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 KAZAKHSTAN International Business Magazine №2, 2002
 The role of export credit agencies in Blue Stream project financing*
The role of export credit agencies in Blue Stream project financing*
Simon Currie, Partner Norton Rose Roselle Stockley, Associate Norton Rose
*This article describes the “Blue Stream” pipeline project on which Norton Rose acted for SACE, JBIC, MITI and ECGD on the US$1.76 billion ECA supported financing of this project. This deal won the European Oil & Gas Deal of the Year award, given by Project Finance magazine. This article was first featured in the “Fundamentals of the Global Offshore Industry” journal in 2001.
The multi-billion dollar Blue Stream pipeline project, the largest multi-sourced, export credit agency-backed loan for a Russian borrower, and Russia’s largest project in recent years, was supported by four export credit agencies. The first advance was made in May 2001, just over two years after the signing of the initial memorandum of understanding between the co-sponsors, Russia’s Gazprom and Italy’s Eni.
The 16BN Cubic metres a year Blue Stream gas pipeline will run 1,250 km from Russia, beneath the Black Sea, to Samsun, Turkey. The first step in the structuring of the project was an intergovernmental treaty between Russia and Turkey, signed in December 1997, for the delivery of Russian gas, Blue Stream Pipeline Company (BSPC), a joint venture between Eni and Gazprom, was established as the transportation company that will own and operate the pipeline and supply gas to state-owned Botas.
The key project contracts are an existing gas supply contract, between Eni and Gazexport, and the gas transportation contract, between BSPC and Gazexport, a Gazprom subsidiary, (see Figure 1). The gas-transportation contract contains a robust ship-or-pay obligation, which is triggered on completion of the pipeline. Under the contract, revenues are exposed to project-completion risk and the financing was therefore structured to give the lenders and the four export credit agencies (ECAs) - Italy’s Sace, the UK’s Export Credits Guarantee Department, Japan’s Ministry of International Trade and Industry (Miti) and Japan Bank for International Co-operation (JBIC) - sufficient protection against delays in completion.
Besides Russian and English law (used for the financing documentation), a wide range of other legal jurisdictions were involved in the project documentation. This was not only because of the number of parties involved in the project, but also because of the various “neutral” governing laws often selected to govern cross-border project contracts. The contractual and financing structure had to be tailored to comply with the requirements of each jurisdiction.
Financing structure
Each of the co-sponsors had to raise its share of the financing for the offshore section of the pipeline. The project comprised the offshore section, owned by BSPC, and the onshore section in Russia, managed by Gazprom. Botas was responsible for the connecting pipelines in Turkey.
The ECAs supported Gazprom’s share of the BSPC financing, with the onshore financing provided by the Russian company itself. Eni financed its portion of the BSPC financing under a similar structure (with corporate guarantees as the underlying security, rather than an assignment of revenues from an existing gas supply contract).
The three ECA-backed facilities were:
• A $1.1bn loan to Gazprom and BSPC, arranged by Banca Commerciale Italiana (IntesaBci), Mediocredito Centrale and WestLB, backed with a Sace insurance policy and reinsured, in part, by the ECGD. The purpose of the facility was to finance the part of the project expenditure deemed “eligible” under the OECD and European Union rules, which govern Sace and ECGD operations;
• A $331m loan to BSPC, from JBIC and commercial lenders - with commercial lenders backed by a Miti insurance policy. The facility was to finance expenditure on the supply contracts with the Japanese consortium of contractors; and
• An untied $295m loan to Gazprom, arranged by Fuji Bank and backed by a Miti insurance policy, provided under its untied programme.
Each of the ECAs provided its own type of insurance. The Sace policy covered political and commercial risks in the form of one of its “Buyer’s Credit” products, with a portion of the coverage being reinsured with the ECGD, under a reinsurance framework agreement, which had only recently been put in place between the ECGD and Sace. Unlike the Sace policy, the Miti insurance did not commit to the percentage of the loans, which would be subject to cover at the very beginning of the process of negotiations, but determined such percentages only at a more advanced stage. The policy insured principal and interest payments against political risks and commercial risks. JBIC was a direct lender for a large portion of the funds to be provided under the JBIC/Miti facility.
The loans have a term of up to 13 years, with a tailored repayment structure that builds to a peak in 2010 and then drops away again until 2013. During construction of the pipeline, it was intended that debt service would be met from Gazprom’s own funds, with the revenues from the existing gas-supply agreement with Eni available to the lenders as security.
