setting the right expectations for vietnams lng project ... · lng project pipeline regulators and...

Thu Vu, Energy Finance Analyst January 2021

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Beyond the Noise: Setting the Right Expectations for Vietnam’s LNG Project Pipeline Regulators and Market Realities Will Give Investors No Easy Route To Success

Executive Summary Vietnamisquicklybecomingoneofthemostpromisingliquifiednaturalgas(LNG)importingmarketsinAsia.Industryplayers—bothdomesticandglobal—havevoicedtheirintenttopursueprojectsinVietnam,encouragedbythegovernment’sdeparturefromitstraditionalcoal-centricmindsetandtherapidpenetrationofrenewableenergyinVietnam’spowermixinrecentyears.

Thegaspowerdevelopershaveworkedhardtopushthemessagethatgascanbea“transitionfuel”andthatgas-firedpowersystemswithrapidpeakingcanserveasthemuch-neededcomplementtointermittentrenewableenergysources.

Sittingbehindthismarketingpushisasimplereality.

GlobalLNGsuppliersarestrugglingwithamedium-termsupplyglutthathasleftthemlittlechoicebuttotargetenergygrowthmarketslikeVietnamwithanaggressivesalespitchtobackarangeofgasandpowerdeals.

Theresultantmarketfrenzy—andassociateddiplomaticpressure—islikenothingVietnam’spowersystemhaseverseen.Whilethenoisehaslargelycomefromwell-publicizedprojectsinvolvingU.S.developersandU.S.-sourcedLNG,AsianplayersincludingtheleadingJapaneseandSouthKoreanenergycompanieshavealsojoinedthefray.Domesticprivategroupsarealsointhemix,keentoleveragetheirlocalprojectdevelopmentexpertisetosucceedintheLNG-to-powersector.Fornow,state-ownedenterprises(SOEs)seemtobetakingaleadingrolewithmoreadvancedstageprojectsundertheirwings.

WhilemuchofthereportingaboutVietnam’sLNGpipelinecreatestheimpressionthatmostoftheproposedprojectsaresailingthroughtheapprovalsprocess,thesituationonthegroundismorecomplicated.Tocorrectlyassessthemarketoutlook,

The market frenzy is nothing Vietnam

has ever seen.

Setting the Right Expectations for Vietnam’s LNG Project Pipeline

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itisimportantthatanalystsunderstandtheremainingpermittingandregulatoryhurdlesthatseparatetheprojectsfromthefinishline.

Somesponsorshavebeenpromotingoverambitioustargetsfortheirproject’sdevelopmentmilestonesdespitethecomplexityofLNG-to-powerprojects.Thetruthisthatthesearecomplicated,multi-stageprojectswithnumerousmovingpartsandmultiplerisks—upstream,downstream,counterparty,construction,andbeyond.TheywillcertainlybemorechallengingtohandlethancoalpowerprojectsthatalreadystrugglewithchronicimplementationdelaysinVietnam.

Inaddition,thereareunresolvedquestionsabouthowtheseprojectswillbefinanced.Foreignsponsorscontinuetoinsistontraditionalprojectfinancerisk-mitigationstrategiesthathavefallenoutoffavorinmarketslikeVietnamwithimprovingfundamentals.Unfortunatelyforthedevelopers,theexistinglegalframeworkgoverningeitherbuild-operate-transfer(BOT)orindependentpowerproject(IPP)modelsseemsincompatiblewiththecontractualtermsthatLNG-to-powerprojectsponsorsaredemandingfromthestateutilityElectricityofVietnam(EVN)andtheVietnamesegovernmenttoensurebankability.

ConcernsovertheaffordabilityofLNGandtherigidfinancialobligationstiedtoLNG-to-powerassetswillshapepowerpurchaseagreement(PPA)discussionsinthemonthsandyearstocome.ForthoseprojectsthathavereachedthenegotiationtablewithEVN,themostdifficultpartoftheprocesshasonlyjustbegun.

AnalystsshouldthereforesetrealisticexpectationsforVietnam’sLNGnear-termfuture.

There are unresolved questions about

how these projects will be financed.


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Table of Contents

ExecutiveSummary................................................................................................................................1

LNGintheSpotlight...............................................................................................................................4

WhoArethePlayers?............................................................................................................................7

SOEsAreTakingaLeadingRole..............................................................................................7

GlobalandRegionalEnergyCompaniesAreCominginasProjectCo-Developers..................................................................................................................................7

GasTurbinesandEquipmentProvidersSeeVastOpportunities..............................8

DomesticPrivateGroupsHopeToRideonSolar(andWind)Success...................9

Non-EnergyProjectDevelopersAreDrivingMarketHype..........................................9

SettingtheRightExpectations.......................................................................................................10

RegulatorySpeedBump....................................................................................................................14

BOTModel.......................................................................................................................................14

IPPModel.........................................................................................................................................15

QuestionsforEVN................................................................................................................................16

Operationalvs.FinancialFlexibilityofLNG-to-Power.................................................16

LNGAffordability..........................................................................................................................16

AbouttheAuthor..................................................................................................................................18


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LNG in the Spotlight Astheworldmadeitswaythrough2020,Vietnamhasmadeglobalheadlinesnotonlyforitseffectivecontainmentofthecoronaviruspandemic,butalsoforitsgrowingprofileasoneofthemostpromisingliquifiednaturalgas(LNG)importingmarketsinAsia.Thesheersizeandscopeofthegas-firedpowerandinfrastructureprojectsthatarebeingproposed,andthenumberanddiversityofinvestorswhohaveexpressedinterest,arelikenothingthecountry’spowersectorhaseverseen.

