PROJECT FINANCING THE DEVELOPMENT OF THE NORTH WEST SHELF GAS PROJECT: BALANCING RISK

Abstract

Project finance is a form of debt provided for the development of a project and repaid primarily from the future cash flows of the completed project. Project lenders focus on assessing the key technical, regulatory and commercial risk elements which may affect project development and its ongoing operations. Project finance arrangements put in place for Woodside's interest in the North West Shelf Gas Project Development have been an exercise in balancing risk.

The early stages of a project development represent the highest relative risk. Accordingly, when Woodside entered into the initial US$1.4 billion project financing facility for its share of the estimated cost of the first phase domestic gas development of the North West Shelf Gas Project in January 1981, a number of factors resulted in the imposition of necessary but restrictive financing conditions on Woodside in order to balance project lenders perceptions of the various project related risk elements.

By 1985, project risk reduced as Woodside began receiving revenue from the completed first phase development, strengthened its capital base and signed the second phase liquefied natural gas (LNG) Export Agreement with the major Japanese utilities. These factors allowed Woodside to refinance the original project finance facility on more favourable terms and obtain additional funds to meet its commitments for the development of the second phase.

The risk profile of the North West Shelf Gas Project Development entered a mature stage in 1989. Second phase project risk had been reduced by the successful operation of the LNG production facilities and commencement of LNG deliveries to Japan. A new credit facility was arranged in 1989 which recognised the change in overall project risk and a new balance provided Woodside with increased flexibility through improved access to funding for non-project activities and other corporate purposes. The 1989 credit facility presently forms the main debt financing arrangement for Woodside's interest in the North West Shelf Gas Project.

Other risks which exist in the economic environment outside of a project, caused by movements in exchange rates, interest rates, commodity prices and inflation, can have a very large influence on the ultimate success of a project. These economic risk elements can be managed and balanced by using various techniques.