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Aramco Draws on Export Finance as Bank Loans Wither: Arab Credit

Middle Eastern and North African companies planning $740 billion in energy projects will need to tap foreign export credit agencies and local banks as commercial lending to the industry slumps to a nine-year low.

Loans for facilities such as refineries and power plants may dwindle to $13 billion this year, down from a record $44 billion in 2010, as European banks curtail exposure to the region, said Arab Petroleum Investments Corp., a multilateral investment bank. Companies in 18 nations from Morocco to Oman have paid an average of 190 basis points above the London Interbank Offered Rate for loans this year, up from an average of 157 basis points from 2007 through 2011, data compiled by Bloomberg show.

Saudi Arabian Oil Co., known as Saudi Aramco, and Qatar Petroleum are already turning to export credit agencies, state- backed lenders that finance purchases of equipment and materials from their countries. Political upheaval from the so-called Arab Spring has made global banks more wary of the region. Bonds hold scant appeal as an alternative to loans because many energy companies in the Middle East and North Africa lack ratings.

“Local banks can help in bridging the financing gap for energy projects over the coming five years, but they can’t cover the whole gap alone,” said Ali Aissaoui, a senior consultant at Arab Petroleum Investments, known as Apicorp. Margins could top 200 basis points, he said in a telephone interview from Khobar, Saudi Arabia, on Oct. 15.

Iraq’s Example

States supplying at least 52 percent of global crude want to invest $740 billion in energy projects through 2017, Apicorp said, to boost output and meet local demand for oil and natural gas. Iraq alone needs to invest $16 billion a year to fulfill its potential for doubling crude production by 2020, the International Energy Agency said in a study published Oct. 9.

Oil-producers, enriched by prices averaging more than $112 a barrel in London this year, can pay for much of this targeted investment from their export earnings and internal funds. They’ll need to borrow the rest, as will energy and utility companies in nations with negligible oil and gas reserves. The last time combined loans for energy projects were as low as Apicorp projects for this year was in 2003, at $10 billion.

ACWA Power International, a privately owned Saudi utilities company, plans to triple its generating capacity to 38,000 megawatts by 2017 and will borrow as much as 80 percent of the needed money from regional banks and other lenders, Chief Executive Officer Paddy Padmanathan said in Riyadh on Oct. 1.

Costlier Loans

Demand for funds is rising even as the cost of capital increases. The three-month interbank lending rate in Saudi Arabia, the largest Arab economy, has risen 19 basis points this year to 0.96625 percent today, the highest since April 2009, data compiled by Bloomberg show.

“The issue with margins on energy loans is the same with oil prices: They are high because of the geopolitical situation in the region,” said Fahad Alturki, senior economist at Riyadh- based Jadwa Investment Co. Predicting margins for next year is difficult, “as the margins and cost of borrowing will depend on how the U.S. and Europe deal with their fiscal problems,” said Alturki, formerly a vice president for research at Barclays Saudi Arabia before he moved to Jadwa this summer.

Saudi Arabia, propelled by record oil revenues from crude prices that have risen 6 percent this year in London, is bucking the downturn in lending, with syndicated loans more than doubling so far in 2012. Companies funding projects in the world’s biggest oil exporter raised almost $12 billion in loans this year from banks including Banque Saudi Fransi and Samba Financial Group (SAMBA), according to data compiled by Bloomberg. That’s up from about $5.3 billion at the same time in 2011.

U.S. Ex-Im Bank

Export credit has gained favor among borrowers in the six- nation Gulf Cooperation Council as debt woes constrain European lenders. Saudi Electricity Co. (SECO) may seek such funds next year to meet $10 billion in capital expenditure, Manish Manchandya, the head of corporate finance, told reporters in Dubai on Oct. 9.

The U.S. Export-Import Bank approved a $5 billion loan to Sadara Chemical Co., a joint venture between Saudi Aramco and Dow Chemical Co. (DOW), the bank said on Sept. 27. The credit for construction of a petrochemical complex boosted total Ex-Im Bank loans in the region this year to $8.9 billion.

Abu Dhabi National Energy Co. (TAQA), the state-controlled power and oil producer known as Taqa, signed a $1.4 billion loan agreement in June to expand a generating plant in Morocco. As part of the project, three Asian export credit agencies provided their first-ever funds in that country, Taqa said on June 21.

Japanese and South Korean credit agencies also helped Qatar Petroleum raise $7.2 billion to develop the Barzan gas field, in the Middle East’s biggest syndicated loan last year.

Apicorp’s Aissaoi said the regional reliance on export credit will probably intensify as borrowing costs rise.

“The total cost of financing for power projects is unlikely to come down much further,” said Padmanathan of ACWA Power. “If anything, they will start creeping back up to the 2000- 2010-era levels.”

To contact the reporter on this story: Wael Mahdi in Manama, Bahrain at wmahdi@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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