SuchenthusiasmwasencouragedbyaresolutionadoptedinFebruary2020bytheVietnam’sCommunistParty’sPolitburo,thecountry’shighest-levelpolicy-settingbody.ItresetthestrategicorientationforVietnam’senergysectordevelopmentforthenextdecade,withavisionto2045.Inthisdocument,thegrowthofVietnam’scoalpowerpipelinewascapped.Insteadofcoal,itwasstipulatedthatattentionshouldbegiventotherapiddevelopmentofLNG-firedpowercapacity,andthatthebuildoutofLNGimportanddistributioninfrastructureshouldbeprioritized.Thenewpolicytargetsannualimportsof8billioncubicmetersofLNGby2030,fromzerotoday.

InVietnam’spolicy-makingcontext,thewordingintheresolutionissufficienttoserveasbasisforspecificregulationsthatwoulddictateahighershareofLNG-firedpowerinthegenerationmix.WorkisalreadyunderwaywiththeformulationoftheNationalEnergyMasterPlanthatsetsthecontextforthePowerDevelopmentMasterPlancovering2021-2030(PDP8).Thelatestdrafthassofarproposedafour-foldincreaseofthecurrentgas-firedpowercapacityto28GWby2030,or21%ofthesystemcapacity.ThemajorityofthenewcapacityisexpectedtobefuelledbyimportedLNG.

Figure 1: Vietnam’s Gas Power Capacity To Quadruple by 2030

Source: Draft National Energy Master Plan (December 2020), Ministry of Trade and Industry.


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Vietnam’stopleadershipcommitmenttotheLNGpivotarrivedatacriticalmomentfortheglobalgasmarket.Asaresultofaggressivecapacityexpansionbynon-conventionalU.S.producerssince2016andplummetingglobaldemandcausedbytheCOVID-19pandemic,suppliersarestrugglingwithamedium-termsupplyglut.Thishasresultedinanaggressivecampaignbytheindustrytocourtlocalofficialswithbig-ticketLNGprojectsoverthepastyear.U.S.interestshavebeenparticularlyprominentinthemix,oftenwithsupportfromtheoutgoingTrumpadministration.

Morebroadly,favorableconditionsonthegroundhavealsomotivatedinvestorsfromtheU.S.toJapanandSouthKoreatopintheirhopesonVietnam’sfutureLNG-to-powersector.Thekeycatalystisrobustmedium-termpowerdemandgrowthpotential.GlobalcorporationscontinuetofavorVietnamintheirsupplychainrelocationstrategies,aguaranteeformoreintensivedomesticindustrialactivitiesinthecomingyears.ThelatestgovernmentdatashowsthatVietnam’smanufacturingoutputandexportsquicklybouncedbackinthesecondhalfof2020afterapandemic-induceddipinthesecondquarter.Therecoveryislikelytobesustainedinto2021.

Figure 2: Vietnam’s Manufacturing Sector Recovers

Source: Vietnam General Statistics Office.

ThepivottowardLNGiscomingasthegovernmentsignalsadeparturefromatraditionalcoal-centricbaseloadmindsetandisembracingvariablerenewableenergy.Since2019,renewableenergyprojectshaveledtoafundamental,fast-pacedtransformationforVietnam’spowersystem.Ononehand,therapiddevelopmentofsolarandwindpowerinstallationshasinstilledconfidencethatthesystemandregulatorsareadaptingquicklytoamorediversegenerationmix.


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Ontheotherhand,thechangehasprovidedtheidealentrypointsforgaspowerdevelopers.Coal-firedpowerprojectshavecreatedconflictwithlocalcommunitiesduetoenvironmentalandsocialimpacts.Asaresult,provincialleadersandnationalpolicymakershavebeenattractedtotheargumentthatgas-firedpowercanbecleanerthanitscoalcompetitor.Inadditiontopresentingthe“cleantransitionfuel”narrativeforgas,advocateshaveusedconsistentmessagingtopositiongas-firedpowersystemswithrapidpeakingasacomplementtothegrowingyetintermittentrenewableenergysources.Justasimportant,giventhefinancialconstraintsofElectricityofVietnam(EVN),somedevelopershavealsoadvertisedtheaffordabilityofLNGpower,withsomepromisingtodeliverelectricitytoEVNatpricesaslowasUSD0.07perkilowatt-hour(kWh).

AlthoughthepivottowardLNGisoftendiscussedasafuelchoicepolicydecision,therearethreeimportantvariablesthatwillshapethesuitabilityofLNGgenerallyandofspecificprojectsinparticular.

First,itisimportanttorememberthatVietnamalreadyhasoperatingoffshoregasprojectsandtheLNGscenariowillinevitablybeinfluencedbythepricingandavailabilityofexistingandnewoffshoregasprojectssuchastheBlueWhale(orCaVoiXanh),BlockB,orfurtherdowntheline,KenBau.

Second,adecisiontocommittoimportsofLNGatscaleimpliesverysignificantinvestmentsinassociatedLNGinfrastructureandeffortstobuildanindustrialorconsumergasmarket.Thesedecisionswillinevitablyinvolvemanystakeholders,andimportantquestionswillsurfaceaboutwhowillbearthecostofagasinfrastructurebuild-outthatservicesofftakersotherthanEVN.

