HSBC: The oil and gas bank

HSBC became Egypt’s first oil and gas bank and since has taken great strides in implementing financial assistance to companies within the sector. This section is a look at the financial world or the oil and gas industry and what it can mean not just for the internal players, but also for the general public in terms of their energy consumption and needs

Mr James Bishop, Managing Director, Head of Oil & Gas and Mining & Metals, Project and Export Finance, HSBC Bank plc

What is the profit margin HSBC receives from oil and gas transactions in Egypt and worldwide?
Unfortunately, I am unable to answer this question for commercial reasons and also in consideration of client and bank confidentiality. However, I can tell you that the oil and gas industry remains a core business sector for HSBC and continues to provide attractive opportunities for the mutual benefit of both ourselves and our clients.

In Egypt, HSBC was one of the first banks to provide export finance to the oil & gas sector. Was this a lucrative step to take? Have many other banks have followed suit? Why or why not?
Egypt is a key country within HSBC’s global strategy and as an organization and where it is appropriate; we always endeavour to provide our broad range of products to our clients. Consequently, HSBC is always one of the first banks to approach clients with new and innovative ideas. Our long established presence in Egypt has given us an excellent understanding and appreciation of the local issues so we are well placed to meet our clients’ requirements. This means we are always going to find it much easier to lead rather than follow. Fortunately, many banks have followed our initiative and are active lenders and in some cases investors in Egypt. The simple explanation for this interest, is that Egypt is considered to be an excellent environment in which to do business and has, and will continue to provide, many attractive opportunities going forward.

You were amongst the lead arrangers of the Egypt Basic Industries Corporation (EBIC)’s project to construct a 2,000 metric ton per day greenfield ammonia plant. What exactly was the role of HSBC in that project?
The debt financing to the EBIC project was provided under two tranches, one which benefited from a guarantee provided by US Exim, an arm of the American Government, and a commercial loan provided by international banks. Having identified from the outset that this was going to be project which had both sound commercial rational and a high profile, HSBC was keen to be one of the first banks to be involved and initially acted as Financial Adviser to US Exim. Subsequently HSBC was appointment as a Mandated Lead Arranger on both tranches of debt and acts as account bank, security trustee and swap counterparty. This is a good example of how HSBC aims to lead the market which in this situation was the first project sponsored primarily by the Egyptian private sector but financed by international banks. EBIC is an excellent project and one HSBC is very proud to be associated with.

In project finance there are several actors, including Government agencies, Shareholders, Lenders, Multilateral and other official agencies, Suppliers and purchasers, Independent Consultants. In Egypt, which actor is the most problematic and what can be done to improve the project finance scheme in Egypt?
Project finance is very complex and time consuming compared to corporate debt but has significant advantages. It is also relatively new to the Egyptian market and therefore, as is to be expected, many of the counterparties we are dealing with, both as adviser and arranger, are going through a very steep learning curve. Having said this, as more projects are undertaken and successfully concluded, experience and comfort levels are improving so the process becomes more efficient. There are many companies and institutions keen to enter the Egyptian market to undertake all of the roles you mention in your question. The key to success is to effectively manage all elements carefully by taking full advantage of those who already have an excellent understanding of both specific Egyptian issues and project finance which is where HSBC can help.

Project finance relies on cashflow generated by the projects rather than the assets or creditworthiness of the project to repay debts incurred. How sustainable is this type of long term financing?
Project finance is a long term financing tool with debt repayment being wholly reliant on the success of the project and creditworthiness as such, is a function of a bank’s ability to assess and predict this success. Let us be clear, project finance is not high risk but managed risk. Lenders and advisers undertake a rigorous due diligence process on each project with the benefit of independent advice on technical, environmental, market, legal and insurance aspects of a project. Lenders will be looking to assess and manage the all of the key project risks which will include:

  • Will the project be built on time, to budget and to the required specification?
  • Is there a sufficient supply of competitively priced feedstock?
  • What is the market for the product and will the project be a low cost producer and therefore able to compete with other suppliers?
  • What is the Sponsors motivation for their involvement in the project, is it consistent with their corporate strategy, are they able to meet their financial obligations to the project, do they have the required skills to both develop the project and manage operation? Project finance is a highly sustainable form of finance, and in fact in some cases the only possible source of finance.

