ViewPoint - Gas Strategies · ViewPoint 3 Introduction In 2018, Gas Strategies published the...

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Collaboration and Complexity:

Solving the Puzzle of New

and GrowingLNG Markets

Gas Strategies Group

10 St Bride StreetLondonEC4A 4AD

T: +44 (0)20 7332 9900W: www.gasstrategies.com

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Collaboration and Complexity: an

Solving theuzzle of NewPuand GrowingaLNG MarketsL

ViewPoint

2 Collaboration and Complexity: Solving the Puzzle of New and Growing LNG Markets

Chris Levell Managing ConsultantEmail: [email protected]

Chris has over 15 years’ experience in establishing gas, LNG and power chains in developing energy markets. Chris has supported governments, state organisations, private sector players and investors in Africa, South America and Asia giving him an appreciation of the requirements of the breadth of stakeholders involved in developing robust and financeable projects. His current engagements include advising an LNG import project in southern Africa, an integrated LNG-to-power project in Brazil and several government entities in the development of Gas Master Plans.

Edward Shires ConsultantEmail: [email protected]

Ed is motivated by helping clients and companies make better business decisions. He has over six years’ experience providing strategy and commercial consultancy to a broad client base in the energy industry. Examples of recent work include advising a project developer establishing a FSRU import project to a new LNG market, helping clients screen for growth opportunities in new markets, and evaluating emerging gas markets to support commercial due diligence for several infrastructure investments and transactions.

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Introduction

In 2018, Gas Strategies published the ViewPoint, “New LNG markets: time for change1”, that looked back at the enablers that led to the rapid development of first LNG import projects in new countries over the past decade. It also looked forward to how stakeholders could go about successfully exploiting new opportunities in a world where “much of the low-hanging fruit had been picked”. Many of the conclusions remain valid today.

Whilst the growth rate of new markets has remained constant, at around two per year, two new trends have emerged. Firstly, we have seen an increase in LNG import projects in “growing” markets – those which already have one project, but are yet to be considered as large, established, markets. Once one project has been developed, and the market and business model is proved in that country, it gives the confidence for future projects to follow. What can often also be observed in these markets is the changing role of government. It is usual for government to be heavily involved in initial projects, and some governments are now stepping back and asking the private sector to play a bigger part in establishing subsequent developments.

Secondly, collaboration is increasing across the value chain. There has been a recognition of both the importance of involvement from local downstream players that can bring the all-important access to demand, and the fact that these projects often need support – principally in access to money through finance or equity – particularly in the early stages of market development. LNG suppliers are also being more creative in finding ways to support projects through flexibility in supply, participation as an equity partner, and even provision of funding.

1 https://www.gasstrategies.com/sites/default/files/download/viewpoint-new-lng- markets-time-for-change.pdf


At the time of writing, significant uncertainty exists around the immediate impact of the COVID-19 pandemic and its longer-term effect on economic growth, gas demand and commodity prices. In this situation, new markets come more sharply into focus. LNG suppliers are likely to have even more length in their portfolios, and low LNG prices are clearly favourable for potential new buyers. However, despite these potentially favourable commodity market conditions, the ability of LNG suppliers to invest in new projects, and the availability of private-sector finance, is likely to be significantly constrained in what is expected to be a deep global recession following the pandemic.

In this ViewPoint we look at the ‘puzzle’ of new and growing markets, and ask what is needed to ‘solve’ it. We consider changes in business model and strategy that are needed from LNG suppliers to find market for their volumes; discuss the implications this has for project developers; look at the role governments can play in encouraging projects; and examine trends in financing to enable projects. Finally, we seek to understand how the ‘puzzle’ may change in a post COVID-19 world.

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A Rebalance of PowerThe balance of power has shifted. Demand, rather than supply, is now the scarcer commodity in the creation of new LNG markets. The development of potential gas markets is critical in both providing an outlet for growing LNG supply volumes, and for the availability of energy and consequently the economic development of many countries.

Demand side players – including gas buyers, local concession holders/project developers, and governments – are more important than ever. It is, after all, demand that injects money into the gas and LNG value chain. Organisations which have access to an existing customer base or can create access to new demand are in a powerful position, as are governments, who can uniquely facilitate this access. Whilst there is a breadth of approaches governments are taking to facilitate access, including those that increasingly minimise their own exposure, governments cannot absolve themselves of the necessity to play a significant role.

This rebalance of power is leading to and creating a need for more collaboration from LNG suppliers. In the past, LNG suppliers generally operated at two ends of a spectrum, either seeking to control the full value chain or taking no role at all beyond supply of LNG. Whilst this has been a successful business strategy in existing LNG markets, it has not yielded the same success in opening up new markets. LNG suppliers are now recognising they no longer hold all the cards. Instead, they need to work with, and support, the full value chain through flexibility and even funding, changing their business models in the process.

To give an example of this collaboration, at the Gas Natural Açu (GNA) integrated LNG-to-power project in Brazil, the project company brings together as equity shareholders the port company (Prumo), the LNG supplier (BP) and the power developer (Siemens).


However, with greater collaboration comes greater complexity. The value chain is becoming increasingly intertwined, with LNG suppliers and gas buyers coming together, taking equity positions, and providing finance. Reaching alignment on the allocation of risk and reward between stakeholders, with a broad set of commercial interests in the project, becomes much more challenging. And the resulting suite of commercial agreements inherently becomes much more complex. It is no longer a linear series of bilateral agreements to be agreed between parties that each had a discreet role in the project. Instead, it is a web of interlinked agreements, which impact on and trade-off against others in the structure. The interplay between commercial and financial structures is more akin to a complex joint venture. This increased complexity gives rise to many more factors to consider in reaching a deal across all participants. However, once agreement is reached, it should be more robust, as participants are “all in it together” not only for the period of construction but across the full project life cycle.

