Transcript BAKER BOTTS L.L.P.

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
 Sponsor Objectives
 Project Risk Identification/Allocation/Mitigation
 Conclusions
 Questions
1
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.
2
Financing Challenges
Preferences for
Aversion to
 Simplicity
 Complexity
 Transparency in cash flows
 Merchant risk
 Certain indexes
 Equity
 Leverage
 Contingent equity
 Distributions
 Corporate finance
 Structured finance
 Strategic assets
 Single asset deals
 Collateral
 Ratings triggers
 Amortisation
 Refinancing risk
3
Financing Objectives
Whether any LNG financing is successful depends on its fit
with sponsors’ objectives:
 Sponsor constraints







Credit rating
Legal and contractual
Limited/full recourse
Credit pooling/severality
Cost and tenor
Equity requirements
Accounting

Off-balance sheet








Financing covenants
Collateral
Rating
Appetite for completion/
operating and other risks
Political risk
Refinancing risk
Tax
Financing source
4
Financing Sources
Certain markets are better for particular objectives and
assuming certain risks.
 Sponsor equity
 Private equity
 Lending
 Public and 144A debt
markets

Traditional bank

Private placement
 Islamic finance

Mezzanine
 Lease

Shipper finance
 Tax-exempt /industrial
revenue
 ECA/IFI
 Public equity markets
 Securitisation/Receivables
financing
 Combinations of the above
5
Drivers for Strong Projects
 Strong sponsors
 Competitive costs and compelling economics
 Strategic product
 Well-crafted contractual arrangements
 Operating track record
 Highly rated host country
6
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.
7
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.
8
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.
9
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 projecton-project risk.
10
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
11
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
12
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
13
Liquefaction
 Delay in Completion
 Production Quantity
 Technology
 Cost Overrun
 Expansion Economics
 Operating Risk, including Force Majeure/Environmental/
Permitting
14
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
15
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
16
Regasification
 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
17
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
18
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
19
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
20
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
21
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
22
Environmental, Social and Regulatory

Equator Principles - sustainable development
 Environmental

Security

Social and Political
 Archaeological

Local Content and Employment

Labour Practices
23
Political Risk
 Expropriation
 Political violence
 Currency convertibility/transferability
 Terrorism
24
Questions?
John D. White
Partner
Baker Botts
99 Gresham Street
London EC2V 7BA
Telephone
Fax
E-mail
+44 20 7726 3423
+44 20 7726 3523
[email protected]
www.bakerbotts.com
25