Petronas-Aramco seek $10b loan for Johor project

Talks with banks have begun; however, analysts say profit squeeze could force rethink of Canadian gas plans

A logo of a Petronas fuel station is seen against a darkening sky in Kuala Lumpur, Malaysia. PHOTO: REUTERS

Malaysia's national oil corporation Petronas and the Saudi Arabian Oil Company (Saudi Aramco) have begun negotiations with Malaysian-based banks to raise a record US$7.5 billion (S$10 billion) syndicated loan to finance a planned refinery and petrochemical complex in Johor.

Bankers familiar with the loan syndication said that the 50-50 joint venture between the two international oil giants will be a straight-forward loan ahead of a much larger bond issue further down the road to finance the Refinery and Petrochemical Integrated Development Project, or Rapid, as it is called in the Pengerang industrial zone in Johor.

"The bridging loan is being guaranteed individually by Petronas and (Saudi) Aramco, and once the project is completed, a bond will be issued by the joint-venture concern," explained a chief executive of a Malaysian-based bank involved in the loan syndication. Rapid is expected to come onstream sometime in 2019, he said.

Petronas declined comment on the planned US$7.5 billion fund raising. In response to queries from The Straits Times, the firm noted that it has "attracted potential strategic and technology partners to the Rapid project and continues to evaluate partnership and funding options".

While the Rapid project appears firmly on track, investment analysts and bankers tracking developments at the Malaysian oil corporation say that they are less certain about Petronas's commitment to the just approved US$27.25 billion liquefied natural gas (LNG) project in western Canada.

The green light for the Pacific NorthWest LNG project in northern British Columbia has taken three years and comes at a time when the prolonged slump in gas prices is showing no immediate signs of a rebound.

Net profit for the second quarter ended June dropped a whopping 86 per cent from the same period a year earlier, the company said last month. It also added that it would cut spending by up to US$12 billion over the next four years.

Petronas' funding plans are being closely scrutinised because of its dominant role in the Malaysian economy, particularly in the country's once-booming oil and gas sector, and as the chief funder to government development programmes.

The move to secure so-called bridge funding instead of embarking on a full-fledged bond has stirred debate that Petronas is reluctant to subject itself to an international rating against a backdrop of sluggish oil prices, weak revenues and continued pressure from the Malaysian government for a higher dividend payout to the national coffers.

But bankers involved in the syndication say that the national oil corporation's move to proceed with a bond issue once the construction of the petrochemical facility is completed is purely due to demands imposed by its lenders.

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A version of this article appeared in the print edition of The Straits Times on September 30, 2016, with the headline Petronas-Aramco seek $10b loan for Johor project. Subscribe