CDB participates in $2.54 billion syndicated loan to Uz-Kor Gas Chemical LLC for Ustyurt Natural Gas and Petrochemicals Complex at Surgil Gas Field Project

Project narrative

On May 19, 2012, a consortium of banks including the China Development Bank (CDB) signed a $2.54 billion syndicated loan agreement with Uz-Kor Gas Chemical LLC -- a special purpose vehicle and joint venture of Uzbekneftegaz (50%), Lotte Chemical Corporation (17.5%), Korea Gas Corporation (17.5%), SK Group (5%), STX (5%) and LG Corporation (5%) that was created in May 2008 -- for the Ustyurt Gas Chemical Complex Project. The $4 billion mega-project was located in the Surgil Gas field. The complex consisted of a gas separation plant, units producing 400,000 tonnes per year of high-density polyethylene, 100,000 tons of polypropylene, and 110,000 tonnes of pryolised gasoline beginning in 2016. The project's debt-equity ratio was about 61:39, with the debt portion amounting to $2.2 billion. CDB provided approximately 15% of the total debt financing for the project (approximately $227 million) with a maturity of 17.25 years (final maturity date: July 2029) and a 10% interest rate. As a source of collateral, the borrower was expected to maintain a minimum cash balance of $64.017 million in a debt service reserve account (DSRA). The loan was also secured by a pledge of shares in Uz-Kor Gas Chemical LLC, mortgages over fixed assets, pledges of bank accounts and assignments of Uz-Kor Gas Chemical LLC’s rights under the project agreements and rights to receive insurance proceeds. The project was funded by debt ($2.2 billion), and shareholder equity and subordinated debt ($1.4 billion). debt was financed through (i) KEXIM—$906 million ($634 million direct loan and $272 million covered loan); (ii) KSure— $726 million covered loan; (iii) ADB—$113 million direct loan; (iv) China Development Bank— $227 million loan; (v) Uzbekistan Fund—$91 million loan; (vi) Euler Hermes—$66 million covered loan; and (vii) Exportkreditnӓmden (Swedish Export Credit Agency)—$88 million covered loan. The project was implemented under a fixed-rate, lump-sum, turnkey engineering, procurement, and construction (EPC) contract structure. Uz-Kor Gas Chemical LLC managed the interfaces between the four EPC contracts (one upstream, three downstream). UNG handled the upstream EPC contract since it has extensive experience in developing and constructing oil and gas fields, and related facilities and infrastructure, in Uzbekistan. Honam (renamed Lotte Chemical effective December 27, 2012) acted as a downstream project management contractor. The downstream facilities package consisted of three lump-sum EPC contracts: (i) utilities and offsite works (with Hyundai Engineering Company), (ii) ethylene cracker (with GS Engineering and Construction), and (iii) downstream gas separation plant and polymer plants (with Samsung Engineering). As confirmed by the lenders' technical advisor (LTA), KBR, Lotte, and UOP Ortloff were reputable technology providers for the ethylene, polypropylene–HDPE, and gas-subcooled process plants. The LTA reported that technologies employed at all stages of the complex were well suited to both the location and the raw material available at minimal risk. Construction started in November 2012 and the testing was completed on December 21, 2015. The commercial operations date was achieved on November 25, 2016, earlier than the long-stop completion date (June 30, 2018) but later than the scheduled completion date (June 30, 2016). The commercial operations date was delayed by negotiations around change orders for the EPC contract. n accordance with the requirements of ADB's Safeguard Policy Statement (2009), Uz-Kor commissioned an independent environmental consultant to undertake an environmental and social compliance audit of the facilities and activities in the Surgil field. The environmental and social impact assessment (ESIA) audit report was posted on ADB's website in November 2011. The audit determined that impacts associated with existing and future operations could be mitigated to an acceptable level. ADB categorized the project impacts as A for environment, B for involuntary resettlement, and C for indigenous peoples. Uz-Kor prepared a draft ESIA in advance of the 120-day disclosure period required by ADB. The draft met lending bank standards but revealed a few action points. These were closed off in the final ESIA report posted in January 2012. An environmental and social management plan (ESMP) set out the actions to mitigate and manage the impacts associated with the construction and operations of the project. The ESIA and ESMP address the requirements of Uzbekistan's applicable environmental laws and licenses, the environmental and social performance standards of International Finance Corporation, and the