In 2005, you were given the “EMEA Gas Deal of the Year” for the Egypt LNG 2. What is the progress of the project? What were some of the difficulties you faced in such a deal? What were some of the lessons learned through such a deal?
The Egyptian LNG Train1 and Train 2 projects are both very successful, construction on both projects was completed ahead of schedule and within budget and they are now proven competitors in the global LNG market. Both projects are very good examples of highly skilled and complementary Sponsors being brought together to deliver the first two worldscale Egyptian projects to secure project finance from the international bank market. The financing process for Train 2 benefited from the contractual structure and knowledge that both the Sponsors and lenders had developed from Train 1. Notwithstanding this insight, there were significant challenges regarding the assessment of the sufficiency of gas reserves to supply both projects over the life of the debt as well as understanding the LNG

sales arrangements. Egyptian LNG Train 2 was the first LNG project for which lenders were being asked to take market price risk on supply to the US and Italian gas markets. Such challenges reinforce the fact that all projects must be considered and evaluated on their individual merits. The most important learning from these two projects was that there is considerable market liquidity in both the international and Egyptian project finance markets for good Egyptian projects. Egyptian LNG set many of the precedents that are still used in Egyptian project finance structures today and, having gained the experience of being involved in these first two projects, lenders are now more comfortable with many of the generic Egyptian legal and structuring issues associated with all projects.

We understand that you took part in the 4th annual GTL Summit. You briefly discussed risk assessment, creditworthiness, and guarantees. What were your final conclusions, and are they applicable to Egypt?
To date there has only been one Gas-to-Liquids project financed in the Europe Middle East and Africa region which is the Oryx GTL project in Qatar. Despite the fact that this was the first project finance transaction for a GTL project and therefore presented lenders with many challenges, including a new technology and market to understand, the project debt raising was highly successful. Since then all of the countries with significant gas reserves have evaluated GTL projects and in most examples still have the intention to develop at least one project. Since the conference you refer to and indeed the financing of Oryx GTL there have been a number of market changes that need to be taken into consideration:

  • The GTL process produces a very “clean” product compared to those refined from crude oil and with ever increasing environmental legislation on fossil fuels demand for such products are increasing.
  • The economics of a GTL project are very sensitive to oil prices, the Oryx GTL project was evaluated and economics deemed robust at an $18-20 crude oil price so should benefit significantly at today’s prevailing prices.
  • Against the positive effect of these two factors is the negative effect of the considerable increase in EPC costs. GTL projects should certainly be fully evaluated in Egypt given the gas reserves and the strategy for development of appropriate and carefully considered projects which will use these gas reserves to produce value added products for export and domestic use.

Have you experienced any problems in your financial transactions with the Egyptian oil and gas sector?
As I mentioned above, project finance is highly complex and time consuming financing tool but one that offers significant benefits. The rigorous due diligence undertaken by both international and domestic lenders, including benchmarking against similar projects around the world, is designed to mitigate risk and ensure that, to the extent possible, transactions are successful and not only repay the debt but provide attractive returns to shareholders. So long as these standards are maintained we would expect the excellent result s we have seen to date to continue.

Mr. Helmy Ghazi – Head of Oil & Gas, HSBC Bank Egypt

How strategic is the Egyptian oil and gas industry for HSBC Bank Egypt and why? What potentials for the industry does it observe?
The Egyptian oil and gas industry was always very strategic for the bank. It is the backbone of the Egyptian economy with exports from the petroleum sector representing circa 55% of the country’s total exports in the year 05-06. At HSBC Bank Egypt, we pride ourselves on having played a significant role in the hydrocarbon industry for more than a decade now. We have an unparalleled track record of delivering truly bespoke products and insightful advice. It is little surprise therefore that we are regarded as the leading provider of financial expertise to the local oil and gas sector. We work right across the industry’s value chain from upstream through refining and transmission/distribution to Liquefied Natural Gas and petrochemicals. We also cover extensively the related service sector. Our clients range from very small upstream independents to large national oil companies and multinationals and of course the National Oil Companies. We have expert teams dedicated solely to serving the oil and gas sector at head office and also at branches level. Overall we observe a huge potential for the industry especially on the gas side.

What products and services do you usually offer to the petroleum companies?
Trade and guarantee services especially Letters of Credit and a full range of payments and cash management tools. HSBCnet which is HSBC’s state of the art electronic banking solution is very popular amongst the Egyptian oil & gas community. It gives you instant access from your PC to bank accounts for enquiries and for execution of transactions from anywhere at anytime. Through our internet trade services module companies can issue and amend LCs as well as monitor their entire trade flow on a real time basis and in a fully secured environment. We recently launched the Cheque Outsourcing Service which provides customers with an efficient and cost saving way to send electronic instructions for bulk issuances of cheques by the bank. In that respect HSBC Bank Egypt is acting as a real innovative solutions provider for all players in this sector.

