technip and McDermott, we’d elected–where we felt there was exposure to cost escalation in the exotic materials and metallurgy that are required for some of the processes–to lock up capacity in the yards for that equipment. We secured capacity with GE for the turbines, with Air Products for the main heat exchangers, and with a number of valve suppliers. And, at the same time, we were negotiating the EPC.

Now, we’ve awarded a lump-sum EPC so there’s no exposure to further escalation.

These other materials supplies, which we’ve already locked up, will be assigned to the EPC contractors for execution.
So, we feel relatively confident that we’ve addressed the issue of cost escalation in our contracting strategy.

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