FLNG moves closer to first-ever project financing

Melanie Lovatt's picture
Melanie Lovatt, Finance Advisor, Poten & Partners
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The question of whether floating liquefaction facilities can be project financed by commercial lenders in a similar manner to land-based operations appears set to be answered soon. Eni has said it could sanction the 3.4-MMt/y Coral floater in Mozambique as early as June, and the Italian major is understood to be planning to raise money for the $4.42-billion scheme using a project finance structure.

While development of both land-based and floating liquefaction projects is difficult under current market conditions, some challenges are FLNG-specific. But bankers believe that with the right protections in place these can be overcome. Banks had been concerned by the lack of an operating track record because they have little appetite for exposure to risk from untried technologies. The water location of FLNG units makes the environment potentially more damaging compared with onshore plants and could result in increased maintenance and downtime. The availability of the asset is a key issue because the project must still continue to pay back its debt, despite any outages.

FLNG projects must create a far more compact liquefaction plant, about a fifth the size of an onshore plant with similar capacity. Space will be very tight for any engineering or repair crews, possibly creating maintenance issues when unanticipated problems arise in areas that may be difficult for workers and equipment to reach.

The risk lenders take on for this untried technology can be mitigated by having sponsor completion guarantees in place not only through the construction phase, but also for an operational phase. Completion guarantees are released for land-based liquefaction facilities once certain operating milestones are hit, and for the first FLNG facilities that seek finance this phase could be extended to provide more projection to financiers.

Bankers have raised concerns that FLNG units, some of which are very large, would stretch the insurance industry’s limits. While the largest FLNG units could still come near the threshold, the amount of capacity potentially available has been rising over the last few years as investors have poured capital into the market in their search for better returns in the currently depressed interest rate environment.

FLNG project financings could be structured like a ship financing or a land-based facility financing. Or they could possibly look like some kind of hybrid of the two. Some bankers suggest financing structures developed for floating production, storage and offloading (FPSO) units could provide a good FLNG project finance template. Project finance is now routine in the FPSO sector but, for the first financings, the due diligence procedures that financiers went through were challenging.

The structure may also depend on which entity is financing the vessel. An oil and gas major or other large company may decide to go the project finance route, but could also choose to use its own funds or balance sheet, like Malaysia’s PFLNG-1 and Shell’s Prelude. Petronas’ PFLNG-1, the frontrunner, is expected to begin operating this year offshore Malaysia. PFLNG Satu will be sited at the Kanowit field off Sarawak where it will produce up to 1.2 MMt/y. Next year it will be followed by Shell’s 3.6-MMt/y Prelude and Perenco’s Cameroon FLNG, which has a 2.2-MMt/y nameplate capacity.

The shipping companies that are supplying FLNG units to projects are more likely to shoulder only the financing for the vessel, which they will then lease to a project company. The project sponsors would then be left to arrange construction and financing for associated infrastructure. Not having to fund the vessel has the advantage of lowering up-front capital expenditure for the project sponsors. Shipping companies will use project finance structures to raise money to build vessels, but they will also use corporate finance, asset-backed finance and leasing structures. Golar LNG is converting an LNG carrier, the Hilli, for use as an FLNG unit for the Perenco project. It will be the world’s first conversion of an LNG carrier to FLNG. CSSC (Hong Kong) Shipping Co. is providing Golar with 80% of the Hilli’s $1.2-billion conversion cost via a sale-and-leaseback transaction.

Join the Conversation: Can these FLNG-specific challenges be overcome in the near future? Leave your comment below.

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Photo: Courtesy of Poten & Partners