LNG: Big Projects Require Big Bucks
There’s no such thing as a small LNG project, according to Graham Hartnell, Manager of LNG and Gas Consulting at Poten & Partners who spoke about LNG investment financing at the European Gas Conference in Vienna, Austria.
Mr. Hartnell pledged he would talk about investment prospects looking forward, the financing requirements and associated issues around the financing of LNG.
“It’s very capital intensive,” he said. “Project finance is going to remain the primary mechanism for financing LNG; the projects are just too big for companies to be prepared to put these on their balance sheets.”
“Through the last decade there have been quite a number of final investment decisions on LNG projects,” he told the delegates. “In 2002-2005, the Qatari projects came on. There’s a bit of a blip in the middle of decade and some more towards the end.”
The projects in the last three years, he noted, were primarily in Asia-Pacific.
“Our take at Poten is LNG demand growth is going to continue. By around 2025 we expect LNG demand to be somewhere in the order of 420 MMt/year,” said Mr. Hartnell, who added that new supply would need to emerge to fulfill that demand.
From about 2015-2025, that would make for about 100 million tons.
In terms of supply, he showed a graph: “This is our picture of how we see the new projects over the period to 2020. In the early part of 2010 we had more new capacity coming on, it drops off a bit in 2014-15 and picks up a bit after that. We see in that latter five years, predominantly Asia-Pacific supply, in fact mostly the Australian projects, and I think the other key, new producer that we expect to see in the end of this decade will be East Africa.”
Mr. Hartnell noted that one thing that never seemed to get much coverage in natural gas conferences was shipping. He said, “Which is a little peculiar when you think actually LNG is about shipping. Shipping is also a very interesting part of the whole LNG value chain.”
He noted the top dollars that vessels were receiving for shipping and said it was a very tight market at the present time. The good news was that there was quite a bit of capacity to build ships.
According to figures from 2010 to 2025, he said Poten & Partners expected the shipping fleet to double during the period.
Then, Hartnell said one must take into consideration the LNG terminals.
He commented: “We expect to see continued development in the terminal space, but not as much as in liquefaction and shipping. Why? Because there’s an awful lot of terminal capacity already in place, so the incremental build will be lower for terminals, than for say shipping.”
He spoke about different costs within the LNG supply chain, saying “We’ve seen a wide range of costs in the last couple of years, all much higher, across the chain and there are multiple reasons for that.” Hartnell named the cost of materials, limited contractor workforce to undertake projects and labor costs as a few of the factors.
“The consequence on projects is that the break-even cost to support a project has significantly increased over time,” he commented. “The fact is that new projects are going to need higher prices to support them, and if the market isn’t prepared to pay those prices, the projects are simply not going to get built.”
He presented what he calculated to be a global range of expenditure in the various areas of an LNG project. “If you take an average, you’re around the $200 billion of expenditure over this 10 year period to 2025, which by any stretch of the imagination is a lot - we’re talking about an average of $20 billion dollars per year,” he said.
“If these are going to get built, clearly financing will need to come to make this happen.”
Project financing of LNG, he said, had a long history, and was looked on favorably by the banking community. “It’s generally been very successful. They are very complex but well-structured projects, which the banks like, involving big players with strong balance sheets. And there’s a lot of dependency between the elements of the many links in the chain that keeps everybody honest,” explained Mr. Hartnell.
He said occasionally there had been help from the World Bank, while bonds had not been typically used to finance LNG.
“Since 1995 if you look at the finance that’s been in place for LNG, then you can see there’s a long history. 2009 was a bit of a banner year when in the order of $18 billion of investment was made to LNG. If you look across that period, in a typical year there’s been about $4 billion/year of lending to the LNG business. If we look at the investment requirement I’ve just spoken about, which is $20 billion, so if 15% or less than that is financed, that’s still a lot more than $4 billion.
“The financial community is definitely going to have to step up to the plate if the projects out there are going to be developed.”
Mr. Hartnell said that unfortunately things had been going in the other direction for banks, especially since 2009. He recalled, “The number of active banks in project finance has dropped; there were more coming in, LNG was looking good and the Qatari projects all went very well, but 2009 happened and capital requirements increased, country and sector limits are reduced and a number of players just pulled out altogether from the market.”
That had had consequences for financing.
“The amount of money banks are prepared to lend has dropped. Banks are looking at more equity in the financing and will be less prepared to be flexible going forward. The other side of that is the cost of financing is going to increase, there are going to be more banks lending in syndicates, more export credit agencies, more multilaterals and so forth, all of which increases the complexity, the time it will take to do it and undoubtedly increase the cost as well.”
Export credit agency financing, he said, would be increasingly important going forward as well as multilateral lending.
“With these agencies involved in the projects, there’s a lot more work that must be done by the sponsors to get everybody lined up with the project and actually make it go through.”
Financing floating LNG, he said was the flavor of the year. “When lenders look at it it’s not something they see with unbridled joy: to them it’s an unproven technology, technical risks, commercial risks; as well as legal regulatory issues: “Is it a boat? How do you treat it legally? There are lots of questions and there will be different questions in different places.”
One advantage, he said, was if something went wrong it was possible to take the operations somewhere else. Still the technology risk was considerably higher, and the capital intensity was “incredibly frightening.”
He explained: “If this goes to the bottom of the ocean it’s a vast loss. Banks are not likely to want to lend to these and the early projects will have to be to be equity financed.”
Still, global prospects for LNG were good, concluded Mr. Hartnell. “We see continued growth in LNG demand, but to get that to happen will require investment throughout the chain.”