More than four years after banks were first appointed to prepare terms for the financing of a new refinery near Cairo, the money is finally in place. The $3.7bn deal to build the facility is Africa’s largest ever project financing and one of the largest inward investments into Egypt.

Local project developers Citadel Capital first appointed banks to prepare the terms of a deal to finance a greenfield refinery project at Mostorod, 10 kilometres from Cairo, in early 2008. At the time, the debt portion was $2.25bn. But it was not until 14 June 2012 that the Citadel-led group of investors announced financial close had been achieved on a $3.7bn funding package, including a $2.6bn debt element.

Complex deal

“There were all the factors of a very large, very complex deal,” says Tim Pick, head of project development and finance at London-based law firm Shearman & Sterling, who has been an adviser on the deal for the past six years. “Project agreements had all been concluded by the end of 2007, and then 2008-10 was about establishing a financial structure and negotiating the financing itself. It seems like a long time, but it was a complex deal.”

But then the Mostorod project did not only face the typical hurdles of a large, complex deal. From the early days, it has been beset by political and economic barriers. “It was never an easy project,” says Pick. “There were always things tripping you up, such as political events in the Middle East.”

From late 2008, the project also had to contend with a global economic downturn that led to a dramatic drop in the appetite of banks to provide debt finance. The structure of the financing was finally completed in the summer of 2010, but within a few months Egypt was engulfed by a political crisis that is still far from resolved.

The project was revived once more in April 2012, when Qatar Petroleum International, the overseas arm of Qatar’s national oil company, announced that it would invest about $400m in the project.

But even on the day that financial close was finally reached, Egypt’s provisional government dissolved parliament, plunging the country into yet another phase of its ongoing political crisis.

Days later, it unilaterally introduced a new constitution. Then followed a lengthy delay over announcing the winner of the presidential election run-off. Against such a complex political background, the Mostorod deal is a huge achievement. “This project was important no matter who won the election,” says Pick. “It’s good for the economy and it’s good for the environment, but it also shows that investors see a bright future in Egypt too.”

The economic and environmental benefits of the project are beyond doubt. The new refinery will process fuel oil from Cairo’s existing refinery to produce diesel that meets international standards. According to Citadel, the new 4.1 million tonne-a-year facility will enable Egypt to reduce its diesel imports by about 50 per cent. “At the moment, Egypt’s oil sector is inefficient in that they have crude of their own, but they’re not producing the products they need,” says Pick.

The refinery will also reduce Egypt’s sulphur dioxide emissions from the burning of diesel and fuel oil by 29.1 per cent, according to Citadel. “The existing refinery in Cairo produces fairly low-quality fuel oil,” says Pick. “You can’t burn it in most modern cars and those that do burn it churn out lots of sulphur. The Mostorod refinery will take fuel oil from the Cairo facility and upgrade it to EU standard diesel. There is also an option to bring in crude from elsewhere if there is insufficient locally produced feedstock.”

Unique structure

While the Mostorod financing is a breakthrough for Egypt, the unique nature and long history of the deal make it unlikely that it will open the floodgates for other infrastructure projects in the near future.

“It was a unique structure, including EGPC [Egyptian General Petroleum Corporation, the state oil company], Citadel, who are highly respected local investors, the clout and the credibility that the Qataris have in terms of finance, and the coverage provided by development finance institutions,” says Pick.

“The financing deal was also signed pre-revolution, so it’s a bit of a one-off in this sense. It was already on the balance sheets, so the funding decisions were already made.”