The world’s largest project finance deals have been transacted for liquefaction schemes. When comparing LNG project finance to other sectors such as power, petrochemicals and infrastructure it is evident that LNG has continued to compete successfully for global funds. It is timely to examine this success as LNG moves from two bumper years – liquefaction projects raised around $37 billion in debt in 2014 and 2015 – to a phase of shifting market fundamentals and sharply lower crude oil and gas prices.
The main appeal of LNG projects to lenders is the use of long term take-or-pay contracts with investment grade counterparties. Stress-tested to break even at low gas prices they allow for loan payback across the 14-plus year horizons typical for LNG project finance. The use of contracts with strong tolling counterparties by some US projects can offer an even lower risk profile. An added attraction can come in the form of support provided by export credit agencies from LNG customers’ host countries. Minimizing market exposure is important because it is the main cause of the rare instances of project finance default seen in some volume-based toll road and merchant power plant deals.
Robust structures have enabled LNG projects to attract lower pricing for larger transactions than those in many other industries. LNG has retained an edge versus other sectors as sponsors and their advisors have adhered to the main principles of project finance, but at the same time made adjustments as the industry has spread into new countries, or pushed the envelope in other ways.
The large size and complexities of some LNG deals has meant that a conservative approach and more sponsor support is needed than seen in other industries. For example: lenders to Australia Pacific LNG’s liquefaction plant are shielded by sponsor guarantees from coal bed methane upstream risk; the giant Ichthys LNG – the world’s largest ever project financing – carries a completion guarantee to protect lenders from construction risk; and Indonesia’s Tangguh LNG maintains guarantees across its full repayment horizon to shield against country risk.
Recently, LNG deals have emulated some of the cutting-edge project financings seen in the US. Loan tenor is reduced to attract US banks and further shortened by bullet bonds. US projects are being built by smaller, entrepreneurial companies so project finance debt may sit alongside equity sourced from new players, such as institutional investors and investors in stock market listings such as Master Limited Partnerships.
The next big step forward would be to raise funds via project finance structures for a floating liquefaction facility. But there are other more far-reaching challenges ahead. Companies with lower credit ratings are emerging as buyers and customers are pushing for shorter term contracts. How quickly LNG project financings will start to reflect these changes remains to be seen. But sponsors that are able to sell a sizeable portion of their production long-term will still find it easier to attract bank funding.
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Melanie Lovatt presented this conference paper at Gastech 2015. In 2017 Gastech moves to Japan for the first time and is being hosted by The Japan Gastech Consortium. Find out who the Consortium Members are.
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