Moody's downgrades Dolphin Energy's senior debt rating; negative outlook
Moody's Investors Service, ("Moody's") has downgraded to A2, from A1, the rating of Dolphin Energy Limited's (Dolphin Energy) senior secured bonds and senior secured bank credit facility and changed the outlook to negative, from stable.
The rating downgrade reflects Moody's assessment that the ongoing dispute between Qatar and, inter alia, three fellow Gulf Cooperation Council
(GCC) neighbours, including the United Arab Emirates (UAE, Aa2 stable), will erode inter-governmental cooperation between Qatar and the UAE.
Moody's expects that, over time, this will, to an extent, decrease the strategic importance of the project to the Government of Abu Dhabi (Aa2 stable) and the likelihood of support, should it become necessary, from Dolphin Energy's 51 per cent owner, Mubadala Development Company PJSC (Mubadala, Aa2 stable).
Moody's has reduced to two notches, from three, the rating uplift derived from the project's strategic importance to the Government of Abu Dhabi and the benefits, including support, of Mubadala's 51 per cent ownership.
However, the A2 rating continues to be supported by:
(1) a long-term Development and Production Sharing Agreement with the State of Qatar,
(2) net revenue, after deducting all operating costs, under long-term fixed price gas supply contracts with government-owned entities in Abu Dhabi, Dubai and Oman sufficient to cover close to 100 per cent of current senior debt service and
(3) A strong competitive position as a low-cost producer of gas and hydrocarbon liquids.
The dispute has resulted in the cutting of diplomatic and economic ties between the UAE and Qatar. However, gas sales by Qatar to the UAE and Oman through the Dolphin pipeline have continued, with Dolphin Energy meeting its contractual supply obligations. Moody's continues to assume that the risk of a disruption to supply is low due to:
(1) the UAE's current dependence on gas supply from Dolphin Energy for electricity production, particularly during peak demand summer months and
(2) the CEO of Qatar Petroleum's (Aa3 negative) announcement, reported by Al Jazeera on 18 June, that Qatar had 'decided not to cut the gas now'.
Nonetheless, Moody's believes that in the current geopolitical environment, if the dispute further escalates, the risk of a gas supply disruption initiated by Qatar is higher than previously assessed. The impact on Dolphin Energy's debt service capacity following a supply disruption could be very severe.
WHAT COULD CHANGE THE RATINGS UP/DOWN
An upgrade is not currently envisaged.
A disruption to gas supply caused by the geopolitical situation could result in a multi-notch downgrade. Moody's could also downgrade the rating following:
(1) a further reduction in the support assumptions incorporated in our assessment,
(2) a multi-notch downgrade of Mubadala's rating,
(3) a lasting deterioration in the relationship between the UAE and Qatar or
(4) a deterioration in the project's operating and financial performance.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects an increased risk that the project may be adversely impacted by escalated geopolitical tension.
The principal methodology used in these ratings was Generic Project Finance Methodology published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The project is an integrated gas production, processing and transport project, delivering gas from Qatar's North Field to customers principally in Abu Dhabi, Dubai and Oman. It comprises (1) an upstream component, an unincorporated joint venture (UJV) that has contracted for the long-term supply and processing of gas from the State of Qatar under a Development and Production Sharing Agreement (which runs until 2032) and (2) a midstream component, owned and operated by Dolphin Energy. The midstream component comprises a 364 km sub-sea export pipeline from Qatar to Abu Dhabi and a network of onshore gas distribution pipelines supplying gas to customers in Abu Dhabi, Dubai, and Oman. The UJV is operated by Dolphin Energy.
The UJV and Dolphin Energy are 51 per cent owned by Mubadala, 24.5 per cent by Total S.A.
(Aa3 stable) and 24.5 per cent by Occidental Petroleum Corporation (A3 stable).
Mubadala is 100 per cent owned by the Government of Abu Dhabi (Aa2 stable).