LNG FINANCE
Financing strategies and principles throughout the LNG value chain
Afonso Reise Sousa and William Clark highlight what lenders look for in a bankable project
One of the characteristics that sets the LNG industry apart from other largescale infrastructure groups is the sheer scale of capital required. To get gas from reservoir to burner tip via LNG would, in the present market, require at least $5 to $10 billion in dedicated infrastructure. For some mega-scale projects presently being planned or under construction, the upstream and liquefaction costs alone have reached $20 billion. To attract these levels of capital to an LNG project requires a sound understanding of project fundamentals, identification of project risks, and a thorough analysis of the project participants in each segment of the value chain. Within the LNG value chain, there are four component parts: upstream development and operations; liquefaction; shipping; and receiving terminal and regasification.[1] Each component is a separate, discrete infrastructure project with differentrisk characteristics, different sets of agreements, and often different participants, and as such is financed separately. Nevertheless, to analyse the economics of an LNG liquefaction plant project on a stand-alone basis without considering the upstream, shipping, and regasification projects would be seriously flawed. A structured series of long-term contracts that guide the gas through the value chain tie each component together, creating a strong interdependence on which lenders and investors place great significance. strength of the value chain and each of its constituent links. The upstream segment of the LNG value chain typically requires approximately $1 billion in investment to feed a 5 MTPA LNG train. Capital investment development, includes gas reservoir and gathering
transportation to plant. In most projects, upstream development is balance sheet-financed by the sponsors, because required investments are smaller in scale and lenders are not as willing to take exploration risk. Lenders to projects farther down the value chain will start their analysis with the upstream segment, and will require that a sufficient and dedicated supply of gas be available to the liquefaction plant for at least the tenor of the liquefaction plant debt plus a “tail”, and more probably for a period that will provide
Value chain
For this reason, financiers will typically look at each component, starting with the upstream development, to ascertain the
Statoil's Snohvit LNG project moving forward
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sufficient returns for the liquefaction plant sponsors. If the gas reserves are in a region with a high level of political risk, then the lenders farther down the value chain
will look to see that interests are properly aligned, and appropriate riskmitigating strategies are undertaken so as to ensure that there is an uninterrupted delivery of gas and
associated cash flows to service the obligations of the whole value chain. The liquefaction plant and associated export terminal are usually the largest capital cost components of the LNG
value chain. Costs start at over $2 billion for smaller plants and can reach upwards of $6 billion for large multitrain complexes in difficult terrain (not including finance costs). Many project sponsors are not willing or able to shoulder those costs on balance sheet, and thus turn to limited recourse project
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financing as a means of alleviating those balance sheet constraints. Project financing is an excellent method in raising capital for but large-scale since the postthe must
LNG
GBS & FLOATING TERMINALS
Cost effective Short delivery
projects, recourse
lenders have limited or no (usually beyond completion) thorough
project and its cash flows, a analysis first be undertaken and enforceable contracts must be in place before loans can be drawn down.
Budget target
For a liquefaction plant, lenders will focus on whether the project can be constructed on time and within budget. For a project with a turn-key lenders EPC will
THE “GIFT” DESIGN
GAS IMPORT FLOATING TERMINAL
contract,
a n e w c o n c e p t d e v e l o p m e n t f o r a L N G F l o a t i n g Te r m i n a l
analyze the EPC contractor’s creditworthiness and ability to pay liquidated damages in the event of a delay.[2] Lenders will also want to know whether the project can perform as according to design specification for the duration of the project. Perhaps most importantly, lenders will analyze the market risks associated with the project. For a liquefaction plant project in which the sponsors are selling the gas to a downstream marketer (as apposed to a tolling arrangement, in which the facility receives a fee for processing the gas and
THE “FLIT” DESIGN
a n e w c o n c e p t d e v e l o p m e n t
FLOATED IN TANKS IMPORT TERMINAL f o r a L N G G B S Te r m i n a l
loading the LNG), lenders will analyze the downstream market to ensure that there is sufficient depth and
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liquidity to accept the gas. Traditionally, LNG gas sales and purchase
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agreements (GSPAs) have been linked to crude indices with rigid price and volume guarantees. However, due to deregulation of the European downstream gas market and a growing demand for LNG in the already deregulated American gas market, GSPA terms have become increasingly flexible as counterparties are no longer willing or able to take on as much risk. In some instances, such as in the Qatargas II Project, lenders were willing to take full price risk on the gas (but took considerable comfort from the condensate revenue stream). This is testament to the fact that demand has risen and production plateaued in established downstream markets in Europe and the United States, convincing lenders that, though there may continue to be volatile price swings in the natural gas markets, the low points will be higher and the averages stronger. In addition to commercial risk, lenders will focus on the political and With regulatory the exception risk of and associated with a project. Norway, Australia,
However, with an LNG vessel, the underlying value is less clear. Because the spot market for LNG is still embryonic, an LNG vessel not tied to an integrated project by a long-term charter
party
agreement value
(TCPA) to a
has
an
creating a form of hybrid structure. In an effort to minimize capital requirements and limit shipping risk, most project sponsors do not acquire vessels, but rather enter into a TCPA with
uncertain
lender.
