Financing Energy Projects in Developing Countries

535 Pages·2007·9.545 MB·English

by  Razavi, Hossein

F
INANCING
E P
NERGY ROJECTS
D
IN EVELOPING
C
OUNTRIES
H R , P D
OSSEIN AZAVI H
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DISCLAIMER
The recommendations, advice, descriptions, and the methods in this book are
presented solely for educational purposes. The opinions in this book are those of
the authors and are not attributable to CRA International, Inc., or the University of
Houston. The author and the publisher assume no liability whatsoever for any loss or
damage that results from the use of any of the material in this book. Use of the material
in this book is solely at the risk of the reader.
Copyright © 2007 by
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Cover Designer: Charles Thomas
Book Designer: Wes Rowell
Library of Congress Cataloging-in-Publication Data;
Razavi, Hossein.
Financing energy projects in developing countries / Hossein Razavi.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-59370-124-6
1. Energy industries—Developing countries—Finance. 2. Energy development—
Developing countries—Finance. 3. Economic development projects—Developing
countries—Finance. I. Title.
HD9502.D442R39 2007
333.7909172’4--dc22
2007032121
All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transcribed in any form or by any means, electronic or mechanical, including
photocopying and recording, without prior written permission of the publisher.
Printed in the United States of America
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P
REFACE
This book provides firsthand information and analysis
regarding how multilateral, bilateral, and commercial financiers
make decisions about oil, gas, and power projects. The financing
of energy projects in developing countries is challenging in
relation to each country’s business environment, government
behavior, and political risk. Hence, putting together an
attractive financing package requires an intimate understanding
of all of the following:
• The availability of many sources of soft loans, credits,
grants, tied loans, and untied loans
• The objectives, tendencies, and requirements of various
financiers
• The possibilities for combining borrowing and guarantee
instruments
• The effective ways of approaching financiers
This book describes the intricacies of public and private
financing of energy projects and provides guidance in preparing
upstream and downstream oil and gas projects, as well as
power generation, transmission, and distribution projects. It
is divided into three parts: Part I comprises two brief chapters
that provide a background of project and corporate financing
and the challenges of funding projects located in developing
countries. Part II consists of five chapters that introduce the
major sources of funding for oil, gas, and power projects.
The sources discussed include global multilateral institutions;
regional development banks; bilateral aid, credit, and insurance
agencies; and commercial capital markets. Part III consists of
four chapters that provide guidelines for the preparation of
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successful project packages. These guidelines include methods
for the analysis of business environments, economic and
financial viability, financial structures, and environmental
concerns for oil, gas, and power projects.
It has been more than 10 years since the first edition of this
book was published. The intervening decade has seen a bust and
a boom in energy investment and energy finance. As a result,
many new players have entered the business of financing energy
projects in emerging economies, and many new methods have
emerged. These changes necessitated the creation of a new
edition of this book. This edition addresses the new business
environment by discussion and case studies throughout—
particularly in the sections devoted to the description of
financiers and the presentation of bankable projects.
Hossein Razavi
The World Bank
Washington, DC
October 2007
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C
ONTENTS
List of Executive Overviews ...................................xv
Summaries ......................................................xv
Figures ....................................................... xvii
Tables ..........................................................xix
Preface ............................................................xxi
Acknowledgments ............................................ xxiii
Abbreviations and Acronyms ................................. xxv
Units and Conversion Factors .............................xxxiii
Oil .........................................................xxxiv
Gas .........................................................xxxiv
Electricity ...................................................xxxv
PART I: THE SETTING .................................................... 1
1 FUNDAMENTALS OF PROJECT FINANCING ......................... 3
Recourse and Nonrecourse Financing ......................... 5
Mobilizing Equity and Debt Finance .......................... 7
External Sources of Funds .....................................12
Project Risks .....................................................16
2 CHALLENGES OF PROJECT FINANCING IN
DEVELOPING COUNTRIES ..........................................19
The Differences in Business Environments ..................21
Mitigating Risks ..................................................24
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vi FINANCING ENERGY PROJECTS IN DEVELOPING COUNTRIES
PART II: GETTING TO KNOW THE FINANCIERS ........................27
3 SOURCES OF FINANCING ..........................................29
Financing Oil Projects ..........................................31
Financing Power Projects .......................................34
Financing Natural Gas Projects ................................38
Sources of Funds .................................................39
4 ACCESSING SUPPORT FROM GLOBAL
MULTILATERAL INSTITUTIONS .....................................43
The International Monetary Fund (IMF) ....................46
The International Bank for Reconstruction and
Development (IBRD) .........................................48
How a loan is processed .........................................54
The World Bank’s guarantee instrument .........................58
Where does the World Bank obtain its funds? ....................60
International Development Association (IDA) ..............61
The International Finance Corporation (IFC) ..............64
Multilateral Investment Guarantee Agency (MIGA) .......69
Energy Sector Management Assistance
Programme (ESMAP) ........................................71
The Global Environment Facility (GEF) .....................74
The Carbon Finance Facility ...................................77
5 BORROWING FROM REGIONAL DEVELOPMENT BANKS ..........81
The Inter-American Development Bank (IDB) .............82
The Asian Development Bank (ADB) ........................86
The African Development Bank (AfDB) .....................89
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CONTENTS vii
The European Union (EU) .....................................91