Finally,thevariousLNGprojectsponsorsallhavedifferentnationalandpoliticalintereststhatmayinfluenceperceptionsofprojectviability.Forexample,somesponsorswillhaveaneasiertimethanotherswinningthebackingofexportcreditagencies.Giventhesizeoftheprojects,theabilityofVietnam’stradingpartnerstosupportthesewillinvolvecarefulcalculations.TheabilitytomobilizeanationalumbrellaofsupportmayalsoinfluenceviewsonthereliabilityofLNGsupplies.BuildinganLNGsupplychaintoservicetheSouthChinaSeainvolvesmanyplayers,andsecurityconsiderationscouldfactorintofinaldecisions.

Vietnam’sLNGfutureisarguablybright,butgreatenthusiasmwillbetestedbythemarketoverthenextyear.Thiswillbeashiftinglandscapeastheplayersjockeyforpositionandtheregulatorsclarifythegroundrulesthatmayweedouttheweakersponsors.Andinthebackground,energypolicyplannerswillbecalledontomatchprojectcostswithEVN’sabilitytopay.


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Who Are the Players? IndustryplayersfromacrossthedomesticandglobalLNGvaluechainhavevoicedtheirintenttopursueprojectsinVietnam,withannouncementsparticularlyactivein2020.IEEFA’sresearch,basedonpublicinformationasofDecember,indicatesthatatleast30projectswithimpliedcapacityofnearly93gigawatts(GW)ofLNG-fuelledpowercapacityareonthedrawingboard.AbouthalfarefullyintegratedprojectswithfullcomponentsofLNGimportterminal,storage,regasification,pipelineandpowergenerationfacility.TherestareLNG-fuelledpowerplantsonly.

Fromthispoolofprojectsproposedbyinvestorsandprovincialauthorities,only17.6GWhavebeenformallyapprovedforthecurrentpowermasterplan(PDP7R).Noneoftheprojectshavebegunconstruction,withtheexceptionofanexistingdiesel-runpowerplantsetforupgradingandconversiontoLNGfuel.

Theinvestorsvarysignificantlybyorigin,background,andexpertiseintheLNGandgaspowersector.Eventhoughthemarketfrenzyhasbeendrivenprimarilybywell-publicizedprojectsinvolvingU.S.developersandU.S.-sourcedLNG,neithertheambitionofJapaneseandSouthKoreanplayersnorthemarket-shapingroleofstate-ownedenterprises(SOEs)shouldbeunderestimated.

BasedonIEEFA’scomprehensivereviewofmarketmovementstodate,thefollowingkeythemesstandout:

SOEs Are Taking a Leading Role Amongthehandfulofprojectswhichhavereachedarelativelyadvancedstageofdevelopment,subsidiariesofthestate-ownedoilandgasgroupPetroVietnamandpowerutilityEVNhavesignedontoseveralofthem.PVGasiscurrentlybuildingThiVaiLNGTerminal,oneofVietnam’sonlytwoimportterminalsunderconstruction,whichisexpectedtostartoperationsin2022.TheterminalwillsupplyPVPower’s1.5GWNhonTrach3and4,thefirstpowerplantsdesignedforLNGinthecountry,scheduledtocomeonlinein2023.PVGashasalsoformedajointventurewithAESCorp.oftheU.S.todeveloptheUSD1.4billionSonMyLNGTerminalforinaugurationby2024.IntermsofintegratedLNG-to-powerinitiatives,PVPowerisalsotheleadingsponsorinLNGQuangNinh,aUSD1.9billionprojectwithfullcomponentsofimport,storageandregasificationinfrastructure,anda1.5GWpowergenerationcapacity,tobejointlydevelopedwithJapanesepartners.Meanwhile,EVN’sGENCO3isspearheadingasimilarinitiativewithLNGLongSonat1.2GWpowercapacity,proposedforcommissioningby2026.

Global and Regional Energy Companies Are Coming in as Project Co-Developers Japanhasbeenalong-termplayerinVietnam’spowersectorandcontinuestoleadwiththehighestnumberofenergycompaniespursuingLNGprojects,includingnamessuchasTokyoGas,Sojitz,Kyushu,JERAandJ-Power.NextintheleagueistheU.S.,withfamiliarnamessuchasExxonMobilandAESCorp.,andSouthKoreawith


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KogasandGSEnergy.Sofar,theseinvestorshaveoptedforthecommonapproachofpartneringwithoneanotherorwithlocalplayersandSOEs.

