Gas Processing News: LNG Projects Pull Big Financing with Long-Term Contracts

5 Nov 2015: “At Thursday morning’s Special Focus stream panel discussion on developments and investments for emerging gas markets, Melanie Lovatt, Finance Advisor—LNG Research Reports for Poten & Partners, explained why LNG liquefaction projects have managed to attract so much funding. “LNG liquefaction projects have taken eight of the top 10 project finance (PF) deals in the last 10 years, Lovatt noted. The very first LNG PF deal was for Woodside’s North West Shelf in 1980. At $1.4 B, it was the world’s biggest limited-recourse PF at that time. “LNG takes lion’s share of financing. Over the last three years, LNG liquefaction projects have taken approximately 10% of the market’s PF loans. So far this year, LNG PF has closed about $18 B in debt. This number could rise to over $20 B if Corpus Christi Liquefaction LLC’s Train 3 and Cheniere Energy’s Sabine Pass Train 6 reach financial close. “On average, LNG projects have raised much more PF per deal, and at fairly low pricing terms, as compared to other sectors, Lovatt said. LNG pulls an average of $2.2 B per deal from banks at a low 174 basis points. Debt represents 67% of LNG total project cost, on average. “Other energy sectors, such as power and water; upstream oil, gas and coal; petrochemicals; renewables; and infrastructure attract, on average, $1.8 B per deal, at slightly higher margins than LNG. These other sectors have good support from banks, but about 20% less funding per deal than LNG, Lovatt said. “LNG projects have lower risks. ‘So, why does LNG attract so much money? Why are these LNG projects the biggest deals we’ve ever seen?’ Lovatt posited. She cited long-term sales agreements—or, as in the US, long-term tolling deals—as the main reason for the high LNG PF, since these projects are characterized by volume risk protection, and defaults are rare. “Most other industry PFs are exposed to volume risk—one example being petrochemicals projects. Additionally, PF defaults are seen in the merchant power sector and for volume-based toll roads. “However, LNG project size and complexity require bespoke treatment, Lovatt said. She cited the examples of Origin’s Australia Pacific LNG project, which has return guarantees and minimized exposure to coal-bed methane prices; as well as the $4.6-B sale of BG Group’s Queensland Curtis LNG pipeline infrastructure to APA Group. “Lovatt also pointed to BP Global’s Tangguh LNG project in Indonesia, which has seen sponsor guarantees remain in place throughout the entire repayment horizon. Additionally, completion guarantees are in place for projects like INPEX’s Ichthys, Santos’ PNG LNG and Sempra Energy’s Cameron LNG. “Emergence of new LNG market players. ‘The focus on these long-term offtake or tolling agreements has allowed new players to come in,’ Lovatt noted. These new players are changing LNG PF practices. Loan tenor has been reduced to around eight years; 14 years is a more typical time frame, globally. “Also, equity is coming from different sources, such as master limited partnerships (thereby allowing a whole new group of investors into the LNG sector), private equity and funds. “However, LNG financing is also facing new challenges. The fall in oil prices is culling projects, although PF should be able to cut balance sheet debt. Partnerships, sponsors and banks must work together with project operators to achieve successful PF. Technical challenges also exist, as seen with emerging floating LNG projects. “For large LNG schemes, long-term offtake and tolling agreements will remain vital. ‘However, that doesn’t mean there can’t be changes and aspects of those projects that deal with shorter-term offtake,’ Lovatt said. ‘I think merchant offtake will only happen if the LNG industry becomes a lot more liquid, with more liquid pricing, and if it becomes more commoditized,’ she said. “’Well-conceived projects will continue to attract funding as long as they are wellstructured. I think the question for everybody right now is where the demand will go. But the financing is definitely there.’”