project financing - lng projects john d. white baker botts, london successfully managing project...
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Project Financing- LNG Projects
John D. WhiteBaker Botts, London
Successfully Managing Project Finance in the GCCEmirates Towers Hotel, Dubai
23 May 2005
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Overview
Amount of Financing Required
Financing Challenges
Financing Objectives
Drivers for Successful LNG Project Financing
Sponsor Objectives
Project Risk Identification/Allocation/Mitigation
Conclusions
Questions
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Amount of Financing Required
Currently 141 MTA of Global LNG export capacity.
Additional 168 MTA of Global LNG export capacity is planned by 2010.
Huge new investment in shipping, regasification, pipeline and related infrastructure is needed.
International Energy Agency estimates over $250 billion will be spent by the gas industry over 30 years for LNG projects.
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Financing Challenges
Preferences for
Simplicity
Transparency in cash flows
Equity
Corporate finance
Strategic assets
Collateral
Amortisation
Aversion to
Complexity
Merchant risk
Certain indexes
Leverage
Contingent equity
Distributions
Structured finance
Single asset deals
Ratings triggers
Refinancing risk
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Financing Objectives
Whether any LNG financing is successful depends on its fit with sponsors’ objectives:
Sponsor constraints Credit rating Legal and contractual
Limited/full recourse Credit pooling/severality Cost and tenor Equity requirements Accounting
Off-balance sheet
Financing covenants Collateral Rating Appetite for completion/
operating and other risks Political risk Refinancing risk Tax Financing source
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Sponsor equity
Lending
Traditional bank
Private placement
Mezzanine
Shipper finance
ECA/IFI
Public equity markets
Private equity
Public and 144A debt markets
Islamic finance
Lease
Tax-exempt /industrial revenue
Securitisation/Receivables financing
Combinations of the above
Financing Sources
Certain markets are better for particular objectives and assuming certain risks.
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Drivers for Strong Projects
Strong sponsors
Competitive costs and compelling economics
Strategic product
Well-crafted contractual arrangements
Operating track record
Highly rated host country
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Integrated Finance Model
Financing all across value chain theoretically makes sense.
For majors, LNG projects are all about accessing upstream reserves.
Profits taken over LNG chain.
Vast investment in each link in LNG chain.
Strategic importance may drive success in each link in chain.
May support multiple markets.
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Integrated Finance Model (cont'd)
Integrated model faces numerous practical problems:
Exposure to multi-jurisdictional, varied risks familiar to Big Oil, but lenders wary of resulting complexity, bankruptcy and legal risks.
Difficulty maintaining alignment across LNG chain.
Hard to attain transparent contractual arrangements that forge integration across LNG chain.
Interdependency of links manifests itself in “weak link” theory.
Many majors averse to project financings unless required by their partners (which may not be invested in all links) or for political risk mitigation.
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Project Risk Identification/Allocation/Mitigation
Sound LNG project financing requires evaluation and allocation of risks and rewards and mitigation, including: Completion Operating Gas Supply Liquefaction LNG and Gas Offtake LNG Shipping Regasification Pipeline Transportation Others
This list is not nearly exhaustive.
Risks compounded by “project-on-project” risk.
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Completion Risk
Risk that the project will not be completed on time or within budget, and will not perform as expected.
Engineering, design, procurement, physical completion and start-up of the project.
Includes legal, regulatory, financial and other aspects.
As segments of LNG chain are financed as separate projects, interdependency of links introduces project-on-project risk.
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Completion Risk Mitigants Proven contractor
Turnkey contracts
Fixed cost and scope
Liquidated damages
Performance bonds/retainage/LOCs/guarantees
Sponsor guarantees
Completion tests
Proven design
Insurance/contingency amounts
Properly vetted permitting process
Technical, Shipping and Marine studies
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Operating Risk
Operating risk is the risk that the project, once complete, will not perform as expected.
Experienced creditworthy service provider
Safety, security and environmental safeguards
Permits
Strong agreements
Incentives for good performance/penalties for bad
O&M reserves
Insurance
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Gas Supply
Availability of Adequate Gas Reserves
Reserve risks ("Proven" vs. "Probable")
Development costs
Dedication to chain
Transport to Liquefaction Facility
Gas Quality
Gas Price
Operating Risk, including Force Majeure/Environmental/ Permitting
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Liquefaction
Delay in Completion
Production Quantity
Technology
Cost Overrun
Expansion Economics
Operating Risk, including Force Majeure/Environmental/ Permitting
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LNG and Gas Offtake
Volume Purchase Obligations
Pricing transparency (take or pay/deliver or pay)
Credit of Offtaker/limits on credit support
Depth of Market - market studies
Long-term offtake but flexible terms
Destination flexibility
Conditions precedent
Operations, Link with Shipping/Regas, Force Majeure
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LNG Shipping
Requires longer lead time than earlier LNG deals
FOB v. DES
Time Charter v. Ownership
Delay in Construction of Vessels
Cost Overruns
Size of Vessels/Economies of Scale
Operating Risk, including Force Majeure/ Environmental/ Permitting
Destination Flexibility
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Regasification Link to LNG supply
Licensing
Delay in Construction
Cost Overrun
Open Access
Security
Distance to Market
Connection to pipeline system
Gas meets pipeline specifications - interchangeability
Operating Risk, including Force Majeure/Environmental/ Permitting
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Pipeline Transportation
Adequacy of current/new take-away pipelines
Delay in Construction
Distance to major end-use market
Pipeline transportation agreements
Terms of service (e.g., firm or interruptible)
Availability of ancillary services (balancing/park and loan/load swing)
Force majeure
Open access/common carrier issues
Storage
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Project-on-Project Risk
What links are absolutely necessary to success of this project?
Construction of completion tests
Intrusiveness to other projects
Partial sponsor guarantee fallaway/debt service reserve/other sponsor support
Effect on debt capacity
Contamination from other projects
Alignment
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Expansion Risks
Could be more robust than a greenfield project Economies of scale Operating history may mitigate completion and operating risks Regulatory regime known Government support Supplement to financing structure
but those results depend on front-end planning with greenfield project
PSC Host government agreements Permits
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Expansion Risks (cont'd)
Flexible financing structures Excess capacity
but even best laid plans can succumb to Separate financings on trains Non-alignment Change in circumstances Lack of control over service providers/shared facilities Priority and coordination of use Unforeseen events
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Weak Links
Successfully financing LNG projects requires solving weak link theory
Most liquefaction projects are in sub-investment grade countries
Can project surmount country ratings? Weaker counterparties
Ability to address capital calls and contingencies Credit enhancement and liquidity
Cost recovery/carried interests Incentives/penalties Dealing with financing delay
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Environmental, Social and Regulatory
Equator Principles - sustainable development
Environmental
Security
Social and Political
Archaeological
Local Content and Employment
Labour Practices
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Political Risk
Expropriation
Political violence
Currency convertibility/transferability
Terrorism
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Questions?
John D. WhitePartnerBaker Botts99 Gresham StreetLondon EC2V 7BA
Telephone +44 20 7726 3423Fax +44 20 7726 3523E-mail [email protected]
www.bakerbotts.com