GlobaloilandgascompanyExxonMobilsignedamemorandumofunderstanding(MOU)inOctober2020withtheHaiPhongCitygovernmentandJapanpowergenerationcompanyJERA“toworktogetheronapotentialintegratedLNG-to-powerprojectinHaiPhong.”1Anestimatedtwo-phaseinvestmentworthUSD5.1billion,theprojectwillincludeanLNGimportterminalwithafloatingstorageregasificationunit(FSRU),floatingstorageunit(FSU),pipelineanda4.5GWpowerplant.InaJunecallwithPrimeMinisterNguyenXuanPhuc,anExxonMobilrepresentativesaidthecompanywasalsointerestedina3GWprojectinLongAnprovinceinthesouth.2

Meanwhile,TokyoGasandMarubenihasjoinedaconsortiumledbyPVPowertodevelopLNGQuangNinhproject.AnMOUwassignedinOctoberandwitnessedbyJapanesePrimeMinisterSugaYoshihideonhisfirstoverseastripaspremierandhisVietnamesecounterpart.3SojitzandKyushuareco-sponsoringthe2.3GWSonMy1powerplantwithFrenchEDF.4InJuly2019,SouthKoreanLNGimportinggiantKogasalsoenteredapartnershiptodevelopLNGKeGa,aUSD2billionintegratedprojectwith1.5GWcapacityinBinhThuanprovince.5InNovember2019,GulfEnergyofThailandsignedanMOUwiththeNinhThuanprovincetoresearchthedevelopmentofthe6GWLNGCaNapowercomplex.6

Gas Turbines and Equipment Providers See Vast Opportunities Todate,GeneralElectricisassociatedwithatleastfourprojects,eitherasacosponsororastheturbineprovider.ThecompanyhasaUSD1billionMOUwithGENCO3tosupplygasturbinesandrelatedequipmentoverthelifetimeofLNGLongSoncomplexinwhichitalsohasequitystake.7GEisalsothechosensupplierinLNGBacLieu,LNGLongAn,andLNGChanMayprojects.Similarly,MitsubishiisamongtheconsortiumofsponsorsforGENCO3-ledLNGLongSonproject,andnamedasapartnerinLNGChanMay,aproposedUSD6billionintegratedproject.ReportsalsosuggestedthatSiemensandSamsungC&Twereeyeingthe2.4GWVungAng3,previouslyintendedasacoalpowerstation,asjointdevelopers.FSRUsolutionsproviderExceleratefromtheU.S.hasclaimedastakeintheLNGKeGaproject.

1ExxonMobil.IntegratedLNGtoPowerProjectinVietnam.28October2020.2Reuters.ExxonMobileyesLNG-to-powerprojectsinVietnam:government.11June2020.3PetroTimes.PVPowerjoinsthedevelopmentofLNGQuangNinhgasproject.19October2020.4EDF.AnothermilestonehasbeenaccomplishedinthedevelopmentoftheSonMy1CCGSpowerplantprojectinVietnam.29November2018.5OffshoreEnergy.Kogas,ECVteamuptodevelopLNGterminalinVietnam.24July2019.6NinhThuanProvinceInformationPortal.NinhThuanPeople’sCommitteesigncooperationagreementwithGulfEnergyDevelopmentPCLtoresearchthedevelopmentofCaNaintegratedLNG-to-powerproject.6November2019.7Bloomberg.GEsignsagreementtodevelopVietnamLNGpowerplant.21November2020.


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Domestic Private Groups Hope To Ride on Solar (and Wind) Success Theboomingrenewableenergysectoroverthepastthreeyearshasledtotheriseofanumberofdomesticplayers.Despitelimitedexperienceintheenergysector,theyhaverapidlyaccumulatedportfoliosofsolarandwindpowerassets.SomecompaniesseemtobehopingtoleveragetheirrecentprojectdevelopmentexperienceandreplicatethesuccessintheLNGsector.LikeGulfEnergy,TrungNamGroupwasalsoawardedaresearchMOUforthe1.5GWLNGCaNabytheNinhThuanprovinceinJuly2020.8InDecember,thegroupsignedanMOUwithaconsortiumofSouthKoreanenergyplayersincludingKogas,HanwhaEnergyandKOSPOtocooperateinthefuturedevelopmentofpowerprojectsinVietnam.9Anotherprominentplayer,TruongThanhVietNam,alsoinitiateddiscussionswiththeprovincialgovernmentinFebruary2020todevelopa4.5GWLNG-firedpowerplantinThaiBinh.10

Notably,localconglomerateT&TGrouphasexpressedinterestinseveralbig-ticketprojectssuchasCaiMepHa,aUSD6billionintegratedLNG-to-powerprojectinBaRia–VungTau,andSonMy3&4LNG-fuelledpowerplantswith3GWtotalcapacityinBinhThuan,amongothers.VinGroup,Vietnam’sbiggestconglomerate,hasalsoobtainedprovincialgovernmentsupportfortheUSD1.9billionintegratedprojectinHaiPhongCity,thenorthernindustrialhubwhereVinGrouphasagrowingmanufacturingpresence.

Non-Energy Project Developers Are Driving Market Hype ThosewhocloselyfollowdevelopmentsinVietnam’spowersectorwouldnoticethatthehighestprofileLNGprojectproposalsarethosebelongingtosponsorswithverythintrackrecordsandfinancialcapacity.TheentitiesbehindprojectssuchastheUSD4billionLNGBacLieuorUSD6billionLNGChanMayarecompaniesestablishedjustinthepasttwotothreeyears.Theyareledbyindividualbusinessmen,and,basedonpublicdisclosures,seemtolackinstitutionalshareholderswithexperienceinthegasorpowersector.

Interestingly,inalloftheseprojects,thepromisetouseimportedLNGfromtheU.S.hasbeenakeysellingpointtogovernmentsofbothsides.WhiletheoutgoingTrumpadministrationhasbeenaggressivelypromotingLNGexports,thewideningtradeimbalancebetweenthetwocountrieshasputpressureonVietnameseseniorofficialstodemonstrateeffortstonarrowthegap.TheseriousnessofthepressurewasconfirmedinDecemberwhentheU.S.TreasuryDepartmentformallyannouncedthatVietnamwouldbenamedacurrencymanipulator—amovethatcouldhavepunitiveimplicationsfortraderelations.

