Project Finance In Middle East

The Middle East is a developing and dynamic hub for investment. A growing population and middle class, together with substantial efforts to encourage activity outside of oil and gas industries provides business opportunities across the region.

The Middle East has become a popular investment destination, given its extensive energy resources and rapidly growing population. While many countries in the region rely on crude oil to support their growth, some forward-looking governments have spent their historically large budget surpluses on public works and other projects designed to stimulate their domestic economies

Project finance activity is on the rise in the Middle East.

Generally, the project finance activities can be undertaken in the region over the four main fields)

Renewable Energies and Clean Technologies

Due to improvement in sentiment and additional bank liquidity following the completion of major regional restructurings, we have seen a cautious increase in the level of project finance activity across the Middle East since 2014 and expect that activity to continue. There is still a huge requirement for infrastructure (including power, water and sewerage treatment) across the region. Export credit agencies continue to feature in many of the significant project finance transactions, along with European, Asian and regional banks. There remains an expectation of significant future activity in the renewables sector, particularly the solar market, and this has raised the profile of renewable energy as an alternative energy source in the Middle East.

Sustainable and diversified energy sources have become a key theme across the Middle East. Jordan, Saudi Arabia, and the United Arab Emirates (UAE) are three jurisdictions in the Middle East that are focusing on renewable energy as an integral component in their future energy mix. Saudi Arabia announced an ambitious renewable energy target of 54 gigawatts by 2032, with solar energy expected to constitute approximately 75% of that target. Jordan and the UAE have also been active in the solar space, with the Dubai Electricity and Water Authority (DEWA) currently tendering the 100 megawatt solar photovoltaic power project expected to be operational in 2017. Dubai’s sustainable and diversified energy strategy also extends to clean coal, with the DEWA seeking to use clean coal as feedstock for electricity generation.

Aviation Industry

The Middle East's aviation market will grow by 5 percent and will see an extra 258 million passengers a year on routes to, from and within the region by 2035, according to the International Air Transport Association (IATA).

It is said that the UAE, Qatar and Saudi Arabia will all enjoy strong growth of 6.3 percent, 4.7 percent, and 4.1 percent respectively, adding that the total market size will be 414 million passengers. Globally, IATA said it expects 7.2 billion passengers to travel in 2035. "People want to fly. Demand for air travel over the next two decades is set to double. Enabling people and nations to trade, explore, and share the benefits of innovation and economic prosperity makes our world a better place," said Alexandre de Juniac, IATA’s director general and CEO.  

As the figures imply, the ever-growing demand for more flights in the region will make a rise in aircraft and aircraft components supply. Consequently, airlines need to renew and maintain their fleets on a regular basis, which in turn adds up to their expenses.

Providing funds and loans for aviation industries in the Middle East can be classified into the following areas:

  • Purchasing and leasing aircraft and aircraft engines
  • Purchasing and leasing helicopter and related parts
  • Building and developing airports 

Commercial aircraft, such as those operated by airlines, use more sophisticated leases and debt financing schemes. The three most common schemes for financing commercial aircraft are secured lending, operating leasing and finance leasing.

  • Secured lending

A secured loan, is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral — in the event that the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower, for example, foreclosure of a home. From the creditor's perspective, this is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.

  • Operating leasing

Commercial aircraft are often leased through a Commercial Aircraft Sales and Leasing (CASL) company, the two largest of which are International Lease Finance Corporation (ILFC) and GE Commercial Aviation Services (GECAS).

Operating leases are generally short-term (less than 10 years in duration), making them attractive when aircraft are needed for a start-up venture, or for the tentative expansion of an established carrier. The short duration of an operating lease also protects against aircraft obsolescence, an important consideration in many countries due to changing noise and environmental laws. In some countries where airlines may be deemed less creditworthy (e.g. the former Soviet Union), operating leases may be the only way for an airline to acquire aircraft. Moreover, it provides the flexibility to the airlines so that they can manage fleet size and composition as closely as possible, expanding and contracting to match demand.

Conversely, the aircraft's residual value at the end of the lease is an important consideration for the owner. The owner may require that the aircraft be returned in the same maintenance condition (e.g. post-C check) as it was delivered, so as to expedite turnaround to the next operator. Like leases in other fields, a security deposit is often required.

One particular type of operating lease is the wet lease, in which the aircraft is leased together with its crew. Such leases are generally on a short-term basis to cover bursts in demand, such as the Hajj pilgrimage. Unlike a charter flight, a wet-leased aircraft operates as part of the leasing carrier's fleet and with that carrier's airline code, although it often retains the livery of its owner.[10]

US and UK accounting rules differ regarding operating leases. In the UK, some operating lease expenses can be capitalized on the company's balance sheet; in the US, operating lease expenses are generally reported as operating expenses, similarly to fuel or wages.[11]

A related concept to the operating lease is the leaseback, in which the operator sells its own aircraft for cash, and then leases the same aircraft back from the purchaser for a periodic payment. The operating lease can afford the airlines flexibility to change their fleet size, and create a burden to the leasing companies.

  • Finance leasing

Finance leasing, also known as "capital leasing", is a longer-term arrangement in which the operator comes closer to effectively "owning" the aircraft. It involves a more complicated transaction in which a lessor, often a special purpose company (SPC) or partnership, purchases the aircraft through a combination of debt and equity financing, and then leases it to the operator. The operator may have the option to purchase the aircraft at the expiration of the lease, or may automatically receive the aircraft at the expiration of the lease.

