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Project Financing - LNG Projects. John D. White Baker Botts, London Successfully Managing Project Finance in the GCC Emirates Towers Hotel, Dubai 23 May 2005. Overview . Amount of Financing Required Financing Challenges Financing Objectives Drivers for Successful LNG Project Financing

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project financing lng projects

Project Financing- LNG Projects

John D. WhiteBaker Botts, London

Successfully Managing Project Finance in the GCCEmirates Towers Hotel, Dubai23 May 2005

  • Amount of Financing Required
  • Financing Challenges
  • Financing Objectives
  • Drivers for Successful LNG Project Financing
    • Sponsor Objectives
    • Project Risk Identification/Allocation/Mitigation
  • Conclusions
  • Questions
amount of financing required
Amount of Financing Required
  • Currently 141 MTA of Global LNG export capacity.
  • Additional 168 MTA of Global LNG export capacity is planned by 2010.
  • Huge new investment in shipping, regasification, pipeline and related infrastructure is needed.
  • International Energy Agency estimates over $250 billion will be spent by the gas industry over 30 years for LNG projects.
financing challenges
Preferences for


Transparency in cash flows


Corporate finance

Strategic assets



Aversion to


Merchant risk

Certain indexes


Contingent equity


Structured finance

Single asset deals

Ratings triggers

Refinancing risk

Financing Challenges
Sponsor constraints

Credit rating

Legal and contractual

Limited/full recourse

Credit pooling/severality

Cost and tenor

Equity requirements


Off-balance sheet

Financing covenants



Appetite for completion/ operating and other risks

Political risk

Refinancing risk


Financing source

Financing ObjectivesWhether any LNG financing is successful depends on its fit with sponsors’ objectives:
financing sources certain markets are better for particular objectives and assuming certain risks
Sponsor equity


Traditional bank

Private placement


Shipper finance


Public equity markets

Private equity

Public and 144A debt markets

Islamic finance


Tax-exempt /industrial revenue

Securitisation/Receivables financing

Combinations of the above

Financing SourcesCertain markets are better for particular objectives and assuming certain risks.
drivers for strong projects
Drivers for Strong Projects
  • Strong sponsors
  • Competitive costs and compelling economics
  • Strategic product
  • Well-crafted contractual arrangements
  • Operating track record
  • Highly rated host country
integrated finance model
Integrated Finance Model
  • Financing all across value chain theoretically makes sense.
  • For majors, LNG projects are all about accessing upstream reserves.
    • Profits taken over LNG chain.
    • Vast investment in each link in LNG chain.
    • Strategic importance may drive success in each link in chain.
    • May support multiple markets.
integrated finance model cont d
Integrated Finance Model (cont'd)
  • Integrated model faces numerous practical problems:
    • Exposure to multi-jurisdictional, varied risks familiar to Big Oil, but lenders wary of resulting complexity, bankruptcy and legal risks.
    • Difficulty maintaining alignment across LNG chain.
    • Hard to attain transparent contractual arrangements that forge integration across LNG chain.
    • Interdependency of links manifests itself in “weak link” theory.
    • Many majors averse to project financings unless required by their partners (which may not be invested in all links) or for political risk mitigation.
project risk identification allocation mitigation
Project Risk Identification/Allocation/Mitigation

Sound LNG project financing requires evaluation and allocation of risks and rewards and mitigation, including:

  • Completion
  • Operating
  • Gas Supply
  • Liquefaction
  • LNG and Gas Offtake
  • LNG Shipping
  • Regasification
  • Pipeline Transportation
  • Others

This list is not nearly exhaustive.