requirements of ADB's environmental and social safeguard policy. The ESIA confirmed Uz-Kor’s compliance with national requirements for an environmental impact assessment. The project was assigned Category 1 by the state regulator, which approved the Stage I assessment in February 2007. A Stage II assessment (Statement on Environmental Impact) was required for UGCC and approved on July 16, 2009. On July 15, 2010, the State Committee for Nature Protection of the Republic of Uzbekistan issued an ecological certificate for the Surgil field operations. The ESIA assessed that no populations of critical or endangered species would be significantly impacted, and temporary and localized adverse impacts associated with construction activities would not affect the habitats’ ability to function and support species. A biodiversity action plan was included in the ESMP. In addition, measures of gas leak prevention, monitoring and preventive maintenance upstream and in the plant were implemented as part of Uz-kor’s Greenhouse Gas Mitigation strategies. During construction, Uz-Kor and the four EPC contractors adopted a construction-specific environmental management plan that defined the procedures and mechanisms required to avoid, mitigate, and minimize the potential environmental and social impacts associated with the project’s construction activities. An environmental, health, and social team or manager was in place for each EPC contractor, at Uz-Kor’s head office in Tashkent, and at the UGCC site when construction began in June 2012. During operations, Uz-Kor established its integrated management system (IMS)17 and was certified to the various international standards by 21 December 2016, which covered UGCC, the Surgil gas extraction division, and the Tashkent head office. The IMS was updated by December 2018 to align with the most recent versions of the international standards, and also included ISO 50001:2019, the new energy efficiency standard of the International Organization for Standardization. The LTA's audits confirmed the alignment of the IMS with ESMP requirements. The ESMP’s implementation was monitored through the regular audits of the LTA. Quarterly and annual reports were submitted during construction, and semiannual and annual reports were issued during operations. The reports confirmed the implementation of the ESMP and identified corrective actions for the nonconformities cited. Below is a list of key project milestones: 29 March 2006 – during the State Visit of the President of the Republic of Uzbekistan His Excellency Islam Karimov to the Republic of Korea, a memorandum on integrated development of the Surgil field was signed between UNG and KOGAS 18 February 2008 – the first Presidential Decree was issued in order to commence works on the Project May 2008 -- the borrower was legally incorporated 4 August 2009 – the second Presidential Decree was issued to further support the development of the Project 11 February 2010 – during the official visit of the President of the Republic of Uzbekistan to the Republic of Korea, the Investment Agreement on the Surgil Project was signed between the Government of the Republic of Uzbekistan, Uz-Kor, the Korean Consortium and UNG. This agreement grants the Project rights to conduct business under terms suitable for an international project finance transaction, as well as providing certain protections to the South Korean investors Q4 2010 – initiation of formal discussions with the Korean Agencies and Asian Development Bank 15-16 March 2011 – Bank Roadshow in Tashkent attended by over 60 bankers from Europe and Asia 15 April 2011 – the Supplemental Investment Agreement was signed between the above parties 23 August 2011 – during the Official Visit of the President of South Korea His Excellency Lee Myung-bak to the Republic of Uzbekistan, key commercial terms of EPC contracts were signed. The UGCC work is divided into three lump-sum EPC contracts: (i) utilities and offsite works (Hyundai Engineering Company), (ii) ethylene cracker (GS Engineering and Construction), and (iii) downstream gas separation plant and polymer plants (Samsung Engineering). The Upstream work will be carried out by UNG 24 August 2011 – stone-laying ceremony for the Project in the honorary presence of Presidents of Republic of Korea and Republic of Uzbekistan 16 September 2011 – formal launch of project financing to the international commercial bank market • 27 September 2011 – signing of financing term sheet between Uz-Kor, Korean Export Credit Agencies and Asian Development Bank 19 May 2012 – signing of Common Terms Agreement, individual finance agreements and project agreements by Uz-Kor and its lenders in the presence of the Deputy Prime Minister of Uzbekistan and Ambassador of South Korea 21 May 2016 — The project was completed ahead of schedule.