8Cafebiz.FourenergyinvestmentprojectsworthoverUSD20billionsigned.22July2020.9HanoiTimes.Vietnam,SouthKoreatakestepstoenhanceenergycooperation.12December2020.10ThaiBinhNews.ProvincialPartyCommitteemeetswithTruongThanhVietNamGroup.25February2020.


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Someoftheprojectshavethusprogressedfasterthantheircompetitorsdownthedevelopmentcurve.TheintegratedLNGBacLieuisthefirst100%privateandforeign-ownedIPPprojecttohavebeenlicensed.Meanwhile,thesponsoroftheyet-to-be-approvedLNGChanMayproject,a2019Vietnam-incorporatedentitywithUSD2.2millioninchartercapital,reassuredVietnameseofficialsthatithadreceivedfullfinancingfortheUSD6billionprojectandthatitsledgerofpartnersincludeslenderssuchastheU.S.InternationalDevelopmentFinanceCorporation,theInternationalFinanceCorporation,andU.S.Export-ImportBank.11

PerhapsoneofthemostnotableinvestorstoenterthecompetitionistheU.S.MillenniumGroup.InAugust,thecompanymadeheadlinesintheVietnamesepresswhenitmetwithprovincialgovernmentstoproposeaninitialUSD15billioninvestmentintwoLNGprojects.12WhilethecompanygaveassurancesaboutaU.S.governmentguaranteefortheprojectsandintroduceditselfasa35-year-oldoilandgascompanyintheU.S.,itscredentialscouldnotbeverifiedinthepublicdomain.

Setting the Right Expectations LNG-to-powerprojectsinVietnamareatvaryingstagesofinception.Tocorrectlyassessthemarketoutlook,itisimportantthatanalystslocateeachprojectaccuratelyontheprojectdevelopmentcycleandunderstandtheremainingpermittingandregulatoryhurdlesthatseparatethemfromthefinishline.

Inacrowdedmarket,itisunderstandablethatLNGinvestorsareworkingdiligentlytoboosttheirpublicprofileinVietnam.Thismayinvolveforgingpartnershipswithprovincialauthorities,establishinganetworkofhigh-profilenon-equitypartners,andensuringthatpublicityeventsreceiveprominentmediacoverage.Marketwatchers,however,shouldnotmistakethesigningofanMOUbetweenaninvestorandaprovincialpeople’scommitteeasaformalprojectlicensingceremony,especiallywhenthescopeofcooperationistypicallyacollaborativeactivitysuchasjointresearchtoassessprojectpotential.Similarly,MOUsandotherearly-stageprojectagreementsbetweenprojectsponsorsandequipmentprovidershavelittleforceandareoftenlittlemorethanprofile-buildingefforts.

Inanefforttodevelopmomentumfortheirprojects,somesponsorshavepubliclypromotedoverambitioustargetsforimportantprojectdevelopmentmilestones.Forexample,oneprojectstillwaitingfortheprimeminister’sformalapprovalclaimedthatitwouldbreakgroundinthefirstquarterof2021.Another,althoughalreadylicensed,wasconfidentthatitcouldbeginandcompletepowerpurchaseagreement(PPA)negotiationswithEVNwithinsixmonths,meaningbytheendof2020.Thisdidnothappeninpractice.

Theseareunrealisticexpectations,giventhecomplexstructureofintegratedLNG-to-powerprojectsandtheneedtoaddressdetailedprojectfinanceriskmitigation

11TheSaigonTimes.Six-billiondollarLNGChanMaygaspowerprojecttocomeonlinein2024.8November2020.12HanoiTimes.U.S.firmseekstoinvestUSD15billioninpowerprojectincentralVietnam.3August2020.


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toolsthatwilllikelybeembeddedinthePPA.Meanwhile,projectsponsorswillneedtoworkcarefullywithrule-boundMinistryofIndustryandTradeandEVNofficialswhoareoperatinginatensepoliticalclimatethatmaycreateabiastowardcaution.Thisisparticularlytruegiventhepolicygapsthatregulatorshaveyettoclarifyandthatmaystandinthewayoffinalizingprojectapprovals.

ArecentpublicationbygloballawfirmWatsonFarley&WilliamshighlightstheriskmatrixfacedbyLNGprojectdevelopersandthecorrespondingriskmitigationtools.13Thelistcanlookintimidatingbutthekeytakeawayissimple:Thesearecomplicated,multi-stageprojectswithnumerousmovingpartsandmultiplerisks—upstream,downstream,counterparty,construction,andbeyond.Theywillcertainlybemorecomplextohandlethancoalpowerprojectswhichalreadystrugglewithchronicimplementationdelays.

Figure 3: LNG-to-Power Project Risk Matrix and Mitigation Strategies

Source: Watson Farley & Williams.

Todifferentiatebetweenearlystageandadvancedprojects,thebeststrategyistofocusontheprojectsthathavesecuredaplaceinthenationalpowerdevelopmentpipeline.AsofDecember,onlynineLNG-to-powerprojectshadreachedthislegally

13WatsonFarley&Williams.TheanatomyofanLNGtopowerproject:Theriskmatrixmitigated.October2020.