The European Investment Bank (EIB) ........................93
The European Bank for Reconstruction
and Development (EBRD) ...................................95
The Nordic Finance Group ....................................97
The Islamic Development Bank ...............................98
The OPEC Fund for International Development ........101
The Arab Fund for Economic and
Social Development ...........................................101
The Arab Bank for Economic Development
in Africa (BADEA) .........................................102
6 BILATERAL SOURCES OF FINANCING ............................105
Development Assistance ......................................106
Export Financing ..............................................108
Insurance and Guarantees ....................................112
United States .................................................114
Japan .........................................................118
United Kingdom ..............................................120
France ........................................................122
Germany ......................................................123
Netherlands ...................................................125
Italy ..........................................................126
Canada .......................................................126
Sweden .......................................................127
Norway .......................................................127
Denmark ......................................................128
Switzerland ...................................................129
Kuwait .......................................................129
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viii FINANCING ENERGY PROJECTS IN DEVELOPING COUNTRIES
Saudi Arabia ..................................................130
Korea .........................................................131
China .........................................................132
7 ACCESSING COMMERCIAL FUNDS ...............................137
Domestic Funds ................................................139
International Commercial Sources .........................145
International Bond Markets ..................................150
International Equity Markets ................................155
Specialized Energy Funds ....................................157
Financial Contributions from
Project Beneficiaries ..........................................160
Rating Agencies ................................................160
The role of the rating agencies ................................160
Interpretation of ratings ......................................164
PART III: DESIGNING AN ACCEPTABLE PROJECT PACKAGE ........167
8 ANALYZING THE BUSINESS ENVIRONMENT .......................171
The Project .....................................................171
Host Country’s Business Environment .....................177
The political system ...........................................178
Economic conditions ..........................................179
The energy sector .............................................181
The relevant subsectors ........................................183
International Business Environment ........................184
World oil markets and international energy prices .............186
Sources of capital equipment ..................................187
Sources and costs of finance ...................................188
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CONTENTS ix
The Use of Risk Mitigation Instruments ...................188
Sources of Information for Preparation of
Energy Projects ................................................198
Country information ..........................................198
Country energy demand and supply ...........................200
Global energy outlook .........................................202
9 ESTABLISHING ECONOMIC AND FINANCIAL VIABILITY ...........205
Economic versus Financial Analysis .........................206
Incremental versus total costs and benefits .....................208
Methods and ratios ...........................................208
Upstream Oil Projects ........................................212
Pricing of crude oil ...........................................214
The relevance of net back value ...............................215
Size of oil reserves ............................................219
Other issues ...................................................219
Upstream Gas Projects .......................................220
Gas pricing ...................................................221
Economic framework for gas pricing ........................223
The relevance of net back value ...............................224
The relevance of the depletion premium .......................227
Other issues ...................................................229
Gas T&D ........................................................231
Separate versus intertwined facilities ..........................231
Ownership versus carrier function .............................231
Calculation of economic rate of return ........................232
Petroleum Refining ............................................234
The relevant crude oil price ...................................236
The relevant product prices ...................................236
Other issues ...................................................237
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x FINANCING ENERGY PROJECTS IN DEVELOPING COUNTRIES
Power Generation .............................................237
The relevance of average levelized cost .........................239
Calculation of IRR ...........................................242
Power T&D .....................................................244
10 STRUCTURING THE FINANCING PACKAGE .......................247
Determining the Ownership Structure ....................249
Types of ownership structure ...................................249
Identifying Sources of Finance ...............................254
Assume a flexible ownership structure .........................255
Examine the government interest ..............................255
Assess the receptivitiy of the multilaterals .....................255
Approach the bilaterals .......................................255
Ask equipment suppliers to mobilize finance ...................256
Use the IFC or regional development banks
to mobilize commercial funds .................................256
Review the availability of specialized energy funds ............257
Survey domestic investors and lenders .........................257
Preparing the Security Package .............................258
Identify sources of applicable guarantees ......................259
Evaluate options for mitigation of political risks ..............259
Investigate options for mitigation of commercial risks .........260
BOT Schemes ..................................................263
Selecting Private Power Producers .........................268
Examples of Financing Structures ..........................271
Financing upstream oil and gas projects .......................272
Financing petroleum refining projects .........................284
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