LNG Rues Renewables' Financing Edge

Gas – and especially LNG – may be a natural partner for renewables, but it gets a raw deal when it comes to finance capital, a panel at Gastech Barcelona agreed on September 18.

They can be bitter enemies in the real world, and gas often finds itself fighting with technologies such as solar to power projects at a micro level. However, on the macro plane gas is helping the transition from coal, a line up of bankers and energy infrastructure developers suggested.

However, while green projects enjoy huge financing benefits thanks to the support of governments and multi-national institutions, LNG projects remain limited to traditional underwriting demands.

Bankers tend to treat the pair as very different beasts. “There’s a separate pool of capital for green projects generally,” says Rajeev Kannan, head of investment banking Asia & Pacific at SMBC “We see it as an energy mix.”

Yet while such barriers may exist, it’s hard to believe that the level of capital flowing to renewables doesn’t divert some money that might go to LNG.

“In terms of financing going to energy, 40-50% goes to oil and gas and around 20% to renewables,” estimates Philip Roberts, head of EMEA investment banking for MUFG. “Oil & gas provide a similar share of the global energy mix, renewables deliver 4%. There’s clearly an imbalance.”

The frustrations are clear on the part of the industry, as LNG is left to compete on a standard playing field when it comes to raising capital despite the claims concerning its environmental credentials. Issues around liquidity, transparency and the level of development on the market are challenges for the banks, especially when mixed with the risks in the emerging economies of Asia, suggests Ryosuke Tsugaru, chief executive at Mitsubishi subsidiary Diamond Gas.

Risk and reward 

Yet bankers are having to try to adapt to a range of new conditions in energy finance. Traditionally based on oil indexation, expanding geographies of supply, demand and methods of delivery require more flexibility.

Without pipelines permanently linking producers and customers, LNG can head anywhere a ship can dock at an import terminal. That has customers preferring to buy on spot markets rather than lock themselves into expensive long-term offtake contracts.

But finance remains wary, especially on projects set in regions such as east Asia where emerging economies are the norm. Lenders are yet to deal with the new reality admits Roberts.

“Finance has strong track record on liquifying projects,” he says, “although it’s based on fundamentals such as offtake contracts. It will always come down to risk and reward. Country risk is a big issue. The likes of Japan, Korea and China, which take around 60% of global LNG, have driven recently-financed projects, and under such conditions I’m sure funding will continue for LNG.”

However, in other markets, expensive upstream projects needing high volumes of financing struggle, unless the operator is a top company with an impeccable credit rating. Even then, they’re keen for long-term contracts on the full output.

Kannan says banks still see a project that’s dependent on selling 20% of production on spot markets as too risky. The operators need to start taking on more of that risk,” he insists. “We need a better balance.”

“You can’t expect the banks to evaluate or understand the spot market in Asia,” adds Tsugaru.

Different strokes

Elsewhere there may be more options. Downstream, the smaller volumes of financing needed for import terminals and distribution infrastructure mean SMBC can take on weaker counterparty risk, just as long as it can mitigate the sovereign risk.

That would be good news for the environment, according to the industry figures. LNG is very good at opening smaller markets and allowing them to change their energy mix and improve air quality, claims Rodrigo Diaz, chief development officer at Reganosa.

Pushing LNG operations into niche segments could be another route to improving the fundamentals of projects in the eyes of the banks.  Capital needs are changing as new services such as bunkering and reloading expand.  

Putting LNG up against renewables is “not comparing apples with apples” says Diaz. “Renewables focus purely on power generation. Gas powers many other products - feedstock for chemicals or shipping for example.”

“Electricity will not be able to fulfil energy demand over the coming decades on its own,” he adds. “Gas will see the greatest growth in the coming years. It will play an important part in achieving COP21 targets.”