Unlocking greater value through capital structuring

Katan Hirachand's picture
Katan Hirachand, Managing Director - Energy project finance, Société Générale
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Prompted by the positive change in commercial model coming out of the new US LNG market, and further reinforced by the recent oil price fall, developers need to find ways to bring costs down to be able to competitively achieve long-term sales into target markets. The U.S. model, akin to a “plug-and-play” approach with little upstream risk allows for separation of the infrastructure components from the commodity components that constitute the value chain. This cleaner risk allocation has led to an expansion in financial capacity with financial sponsors, capital markets and commercial banks establishing and in some cases, increasing their appetite. The equity component from such parties commands a significantly lower return requirement compared to a major E&P player, whose return requirements are predicated on growth plays as opposed to infrastructure plays. Hence, deploying cheaper capital in LNG-related infrastructure allows the overall cost of the chain to be significantly reduced. Indicative levels on conventional projects suggest with the appropriate capital structuring such value chain costs could be materially reduced.

As we eventually saw with LNG ships, majors are realizing that the LNG-related infrastructure does not need to be owned outright but project structures should be designed to allow cheaper, third party equity to be brought in. This has clearly started to happen in the U.S. projects where capital markets and financial sponsors have become well-versed with the LNG market. Projects like Freeport and Cheniere are great examples of equity being provided by financial sponsors.

Outside of the US, this has been slow to surface but economic realities coupled with new LNG markets that are far more price-sensitive are compelling major developers into hiving off infrastructure yet benefiting from lower cost of capital providers and ensuring the requisite level of access/usage. Examples include BG in Australia, and CATS in the North Sea. Sponsors faced with such costs/returns dilemma should seek to structure their projects with an appropriate business model and project architecture such that cheaper third party equity – whether from buyers or financial sponsors – is brought in to infrastructure parts of the project from the outset.

Do you agree with Katan? How can the industry bring costs down to be able to achieve long-term goals? Leave a comment below.

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Katan Hirachand is a member of Gastech’s Governing Body - The Gastech Governing Body is made up of a senior, select group of industry professionals, representing the full global gas & LNG supply chains – commercially as well as technically. The heritage of some members goes back 40 years and Gastech is proud that its conference is developed and run purely by the industry, for the industry. Attend Gastech 2017 in Tokyo.

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