10 Watson Farley & Williams

Of course, it is not clear whether a government or utility will be able to honour the guarantee it may have granted. If available, it is advisable for the project to also take the benefit of a project implementation agreement/host government agreement (HGA). In addition, structuring the project in such a way that the project company can make use of bilateral investment treaties with the host country would allow additional protections under which a breach of guarantee can be raised under the relevant treaty rather than having to resort to bringing a claim under the guarantee itself against the government in the host country. There are, however, examples in the market where no government guarantees or implementation agreements were available to the project investors, but the project nevertheless went ahead and was successfully financed. This was the case with the above-mentioned Pakistan project.

Delays

Unless the delay risk is effectively managed, delays that occur during the construction phase will hamper the start of cashflow being generated and hinder the repayment of project loans while interest charges continue to accumulate. As a starting point, start dates, commissioning periods and acceptance tests need to be coordinated throughout the in-country contractual chain but also with the start-up of LNG supply. Liabilities for delay, force majeure and termination provisions must be passed through as well, if this risk is to be mitigated effectively. Where the contracts provide for liquidated damages to be payable on delay, these should ideally be structured so as to keep the entire project whole. However, this may not be feasible given the cost intensity particularly of the upstream project. Therfore, to mitigate construction phase delay, LNG sales contracts will normally contain diversion rights and often also the right to resell the cargo or regasified LNG downstream.


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significantdevelopmentmilestoneandreceivedtheprimeminister’sapprovalforinclusionintothecurrentpowermasterplan.DetailsoftheprojectsarelistedinTable1.AsthegovernmentclosesinontheissuanceofPDP8,itisunlikelythatanyadditionalprojectswillbeapprovedinthecomingmonths.

Table 1: Vietnam’s LNG-to-Power Project Pipeline

Source: IEEFA research based on public sources.Note: The list includes only projects which have been approved into the current power master plan (PDP7R).

Itisworthnotingthattheprojectsponsorhasbeenofficiallyselectedandpermittedtoprogresstotheimportantmilestoneofnegotiatingpowerpurchaseagreements(PPA)withEVNinonlyfiveprojects.Bycontrast,projectsponsorsforLNGLongSon,LNGCaNa,LNGLongAn,andLNGQuangNinhhavenotbeenconfirmedyet,accordingtopublicsources.

IntheabsenceofanationalpolicyforLNGvaluechaindevelopment,projectsponsorshavetakendifferentapproachestoprojectstructuring,eachwithadifferentrisk-rewardprofile.Thesestructuraldifferenceshaveimplicationsforriskmanagementandfinancingoptions.Sofar,threemodelshavebeenused:

ThestandalonemodelcansofarbeseeninSonMy1powerplantproject.TheEDF-ledprojectcompanyplanstoownandoperatethe2.3GWpowerplantandwillimportLNGviatheSonMyImportTerminal,whereitpaysatollingfee.Thepower

Name of Project LocationCapacity

(MW)Expected

CODProject Sponsor Project Details

Hiep Phuoc Ho Chi Minh City 1,200 2022 Hai Linh Co. Ltd (Vietnam)Power plant only. LNG to be imported via Hai Linh LNG Terminal.

Son My 2 (BOT) Binh Thuan 2,250 2023 AES Corporation (United States)Power plant only. LNG to be imported via Son My LNG Terminal.

Nhon Trach 3 & 4 Dong Nai 1,500 2023-2024 PV Power (PetroVietnam)Power plant only. Both plants will use LNG imported via Thi Vai LNG Terminal.

Ca Na (Phase 1) Ninh Thuan 1,500 2024 Investor selection in progress.Fully integrated project with onshore/floating import terminal, storage, regasification tanks, pipeline and power plant.

Bac Lieu Bac Lieu 3,200 2024-2027 Delta Offshore Energy (Singapore)Fully integrated project with FSRU, gas pipeline and power plant. First fully foreign-owned IPP.

Long Son (Phase 1) Ba Ria – Vung Tau 1,200 2025-2026

Consortium (unconfirmed): EVNGENCO3 (lead sponsor), TTC Investment, PECC2, Thai Binh Duong Group (Vietnam), Mitsubishi (Japan),General Electric (U.S)

Fully integrated project with import terminal, storage, regasification tanks, pipeline and power plant.

Long An Long An 3,000 2025-2026 Investor selection in progress. Power plant only.

Quang Ninh Quang Ninh 1,500 2026-2027

Consortium (unconfirmed): PV Power (lead sponsor),Colavi (Vietnam),Tokyo Gas, Marubeni (Japan)

Fully integrated project with import terminal, storage, regasification tanks, pipeline and power plant.

Son My 1 (BOT) Binh Thuan 2,250 2027EDF (lead sponsor), Sojitz, Kyushu (Japan), Thai Binh Duong Group (Vietnam)

Power plant only. LNG to be imported via Son My LNG Terminal.

17,600Total Planned Capacity


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projectcompanyhasnoownershipstakeintheimportterminalandregasificationfacility.