Risks compounded by “project-on-project” risk.

completion risk
Completion Risk
  • Risk that the project will not be completed on time or within budget, and will not perform as expected.
  • Engineering, design, procurement, physical completion and start-up of the project.
  • Includes legal, regulatory, financial and other aspects.
  • As segments of LNG chain are financed as separate projects, interdependency of links introduces project-on-project risk.
completion risk mitigants
Completion Risk Mitigants
  • Proven contractor
  • Turnkey contracts
    • Fixed cost and scope
    • Liquidated damages
    • Performance bonds/retainage/LOCs/guarantees
  • Sponsor guarantees
  • Completion tests
  • Proven design
  • Insurance/contingency amounts
  • Properly vetted permitting process
  • Technical, Shipping and Marine studies
operating risk
Operating Risk
  • Operating risk is the risk that the project, once complete, will not perform as expected.
    • Experienced creditworthy service provider
    • Safety, security and environmental safeguards
    • Permits
    • Strong agreements
    • Incentives for good performance/penalties for bad
    • O&M reserves
    • Insurance
gas supply
Gas Supply
  • Availability of Adequate Gas Reserves
    • Reserve risks ("Proven" vs. "Probable")
    • Development costs
    • Dedication to chain
  • Transport to Liquefaction Facility
  • Gas Quality
  • Gas Price
  • Operating Risk, including Force Majeure/Environmental/ Permitting
  • Delay in Completion
  • Production Quantity
  • Technology
  • Cost Overrun
  • Expansion Economics
  • Operating Risk, including Force Majeure/Environmental/ Permitting
lng and gas offtake
LNG and Gas Offtake
  • Volume Purchase Obligations
  • Pricing transparency (take or pay/deliver or pay)
  • Credit of Offtaker/limits on credit support
  • Depth of Market - market studies
  • Long-term offtake but flexible terms
  • Destination flexibility
  • Conditions precedent
  • Operations, Link with Shipping/Regas, Force Majeure
lng shipping
LNG Shipping
  • Requires longer lead time than earlier LNG deals
  • FOB v. DES
  • Time Charter v. Ownership
  • Delay in Construction of Vessels
  • Cost Overruns
  • Size of Vessels/Economies of Scale
  • Operating Risk, including Force Majeure/ Environmental/ Permitting
  • Destination Flexibility
  • Link to LNG supply
  • Licensing
  • Delay in Construction
  • Cost Overrun
  • Open Access
  • Security
  • Distance to Market
  • Connection to pipeline system
  • Gas meets pipeline specifications - interchangeability
  • Operating Risk, including Force Majeure/Environmental/ Permitting
pipeline transportation
Pipeline Transportation
  • Adequacy of current/new take-away pipelines
  • Delay in Construction
  • Distance to major end-use market
  • Pipeline transportation agreements
    • Terms of service (e.g., firm or interruptible)
    • Availability of ancillary services (balancing/park and loan/load swing)
    • Force majeure
    • Open access/common carrier issues
  • Storage
project on project risk
Project-on-Project Risk
  • What links are absolutely necessary to success of this project?
    • Construction of completion tests
    • Intrusiveness to other projects
  • Partial sponsor guarantee fallaway/debt service reserve/other sponsor support
  • Effect on debt capacity
  • Contamination from other projects
  • Alignment
expansion risks
Expansion Risks

Could be more robust than a greenfield project

  • Economies of scale
  • Operating history may mitigate completion and operating risks
  • Regulatory regime known
  • Government support
  • Supplement to financing structure

but those results depend on front-end planning with greenfield project

  • PSC
  • Host government agreements
  • Permits
expansion risks cont d
Expansion Risks (cont'd)
  • Flexible financing structures
  • Excess capacity

but even best laid plans can succumb to

  • Separate financings on trains
  • Non-alignment
  • Change in circumstances
  • Lack of control over service providers/shared facilities
  • Priority and coordination of use
  • Unforeseen events
weak links
Weak Links

Successfully financing LNG projects requires solving weak link theory

  • Most liquefaction projects are in sub-investment grade countries
    • Can project surmount country ratings?
  • Weaker counterparties
    • Ability to address capital calls and contingencies
    • Credit enhancement and liquidity
  • Cost recovery/carried interests
  • Incentives/penalties
  • Dealing with financing delay
environmental social and regulatory
Environmental, Social and Regulatory
  • Equator Principles - sustainable development
  • Environmental
  • Security
  • Social and Political
  • Archaeological
  • Local Content and Employment
  • Labour Practices
political risk
Political Risk
  • Expropriation
  • Political violence
  • Currency convertibility/transferability
  • Terrorism

John D. WhitePartner

Baker Botts

99 Gresham Street

London EC2V 7BA

Telephone +44 20 7726 3423

Fax +44 20 7726 3523