19 Markets apparently do not distinguish between different oil price levels in pricing Ras Gas' credit risk. Given the intricate economics of LNG it might simply be the case that investors lack the information to make the link between different oil price levels and Ras Gas' prospects. Alternatively, the high volatility of oil prices in the past decade might have induced the belief that oil prices never stay long enough in any of the three bands to trigger the corresponding economic and financial consequences. In this case, the relative unimportance accorded to oil prices might reflect the market's collective view that the revenue impact is only temporary and that contracts are not renegotiated unless the oil price settles permanently way beyond one of the trigger points.

# 7. _Conclusion_

Much of current corporate finance theory draws upon the view that a firm is a nexus of contract. Nowhere is this view more evident than in project finance where construction, operating, output purchase and financial contracts form an interwoven web that determines the project's value and risk. In this paper we analyze how in the face of contractual incompleteness risks are transmitted and allocated between the different contracts and investors. Of particular importance is the relationship between off-take and financial contracts because the former effectively serves as security for the latter. Since such long-term supply contracts are necessarily incomplete and subject to opportunistic behavior, one would expect that factors affecting the offtake agreement impact a project's riskiness. Using daily data from the Ras Gas project, we investigate the link between off-take contract and financial structure by relating Ras Gas bond spreads to credit spreads of the major output buyer, the Korean electricity monopoly Kepco, emerging market returns and variables affecting the economic prospects of the parties. We find evidence for risk-shifting in the sense that non-contractible risks arising from the 25 year sale and purchase agreement determine the pricing and riskiness of the Ras Gas bonds. Ras Gas essentially passes on the output contract risk to its investors who, in consequence, closely identify the company with the prospects and riskiness of the ultimate buyer.

As predicted by the nexus of contract view of the firm, the market's perception of the output buyer's (Kepco) credit quality is the most important variable for explaining bondholders' attitudes to Ras Gas' riskiness. With the lack of a spot market for the output, Ras Gas needs the long-term supply contract for fixed quantities, which generates 75% of the company's revenue, as the basis for its funding. Bondholders accordingly assess the financial prospects of Ras Gas in terms of the output buyer's credit quality as a proxy for contract default or renegotiation risk. However, we also find evidence that bondholder over-react to movements in the off-taker's credit spreads.

The second critical contract variable, the oil price to which the sales are indexed, is surprisingly insignificant. Markets seem to view price risk as secondary to counter-party (breach of contract) risk. However, high oil prices adversely affect the financial position of Kepco so that we decompose the various risks into their direct effects on Ras Gas credit spreads and the