Thecross-ownershipmodelisarisk-mitigationstrategywherepowerprojectsponsorshaveanownershipinterestintheLNGimportterminalcompanyand/orviceversa.Thisstructuralfixisintendedtoaddresscounterpartynon-performanceriskbyaligningtheinterestsandmotivationofthepartiesinvolved.ThisistheapproachadoptedbytheAESCorp.,thesolesponsorofthe2.3GWSonMy2powerplantandalsotheco-owneroftheSonMyImportTerminalwithPVGas.Similarly,PVPower’s1.5GWNhonTrach3&4powerstationswillbefuelledbyLNGimportedviaThiVaiImportTerminal,whichisownedandoperatedbyitssisterunitPVGas(botharesubsidiariesofPetroVietnam).HaiLinhImportTerminalandHiepPhuocpowerplantarebothownedbytheprivately-heldHaiLinhCo.Ltd.

Figure 4: Corporate Structuring Options for LNG-to-Power Projects


InintegratedLNG-to-powermodelssuchasLNGBacLieu,LNGLongSon,LNGCaNaandLNGQuangNinh,theprojectcompanywillhandleLNGfuelpurchase,developandoperatetheimportterminal,regasificationandpipelinetransportationinfrastructure,andthepowerplants.PowerwillbesoldtoEVN.Also,asarisk-mitigationstrategy,consortiummembersusuallyincludeplayersfromacrosstheLNGvaluechain.

8 Watson Farley & Williams

1. Corporate Structuring

Integrated

Standalone Cross Ownership

As mentioned in our previous article, there are three possible corporate structures for LNG to Power projects - integrated, standalone and cross-ownership. Each of these structures is permissible for LNG to Power projects under Vietnamese law. It is interesting to note that there are only a few LNG to Power projects approved in the Power Master Plan and each has a different corporate structure.

Based on publicly available resources that we have reviewed, one example of an integrated structure is the Bac Lieu project, in which the project company owns the power plant and the FSRU and controls the entire LNG value chain. The Son My 1 project is an example of the standalone structure, in which a consortium led by EVN owns the power plant and the onshore terminal is owned by other entities. Further, the Son My 2 project is an example of cross-ownership, where AES Corporation is the

STRUCTURING


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Figure 5: Corporate Structuring for LNG-to-power Projects – Integrated Model


Regulatory Speed Bump OneofthemostimportantdecisionsfacingdevelopersrightnowisthelegalframeworkforLNG-to-powerprojects.Giventhemultibillion-dollarpricetagofeachproject,ithasbecomeevidentthatinvestorsarelookingfortraditionalprojectfinancerisk-mitigationstrategies,includingthosethathavebeenappliedwithsuccessinsomecoalpowerprojects.

Underexistingregulations,therearetwoeligiblepathways:Thebuild-operate-transfer(BOT)modelorindependentpowerproject(IPP)model.

BOT Model Thisstructurereliesonamarket-testedbankablecontractthathasbeensuccessfullyusedinanumberofcoalandgaspowerprojectsinVietnam.Underthismodel,thegovernmentmakesgenerousconcessionssuchasfullpowerofftakeobligationbyEVN;sovereignguaranteesovertheEVN’spaymentdefault;foreignexchangeconvertibility;andapplicabilityofforeignlawsasgoverninglawindisputeresolution.Thiscarefullyconstructedpackageofconcessionshasenabledoffshorefinancingforprojects.Inthepastdecade,theVietnamesegovernmenthasbeenwillingtoprovidesuchconcessionsinexchangeforinternationally-fundedlargebaseloadgenerationcapacityneededtosustainthecountry’srapideconomicgrowth.


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Despitethisbeingatried-and-testedpathway,investorsinLNG-to-powerprojectsareunlikelytofindthisisnowanoptimalfit.BOTpowercontractsarenotoriousfortheirlengthynegotiationtimeline,whichinrecentcaseshavetakenaslongasadecade.Second,thenewPublic-PrivatePartnershipLaw(PPPLaw)tookeffectinJanuary2021,streamliningregulationsgoverningBOTprojects.ReflectinggrowinginterestintheVietnameseenergymarket,thenewlawendssomefavorablecontractualtermsthathadbeenregardedasessentialtointernationallenders.TheywillbeparticularlyconcernedthatthePPPLawmandatesVietnameselawasthegoverninglawofcontractandissilentonsovereignguaranteesoverthenon-performanceofstateenterprisessuchasEVN.Thelatterreflectsacontinuityofthegovernment’sfiscalprudencepolicyadoptedsince2017thathasresultedinsovereignguaranteecutbacksacrossallsectorsoftheeconomy.Thesetougherprovisionshavenaturallycreatedmarketuncertaintyandcanbereadasanindicationthattherewillbeatoughernegotiationclimateforinvestorsinthecomingyears.

ThesepainpointsarealreadyfeltbyahandfulofBOTcoalprojectsthathavebeenyearsinthemakingandnowhavelittlehopeofbeingexemptedfromthePPPlaw.Therefore,atthispoint,LNGprojectdevelopersshouldnotharborhopesforalawrevisionorspecialtreatmentthatcontradictsnewlegislation.

IPP Model InVietnam’spowersectorcontext,IPPsaregenerallyunderstoodasfullyprivateandindependentpowerprojects.TheinvestmentandcontractingaregovernedbytheInvestmentLawandEnterpriseLaw.WithlimitedprospectsofsuccesswiththeBOTmodelinthefutureaswellastimelineconsiderations,privateinvestorshavelittlechoiceotherthantheIPProute.