After construction of the pipeline, the monthly transportation charge, set under the gas-transportation contract between BSPC and Gazexport, is designed to cover BSPC’s fixed and variable operating costs, including debt service. Even though there was support for the financing through the assignment of revenues under the existing gas-supply agreement between Gazexport and Eni, the ECAs had to be comfortable with the ship-or-pay terms of the gas-transportation contract, its duration and the capacity being made available to Gazexport.
Security package
The security package for the ECA-supported financing was multi-faceted and included:
• Assignment by BSPC of the debt-service component of the transportation charge, under the ship-or-pay contract with Gazexport;
• Assignment by Gazexport of a portion of payments, under the gas-supply agreement with Botas, as support for Gazexport’s obligation to pay the transportation charge;
• Assignment by Gazexport/Gazprom of revenues, under the existing gas supply contract with Eni; and
• Guarantees from Gazprom and Gazexport.
No security was taken over the project’s physical assets. The structure was designed so that each sponsor’s portion of BSPC financing was kept separate and Eni’s interest was not used as security for the ECA-supported financing. This meant that carefully worded, limited recourse language had to be agreed by all relevant parties. A complex framework of project accounts was established, including separate debt-service reserve accounts in relation to each facility.
Traditionally, large-scale financings in Russia are secured by an assignment of the revenues under a long-term export contract. The security for the Blue Stream project includes revenues under the existing gas contract with Eni. These revenues had already been used as support for the Sace-backed financing for the Tragaz project in 1994, where the funds borrowed were used for upgrading Gazprom’s network. The Tragaz lenders received an “upgrading” of the legal strength of their security rights (where previously there had been irrevocable payment instructions, all the lenders, and ECAs now had the benefit of a security assignment).
As the revenues under this contract underpinned the financing for both the Tragaz and Blue Stream projects, the ECAs obtained protection against material changes being made to the contract without their consent.
Once construction is complete, the debt service payments to the Blue Stream lenders are first to be met from the transportation charge under the gas transportation contract. If payments under the transportation agreement are not made, the lenders will have access to the portion of the payment under the gas supply agreement with Botas, which has been assigned to the security trustee. The lenders can also fall back on the assignment of the proceeds of the existing contract with Eni, if no other funds are available.
Creditor issues
Inevitably, creditor issues arose between the Blue Stream ECAs and lenders and the Tragaz lenders, and between the lenders of the Gazprom and Eni portions of the Blue Stream financing. One of the ways intercreditor issues were dealt with was through requiring consultation periods before any enforcement action could be taken, rather than any lender having an automatic independent right to accelerate its loan. One of the most contentious points was whether lenders that have accelerated should be subordinated, in all circumstances, behind payment of the current instalment for all facilities and topping up the minimum balance in the debt service reserve accounts. As the ECAs were involved in all of the facilities, this type of issue was resolved by a high degree of co-operation between the agencies.
Currency controls
The accounts structure was designed so that payment flows, under the existing contract with Eni, would be paid into an offshore account and immediately released to Gazexport, as long as the debt service was met and no other default had occurred. If not, payments would be captured in the account structure and, where applicable, used to remedy the default.
The legislative framework in Russia requires a Russian resident to repatriate and convert 75% of its export earnings into roubles. Whether or not the payment mechanism fell within the relevant currency laws depended on when exactly such requirement took effect. One view is that, under the Blue Stream account structure, export receivables will not have come into the possession of the Russian exporter at the crucial stage when the money may need to be utilised to pay off the debt.
However, neither the ECAs nor the commercial lenders were prepared to take any significant risk that this interpretation might be incorrect. After extensive due diligence by the ECAs and the lenders, the problem was overcome by obtaining an acceptable licence from the Russian central bank and an official interpretation of the relevant Russian presidential edict. The ECAs obtained further comfort through satisfactory legal opinions from all relevant jurisdictions.
The positive benefits of having ECAs on board in any major financing is that their presence can inject much needed confidence where there is uncertainty, which, left unchecked, can jeopardise the successful completion of many of the most challenging and interesting projects. The ECAs are embracing more complicated contractual project structures and more flexible repayment terms, as the insurance products they offer become increasingly sophisticated. But they are willing to do this only if they are allowed to conduct their own due diligence and have their own seat at the negotiating table.
The ECAs were important players in the negotiation of the Blue stream financing and contractual structure, using the financing documentation to address and solve any risks. The ECAs’ use of a broad range of specialist advisers, the lead they took in the negotiations and the way they contributed to the development of innovative legal and commercial solutions will provide a template for future offshore projects.
Established in 1794, Norton Rose is a major international law firm with its headquarters in the City of London. Norton Rose’s practice covers the whole range of financial and business activities. The firm is an acknowledged market leader in the fields of project and structured finance, aviation, corporate finance, banking and capital markets, debt, asset finance and company and commercial law.

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