Navigating the pitfalls in project-on-project structures
Without safeguards, the structure of choice for many refinery and petrochemical projects can expose sponsors and financiers to costly risks
Refinery and petrochemical projects are increasingly being developed under a structure in which one or more associated facilities (AFs), such as power facilities and pipelines, are constructed, owned, financed, operated and maintained independently of the main project (MP)—resulting in an MP/AF structure.
Sponsors adopt an MP/AF structure to reduce the capital cost of the main project and to increase efficiencies through the sharing of the associated facilities with other projects. But projects using MP/AF structures are subject to complicated risks that can erase the expected benefits.
For example, the main project can’t begin to operate until the associated facilities are ready. When delayed by an unfinished associated facility, the main project’s owners may not be able to generate revenues and service their debt, and may also incur expensive penalties under agreements with other project participants, such as companies that have agreed to supply feedstock to the main project.
Issues related to allocation of supply from, or offtake by, associated facilities and corresponding priority rights are especially thorny where the associated facilities are shared by a number of separate projects. When the aggregate capacity of the associated facilities falls below the minimum level required, how should the shortfall be allocated among the various main projects?
A deep investigation of these and other complications as early as possible in the main project’s development stage will help sponsors establish a deal structure that adequately addresses them, reducing risks in a manner that is time- and cost-efficient, and that improves the bankability of the main project.