How many projects have you provided export finance to in Egypt? What is the progress of these projects?
HSBC Bank Egypt played a major role in financing landmark oil and gas projects in Egypt crucial to its national economy. We financed many export oriented projects such as Egyptian LNG Train 1 and 2, Egypt Basic Industries Corporation and Egyptian Fertilizers Co. The bank also financed the Fayum natural gas distribution network for industrial, commercial and domestic users. All projects were very successful and construction fully completed while EBIC is currently in the construction phase. It is also worth mentioning that HSBC acted as Financial Adviser to the Egyptian Methanex Methanol Company, a project company established to build a 1.3 million tonne per annum methanol facility in Damietta Port. The project is part of the first phase of Egypt’s Petrochemical Master Plan.

How has the introduction of project and export finance changed the way business is done in the oil and gas sector in Egypt?
Though project finance may appear very complex and time- consuming, I think the Egyptian business community in general and the oil and gas sector in particular adapted itself and coped very well with this long term financing technique.

Do you provide other types of financing to the oil and gas sector?
Of course. In addition to the traditional bank financing and project finance, we were pioneers in introducing structured oil-backed financing such as Pre-Export Finance Facilities and Reserve Based Lending to some public and private sector companies. We also offer Islamic finance structures.

Have you provided Performance Bonds to successful principles in tenders yet? If yes, how would you rate the effectiveness of such a service? If no, why not?
Yes of course. It is an international practice when principals are successful in their tenders for contracts, they will usually be required to provide Performance Bonds, often based on a percentage of the value of the contracts.

HSBC took part in the 2005 BG Challenge. Is HSBC undergoing any other form of corporate social responsibility in Egypt? If not, are there plans for such an endeavor in the future?
In line with HSBC’s belief in CSR, HSBC Bank Egypt has extended its contributions to a remarkable number of community projects including education projects such as supporting Students in Free Enterprise (SIFE), environmental conservation projects in coordination with Care Egypt, people enhancement projects through INJAZ programme, in addition to health care projects such as supporting several hospitals and other health related associations. HSBC Bank Egypt also supports street children, and children with special needs such as supporting the Egyptian society for Developing Skills of Special Needs Children “ADVANCE”, in addition to cultural heritage projects.

One of the more controversial topics globally is climate change. How is HSBC addressing this issue through investments?
HSBC is a founder member of the Bank Working Group of The Climate Group, an international body whose mission is to speed up the reduction of greenhouse gas emissions. In 2004, HSBC made a commitment to become the world’s first major bank to achieve carbon neutrality. The target was 2006. We in fact achieved this three months early. Our Carbon Management Plan consists of three phases. First, to manage and reduce our direct emissions. Second, to reduce the carbon intensity of the electricity we use by buying ‘green electricity’. Finally, to offset the remaining emissions in order to achieve carbon neutrality.

What are the Equator Principles and when did HSBC adopt them?
In September 2003 HSBC adopted the Equator Principles, a set of nine voluntary principles developed to address the environmental and social issues that arise in financing projects. We do not see this as an “add-on” to our business, but a key part of a much wider approach to managing the sustainability of our lending. In brief, the Equator Principles help us to categorise the degree of environmental and social
impact of commercial proposals. Projects fall into one of three categories, A, B or C, with category A indicating the highest degree of environmental or social impact. Fifty-one financial institutions from nineteen countries have adopted the Equator Principles so they have become the project finance industry standard for addressing environmental and social issues in project financing globally. In adopting them, HSBC has undertaken to ensure that all applicable project finance proposals fall within the requirements of the Principles. We will not provide loans directly to projects where the borrower will not, or is not able to, comply with either the Equator Principles or our own internal environmental, reputational and social policies, whichever carries the higher standard.

How much of HSBC’s profits are received from the Egyptian Subsidiary?
In 2006, HSBC Bank Egypt performance progressed significantly with total assets up 32.1% to EGP 17.7 billion at year end. Customer deposits increased by 33.6%. Net profits reached EGP 604m out of which EGP 420m were distributed to the shareholders. It is worth mentioning that Egypt belongs to the top 20 countries which contribute the most to HSBC global revenue. HSBC is present in 79 countries and Egypt is definitely a key country.


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