However,thereisnotmuchhopefortraditionalinternationalfundingtermsunderthismodel.Forexample,unlikeitspredecessor,thenewInvestmentLawthatalsotookeffectinJanuary2021isunclearontheprovisionofgovernmentguaranteeundertakings(GGUs)andforeignexchangeconvertibility.AstandardPPAwillalsoapplytotheLNG-to-powerIPPsandwillbegovernedbyVietnameselaw.Notably,therewillbenotake-or-payclause.Instead,thepowerplantwillhavetocompeteonthewholesalemarket,withalimitedofftakeguaranteebyEVN.Todate,themajorityofIPPs(excludingBOTprojects)inVietnamaresmall-scalepowerprojects.

Sofar,reactionsbythegovernmenttospecificLNGprojectssuggestlittledeparturefromtheusualframework.InFebruary2020,PrimeMinisterNguyenXuanPhucstressedthatthegovernmentandstateagencieswouldnotbeofferingguaranteesforLNGBacLieuproject.Morerecently,inDecember,theNinhThuanprovinceissuedthecountry’sfirstopentendertoselecttheinvestorforthe1.5GWLNGCaNaproject.

Notably,theRequestforExpressionofIntereststipulatedthatinvestorsmustpledge(i)nottorequireanysovereignguaranteeorsupportovermatterssuchasforeignexchangeconvertibility,powerofftakeorPPA;and(ii)tohandledisputesinaccordancewithVietnameselaw,undertheVietnamesecourt.Furthermore,it


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highlightedthattheprimeministerandhisofficewouldnotinterfereintheactivitiesofbusinesses.ThissuggeststhatthefutureprojectsponsorwouldnegotiateandconcludethePPAwithEVNbasedonexistinglawsandregulations,andshouldnotexpectanyspecialtreatment.

Questions for EVN Operational vs. Financial Flexibility of LNG-to-Power Comparedtotheircoalcounterparts,LNG-to-powerprojectsponsorsfaceatougherriskmitigationexerciseduetothefuelcomponent.Thenotoriouslyrigidtermsoflong-termgassalesagreementsandtheupfrontcapitalthathastogointothedevelopmentoftheimportterminal,regasificationandtransportationinfrastructureinevitablyincreasethefinancialrisksforprojectsponsors—riskstheywanttopartiallypassontothepowerofftaker.

Interestingly,whiletheinvestors’keyvaluepropositionhasbeentheoperationalflexibilityofcombinedcyclepowerplantsandhowfastthestationscanberampedupanddowntoaccommodatevariablerenewables,thecontractualtermstheyareaskingfromEVNandthegovernmentaremuchmorerigid.Fromaprojectfinanceperspective,take-or-payandfuelcostpass-throughclausesmakesenseandarethuspreferredbytraditionallenders.WhethertakingonsuchrisksistherightchoiceforEVNandVietnam’spowersystemislessobvious.

AttheASEANEnergyBusinessForuminNovember2020,aPhilippineLNG-to-powerprojectdeveloperemphasizedtheneedforadeparturefromtheusuallyrigidLNGsalesagreement.“Whathappensifrenewableenergydoestakeoff?WhathappensifIgetstuckwithabigtake-or-paycommitment[inLNGsalescontract]thatIcannotdealwith?”heasked.

ProjectdevelopersinVietnammaynotbethatcandid,buttheyarecertainlyfacingthesameconcerns.Thequestionnotonlyhighlightstherealizationofapossiblescenariowhererenewableenergyandassociatedstoragesolutionscanmakegas-firedcapacityobsolete,itisalsoareminderofthestrandedassetsriskthatpowerutilitiesmayfaceiftheyprematurelyagreetotheseconcessions.

LNG Affordability ThereisnohidingthatLNG-firedpowerwillbecostly.Powermarketregulatorsandcertainprojectsponsorshaveacknowledgedthiseitherdirectlyorindirectly.Insomeinstances,thewarningwasconcealedunderthepushforamarket-basedelectricitypricingwithfuelcostpass-throughorthepromotionofenergyefficiencydrivenbyhigherretailtariffs.Whilethegeneralconsensusisthattheincrementalcostcurvesofsolar,windpowerandbatterystoragearedownwardslopingfarintothefuture,thesamecannotbesaidofLNGandLNG-firedpower.

TheseconcernswillshapePPAdiscussionsinthemonthsandyearstocome.Fornewobservers,itisimportanttostressthatinVietnam,ahigh-levelpolicycommitmenttoestablishanddevelopareliableLNG-to-powermarketdoesnot


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necessarilytranslateintopromptconcessions,muchlesswhenthepublicdiscussionhasbeenskewedinfavorofthesponsors.ForthoseprojectsthathavereachedthenegotiationtablewithEVN,themostdifficultpartoftheprocesshasonlyjustbegun.


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About IEEFA TheInstituteforEnergyEconomicsandFinancialAnalysis(IEEFA)examinesissuesrelatedtoenergymarkets,trendsandpolicies.TheInstitute’smissionistoacceleratethetransitiontoadiverse,sustainableandprofitableenergyeconomy.www.ieefa.org

About the Author Thu Vu EnergyFinanceAnalystThuVuisapublicpolicyanalystandriskconsultantcoveringregulatorydevelopmentsinrenewableenergyandenergyefficiencyinVietnam.ThuhasworkedfortheFinancialTimes(UK)[email protected]

setting the right expectations for vietnams lng project ... · lng project pipeline regulators and...

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