The Strategy, combined with the various tax and regulatory changes, has helped to create an environment as well as the incentives to encourage investment in the refining and petrochemicals sector. So how have and will the upgrades and new capacity be built and financed. Limited recourse financing would seem to be one of the simplest ways to bring these projects on stream quickly and effectively. The Russian legal framework contains a number of structural impediments true limited recourse financing. However, in the last three years, and in a financial world where western banks have less to lend and higher barriers imposed on them by credit committees, a number of new structures have appeared in the Russian market.
We will look at two structures that have been utilised since the implementation of the Strategy.
In August 2010, Alliance Oil Company Limited (Alliance Oil) entered into a number of direct long-term financing loans totalling US$ 760 million with Vnesheconombank (VEB) (the Russian state development bank) for the upgrade of its Khabarovsk refinery. In line with the Strategy, the upgrade, expected to be completed by 2013, will result in enhanced refining yields and higher quality petroleum products. The refinery’s Nelson complexity index will increase from the current level of 3.4 to 9.9, and the depth of refining will improve from 61 per cent to 93 per cent. The production capacity will expand from 70,000 to 90,000 barrels per day.
Alliance Oil contracted the Spanish construction group Tecnicas Reunidas to complete the upgrade. As part of this process VEB and the Spanish Export Credit Agency (CESCE) supported the financing through an ECA structure that involved a syndicate of Spanish and French banks providing VEB with the majority of the US$ 760 million through three tranches backed by CESCE.
VEB used a very similar structure again in 2011 for the greenfield Tobolsk Polypropylene project for Sibur. Again VEB was the lender to the project company with a back to back ECA covered loan from a syndicate of western banks this time with coverage from Hermes (the German ECA).
Financing structures developed further with the financing of RusVinyl’s (a joint venture between Sibur and SolVin) €1.5bn greenfield PVC production plant project. This structure moved a step further to full limited recourse financing, with direct lending from EBRD and Sberbank and a club of commercial banks comprising ING, BNP Paribas/Fortis and HSBC with ECA cover from Coface (the French ECA) and the Belgian Export Credit Agency Office National Du Ducroire Nationale Delcrederedienst (ONDD). The RusVinyl deal utilises a unique combination of traditional limited recourse structures and some innovative Russian law structures to produce a workable and successful limited recourse financing.
Recently (17 September 2012), further enhancements to the options for financing of large infrastructure such as refining and petrochemicals plants have been proposed by the deputy Minister for Economic Development, Sergey Belyakov. The deputy Minister has suggested the financing of some major infrastructure projects could be supported by the state buying project bonds issued by the project companies. The deputy Minister spoke of up to US$46 billion being available for acquiring bonds. The deputy Minister’s proposal is consistent with the statements set out in the Strategy. The Strategy states that “…under conditions of sharp decrease in world oil prices and (or) crisis situations on financial markets the state will provide for necessary support for oil business by means of state guarantees provision for investments into the oil complex development, re-financing of oil companies liabilities, taxation optimization…”. Such bond buying would provide support to the projects and make them more bankable while at the same time ensuring the state is repaid for its support of commercial projects.
The combination of the VEB back to back structure, the tools used in the RusVinyl project and the proposed bond acquisitions provides further incentives for the refining and petrochemicals industry to upgrade and expand.