Saudi Aramco and the US’ Dow Chemicals have appointed banks to arrange a Saudi riyal denominated sukuk (Islamic bond) issue that could be up to $1.4bn in size to finance the development of the $20bn Sadara Chemical Company.

The banks include the local Riyad Bank, Bank Albilad and Alinma Bank, and Germany’s Deutsche Bank. Sources close to the project say the lenders were appointed in early May.

The project sponsors are aiming to get the sukuk completed at the same time as the rest of the $12.4bn debt package on the project, which is expected to reach financial close by early 2013.

Sources close to the project also say that the exact size of the sukuk is still unclear as Aramco and Dow are still considering the possibility of doing an international bond issue. In the financing documentation for the Sadara project sent to banks in late May it says $1.4bn will raised through the “offering of securities in the debt capital markets (sukuk and conventional)”.

However, bankers say that pricing on an international bond issue is unlikely to be attractive enough for Aramco to go ahead with the issue. “They can try it if they want and there will be investors for it, but the pricing they will demand will be unattractive for Aramco compared with what they will get in the Saudi market,” says one international banker in Riyadh.

In 2011, another Aramco project, the Saudi Aramco Total Refining and Petrochemical Company (Satorp), completed a SR3.7bn ($1bn) sukuk issue to fund the development of a refinery project at Jubail. That deal had been planned for over a year and was eventually used to scale back bank lenders who provided $3.5bn of debt to the $14bn project. For the Sadara financing, the sukuk needs to be completed around the same time as the bank debt because both are required to reach the huge amounts of funding needed for the project.