_5_ Using a sample of daily data from January 1997 to March 2000 we find that Ras Gas yield spreads exhibit a very high degree of persistence. By far the most important explanatory variable for both levels and changes in credit spreads is the Kepco credit spread: investors rationally anticipate on the incidence of the off-taker's financial and economic condition on the riskiness of their bond. However, we also find evidence for over-reaction: while Ras Gas spreads widen with contemporeanous Kepco spread movements, they narrow in lagged ones. The price of crude oil, which serves as a reference for LNG pricing, comes out largely insignificant: investors seem to disregard commodity price risk.. While rising energy prices increase revenue and debt service capacity it also raises the cost of electricity generation for Kepco leading to higher breach of contract risk. Further investigation shows that the direct energy price impact on Ras Gas is insignificant but that the indirect impact via Kepco's financial position is highly significant: revenue and off-taker quality effects off-set each other but the indirect effect via Kepco yields survives.

In terms of Korean exposure variables we find evidence of Ras Gas exposure to the Korean currency both directly and indirectly through Kepco yields despite the fact that the offtake agreement is USD based. Also, Ras Gas bond holders acquire significant Korea country risk which, in light of the energy dependence of the Korean economy, makes sense. Finally, we find significant evidence for "guilt by association" effects related to financial contagion. As returns in European, Asian, Middle Eastern and Latin American emerging debt markets fall Ras Gas spreads are predicted to widen considerably. In particular, the impact of contemporaneous and past events in European emerging debt markets stands out. This responsiveness reflects the turmoil in global debt markets following the Russian financial crisis of summer and fall 1998 which heavily affected other market segments. Similarly, Ras Gas spreads exhibit a delayed reaction to Asian, Middle Eastern and Latin American emerging debt markets with only a few but highly significant lagged returns accounting for most of the explanatory power.

The paper is organized as follows. In the next section we provide background information on the Ras Gas project and its web of inter-related contracts. Section 3 describes the projectspecific sources of contractual incompleteness and risk factors. Section 4 contains a description of our variables and how they are related to the various risk factors. In Section 5, we summarize the results of our empirical analysis. Next, we carry out a decomposition of the risk factors' direct and indirect effects. Section 7 concludes. We relegate all tables to the Appendix.

# **_2._** _Ras Gas: Project and Contract Design_

The Ras Laffan Natural Liquified Gas Company Limited (Ras Gas) is a joint venture between the Qatar General Petroleum Corporation (70%) and Mobil Corporation of the US (30%). Ras Gas has the right to develop lOm tons of liquified natural gas (LNG) annually from Qatar's North Field, the world's largest unassociated natural gas field with about 380bn cubic feet of confirmed recoverable reserves (about 9% of global gas reserves). To this end, Ras Gas has constructed a 5.2 MMTA (metric tons per annum) liquification facility in Ras Laffan consisting of two