Consequently, lenders require many of the contractual arrangements inherent in a typical project financing, thus
Trinidad & Tobago, most major liquefaction projects currently in operation or being planned risk exist in will regions where the degree of political necessitate risk coverage by an export credit agency (ECA) or multilateral lending agency (MLA). In addition to risk coverage, ECAs and MLAs can offer additional debt capacity to large-scale projects.
Shipping
Vessel lending, in general, is traditionally viewed as an asset-backed financing. Lenders provide asset, capital and based on the value of the underlying maintain a first priority charge on the vessel as collateral.
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an LNG shipping company to transport a specific amount of LNG to and from specific locations using designated ships. Recently, however, destination clauses have loosened such that charterers are
allowed some flexibility in where they intend to ship LNG. The shipping company finances the LNG ships on the back of the TCPA. The charterer pays a fixed charge, which
covers the financing costs, to hire the vessel and a variable charge indexed against operating costs. Typically, the TCPA revenue flows into an offshore, dollar-denominated escrow
account over which the lenders hold a security interest. In addition to a security interest on the TCPA cash flows, the ship lenders will require a thorough risk analysis of the project that will include not only the charterer, but also other participants throughout the value chain. Despite required “shipor-pay” provisions, many TCPAs are signed with project have companies themselves who raised funding. a
nonrecourse will
Consequently, ship lenders undertake downstream market
analysis for the underlying LNG project to ensure that sufficient funds will be available throughout the life of the contract to pay the charter hire. At the destination, there must also be a firm terminal use agreement in place that allows the ship offload access. Operating to and the technical risk must also be apportioned appropriate parties.
Receiving terminal
Various project structures and have financing been strategies used in
developing regas terminals around the world. The type of structure is often dictated by the downstream market, the offtaker(s), and the size and financial capacity of the terminal developer. A merchant structure is utilized by developers looking to maximise upside potential, but also willing to take the highest risk. Large offtakers with stakes in multiple terminals and a strong downstream marketing operation can take advantage of the LNG to natural gas price differential. The lending community presently views the volume and price risks associated with a merchant structure too great for project requiring financing,
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merchant developers to corporate finance their projects. Alternatively, sponsors will likely employ a tolling structure, whereby the terminal owners receive a fee for processing LNG. A terminal usage agreement (TUA) is signed between the sponsor and a counterparty looking to process its LNG and place the natural gas in the market.[3] The success of the nonrecourse lending, which is secured on the back of terminal fees, is greatly enhanced by signing a TUA with a strong, credit-worthy company that is either an experienced LNG supplier or gas offtaker. looking to project finance their terminal development
upstream developments, new 2.5 bcfd receiving terminals, and large 200,000+ cubic meter LNG vessels, will test the lending community’s desire to commit large amounts of capital to specific
projects in certain parts of the world. On the other hand, smaller projects may be strained to match the returns that larger projects enjoy through economies of scale. Regardless of some of the challenges
the LNG community faces ahead, strong demand throughout the world for alternatives to oil and cleaner sources for electricity will no doubt keep developers confident and lenders interested.
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Conclusion
As the LNG industry continues to grow, some market participants may experience growing pains. The developing world, including India, China, and South America, are poised to make a strong entrance in the LNG consumer market, which may put a strain on ECAs and MLAs to provide sufficient capacity and coverage for new terminal projects. On the one hand, new mega-scale including projects, Russian
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Notes
[1] Distribution can be considered a fifth element in the chain. However, distribution infrastructure is not used exclusively for LNG, and its financing is not covered in this article. [2] It should be noted that Contactors are moving away from EPC contracts generally, and we expect this to spread to the LNG sector in the near future. [3]A TUA can either be with the LNG supplier (“push tolling”), or the gas offtaker (“pull tolling”).
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