Under American and British accounting rules, a finance lease is generally defined as one in which the lessor receives substantially all rights of ownership, or in which the present value of the minimum lease payments for the duration of the lease exceeds 90% of the fair market value of the aircraft. If a lease is defined as a finance lease, it must be counted as an asset of the company, in contrast to an operating lease which only affects the company's cash flow.[12]

Finance leasing is attractive to the lessee because the lessee may claim depreciation deductions over the aircraft's useful life, which offset the profits from the lease for tax purposes, and deduct interest paid to those creditors who financed the purchase. This has made aircraft a popular form of tax shelter for investors, and has also made finance leasing a cheaper alternative to operating leases or secured purchasing.

Oil & Gas Fields Development

Recent Middle East oil and gas projects experiences includes working on projects such as:

  • Dolphin Energy Project: including a $1.25 billion project bond, for the Dolphin Energy project. The project produces gas from the North Field in Qatar, the world's largest no associated gas field, and then transports and sells the gas to customers in Dubai, Abu Dhabi and Oman.

The project is the Middle East's largest cross-border gas project. The financing signaled the re-opening of the project bond market for the region. The project was recognized by Infrastructure Journal as "Oil & Gas Deal of the Year" and by Project Finance and Project Finance International as "Middle East Oil & Gas Deal of the Year."

  • Yemen LNG Project (Yemen). Yemen LNG on the $4.8 billion upstream, pipeline and two train LNG liquefaction project. YLNG's shareholders are direct or indirect subsidiaries of Total, Hunt Oil, SK, Hyundai, Kogas, Yemen Gas and Yemen's pension fund, GASSP.

The project, which closed despite the lack of precedent in Yemeni law for complex project financings and the challenging global credit markets, is the first large-scale international project financing in Yemen. The project was recognized by Infrastructure Journal as "Global Deal of the Year" and "Oil & Gas Deal of the Year" and by Project Finance and Project Finance International as "Middle East Oil & Gas Deal of the Year".

  • Dolphin Pipeline Project Occidental Petroleum in the Dolphin gas pipeline project including advice on the more than $1 billion Islamic financing.
  • Al-Khaleej Gas (AKG-1) Project (Qatar/Kuwait). ExxonMobil as sponsor/developer of the gas pipeline designed to transport significant quantities of gas from Qatar's North Field to Kuwait.
  • Saudi Gas Initiative
  • Egypt and Qatar Petrochemical Projects.  structuring of confidential petrochemical projects in Egypt and Qatar.
  • Saudi Telecom (Saudi Arabia). JP Morgan as financial adviser to Saudi Telecom and the Kingdom of Saudi Arabia in connection with the privatization of Saudi Telecom.
  • Oil and Gas Development in Iran

Iran has over100 oil and gas fields to develop:

Iranian Oil Minister praised the capabilities of domestic energy companies to develop oil and gas fields and said the country has more than 100 fields, which can be developed by explorers and production companies.

Speaking at a ceremony to sign a contract between the National Iranian Oil Company (NIOC) and Pasargad Energy Development Company (PEDC), a domestic E&P company, to develop Sepehr and Jofeir oil fields, Zanganeh hailed the agreement and said he is pleased to see that months of negotiations between the two companies have yielded results ahead of the new Iranian year (which will begin on March 21).

The contract is the first one with an Iranian E&P company under the new Iran Petroleum Contract (IPC) model, the minister added.

He further emphasized that there are jobs for all Iranian oil companies, adding that the country has more than 100 oil and gas fields that the companies can develop.

The CEOs of NIOC and PEDC, Ali Kardor and Mehdi Mir Mo’ezi, signed the contract here in Tehran on Sunday.

The contract is aimed at a maximum production of 110,000 barrels per day with a total output of 512 million barrels from the Sepehr and Jofeir oil fields over a period of 20 years.

Iran’s new format of contracts for oil sector projects would replace the old buyback deals which required the host government to pay the contractor an agreed price for all volumes of hydrocarbons it produced.

Under the new format, different stages of exploration, development and production will be offered to contractors as an integrated package, with the emphasis laid on enhanced and improved recovery.

Infrastructure construction

Due to improvement in sentiment and additional bank liquidity following the completion of major regional restructurings, we have seen a cautious increase in the level of project finance activity across the Middle East since 2014 and expect that activity to continue. There is still a huge requirement for infrastructure (including power, water and sewerage treatment) across the region. Export credit agencies continue to feature in many of the significant project finance transactions, along with European, Asian and regional banks. There remains an expectation of significant future activity in the renewables sector, particularly the solar market, and this has raised the profile of renewable energy as an alternative energy source in the Middle East.

Sustainable and diversified energy sources have become a key theme across the Middle East. Jordan, Saudi Arabia, and the United Arab Emirates (UAE) are three jurisdictions in the Middle East that are focusing on renewable energy as an integral component in their future energy mix. Saudi Arabia announced an ambitious renewable energy target of 54 gigawatts by 2032, with solar energy expected to constitute approximately 75% of that target. Jordan and the UAE have also been active in the solar space, with the Dubai Electricity and Water Authority (DEWA) currently tendering the 100 megawatt solar photovoltaic power project expected to be operational in 2017. Dubai’s sustainable and diversified energy strategy also extends to clean coal, with the DEWA seeking to use clean coal as feedstock for electricity generation.

Some Types of Infrastructure Construction Projects in the Middle East:

  • Highways, Streets, and Roads
  • Bridges
  • Mass Transit, Airports, and Airways
  • Water Supply and Resources, Dams
  • Waste Management and Waste Water Management
  • Power Generation and Transmission
  • Telecommunications
  • Hazardous Waste Removal and Storage.