The bankability of LNG import terminals
The liquefied natural gas (LNG) sector is booming. According to Bloomberg, global LNG consumption will increase by 65% by 2030 and it is expected that most growth in LNG demand will come from emerging LNG markets in Africa, China, South Asia and Southeast Asia.
LNG is natural gas that is liquefied by cooling to -160ºC, reducing its volume to one six hundredth which allows for safe and efficient shipping in specialized LNG carriers. At an LNG import terminal, the LNG is regasified (simply put: warmed back to a gaseous state).
An LNG import terminal is often developed as part of an integrated LNG-to-power project, whereby the regasified LNG is used as feedstock fuel for power generation. The development of these LNG-to-power projects is mainly driven by four factors: (a) gas-fired power generation is quick to market, (b) gas offers sustainability benefits over other fossil fuels, (c) availability of an ample global LNG supply at competitive prices, and (d) growing demand for electricity due to population growth, economic growth and the emergence of a larger middle class in emerging and frontier markets in Africa and Asia.
LNG-to-power projects can adopt either an onshore regasification solution or an offshore solution in the form of a Floating Storage and Regasification Unit (FSRU). When comparing onshore and offshore regasification solutions, four main differences stand out. An FSRU (a) requires a lower initial investment (about $300m, whereas a land-based regasification terminal would be double that), (b) is quicker to market (market players consider it a “fast-track” solution with construction of an FSRU usually taking around two years), (c) generally has a more limited operating capacity, and (d) as a floating unit, can be relocated or re-deployed (for example, the world’s largest FSRU MOL FSRU Challenger; she was originally constructed for Gas Sayago for a project near Montevideo in Uruguay and is now operating in Dörtyol, located on Turkey’s Mediterranean coast).
The development of LNG import terminals is not straightforward. Some of the challenges are common to many energy infrastructure projects, including construction risk, project-on-project risk, supply risk, offtake risk, natural hazards (such as earthquakes and typhoons) and currency risk. Most LNG terminals now being developed are in emerging and frontier markets in Africa, South Asia and Southeast Asia. Sponsors, contractors, investors and lenders in these markets face a so-called “country risk” linked to the stability of a country, including the risk of change in laws, nationalization, change in tax regulations, riots and civil war. This country risk can discourage foreign investment and can make it challenging to secure financing as lenders may ultimately consider the LNG project to be unbankable.
Fortunately, there are ways in which country risk can be mitigated, potentially making an LNG project in challenging markets bankable. In addition to relying on, for example, bilateral investment treaties (BITs) or governmental assurances, lenders can purchase political risk insurance from insurance companies, export credit agencies (ECAs) and multilateral development banks. Not only do these products offer protection, they also offer the “halo effect” of perceived risk mitigation from a multilateral’s participation in the project.
There are great opportunities for new LNG infrastructure in emerging and frontier markets. Many power producers will adopt floating regasification solutions for LNG import terminals in Australia, Ghana, Hong Kong, India, Indonesia, Ivory Coast, Lebanon, Mozambique, Namibia, Senegal, Sri Lanka, the Philippines and elsewhere, offering excellent opportunities to sponsors, contractors, financiers and investors. Our global Energy & Infrastructure team has been heavily involved with LNG and floating regasification projects over the last few years and has expertise in all aspects of the contracting, design, financing, construction, leasing, insurance and operation of FSRUs and LNG terminals.
Source: Ince & Co