Gas Strategies is supporting clients navigate this complexity first-hand around the globe. Our insight and understanding of what different parties are seeking to achieve has brought participants together and encouraged collaboration, setting projects up for long term success. We appreciate the trade-offs each participant has to make, and understand the steps which need to be taken and agreements which need to be made to move a project from an idea to a robust, working, value chain.

In this ViewPoint we look from the perspective of LNG suppliers, governments, project developers and financiers (as illustrated in Figure 1) and consider how this changing market balance is playing out and what opportunities it could create. Recognising the rapidly evolving situation this year to date, brought about by the combination of COVID-19, the

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impact on long term demand, and the fall in commodity prices, in the final section of this ViewPoint we also explore whether the balance of power will move again – with finance perhaps becoming the scarcest of the components required for market development.

Figure 1 – The Puzzle of New and Growing LNG Markets

$€£¥

LNG Suppliersl Seeking market outlets for burgeoning

portfoliosl Offering greater supply flexibility or

smaller volumesl Looking to enable (or ‘push’) projects and

go beyond just LNG supply e.g., through taking equity and enabling or providing finance

l Agile players (either new, or spin-outs) are emerging to meet specific market needs e.g., small scale players utilising new technologies

l Capital constraints may limit ability to invest following oil & gas commodity price falls in 1H2020

Project Developers and Gas Buyersl Gas buyers are in a powerful position in

this ‘buyers’ market’l Greater involvement from LNG suppliers

is increasing complexity of commercial arrangements

l Local relationship, consents and market understanding are increasingly recognised as significant enablers

l Project developers risk becoming ‘squeezed’ with LNG suppliers and gas buyers both wanting project equity

l Oil & gas commodity price falls create an even greater opportunity

Financiersl Affordable and reliable energy is

aligned to the agenda of development banks – however these are increasingly challenged on fossil fuel investments which could impact future levels of finance

l International players e.g., LNG suppliers and equipment suppliers bringing finance to projects

l Private Equity is seeing more of an opportunity, with a higher risk appetite than commercial banks albeit at much higher cost

l Foreign direct investment has had a role in some projects. Too early to tell if this is the start of a trend

l COVID-19 induced global recession may tighten availability of private finance

Governmentsl Looking to ‘pull in’ LNG projects,

seeking affordable and reliable energy, and encouraging private capital to minimise government funding

l However government and regulative support remains crucial to most LNG import projects

l Different models are being used to achieve this, from deregulation (Pakistan), to regulated auction markets (Brazil) through to Governments acting as gas buyer (Ghana) and even providing subsidies (Bangladesh)

l May take a greater role and unlock projects if capital and finance are constrained. Energy investments are a route to kick start economic growth


The Private Sector PushDespite the drive to open new LNG markets, and the apparent opportunity, 2019 saw no step up from the 10-year average of two new markets opening per year. Establishing a successful, robust LNG value chain is far from straightforward. From direct experience working with several new LNG import projects, Gas Strategies understands first-hand the challenges this has presented over the past decade.

Upstream and midstream players started to address the new markets opportunity by seeking to either fully control the development themselves or, alternatively, restrict their role solely to that of LNG supplier. Governments also sought to exert control through self-development of projects, strength of regulation and often ill-conceived insistence on third party access to project facilities to be developed by external parties. The lack of potential projects that actually came to fruition in these circumstances speaks for itself.

Recent developments show a significant movement from these entrenched positions. It would seem that all parties recognise that far greater collaboration is required to bring this complex value chain together. LNG suppliers are becoming more open to cooperative project development with local partners, while willing to offer supply flexibility and contract smaller volumes from the increased scale and diversity of their portfolios. Some of these players are going as far as providing or enabling finance for projects (discussed later). In addition, governments are seeking to bring in private capital to minimise state funding, for example through private-public partnerships and/or government support to infrastructure funding arrangements, while recognising that the regulatory infrastructure third party access models are not always appropriate for early-stage developing markets.

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However, these developments also add increased complexity to commercial arrangements. The overlap of parties across project equity and finance requires greater consideration. The scale of these commitments, and the risk and reward taken in each, will impact on each of the others in the structure. Moreover, the SPAs themselves now must incorporate greater complexity, for example in flexible delivery scheduling in order to manage inventory, and agreements need to reflect clear accountability for this.

There are now many more pieces, each with different moves, on the table; a game of draughts has become a game of chess.

Finding alignment of interest between participants along the LNG value chain is a challenge. Large upstream and midstream players, with ingrained ‘ways of doing things’ do not find it easy to establish common ground with local project developers that are generally far more entrepreneurial and nimble.

Those who are most successful are adapting their mindsets and business models to meet the unique needs of new and emerging markets, and the gas buyers within them. We have seen at first-hand several larger LNG players take increasingly accommodating and adaptable approaches in opportunities that open new markets – for example, the flexible supply arrangements agreed by ExxonMobil and BP in Brazilian LNG import projects that have reached FID, and we are aware of Total and Shell offering similar flexibility in projects at an earlier stage of development.

At the other end of the spectrum, smaller LNG players are emerging, with inherent potential to be more dynamic and entrepreneurial in their business models. These companies are finding success by offering


small scale solutions, utilising new technologies, and adapting quickly to market needs. New Fortress Energy is one recognised example. It quickly established a first LNG import facility in Jamaica in 2016, understood and grew local demand, and then added a second terminal to meet another demand centre. Both are now served by a single Floating Storage Unit (FSU) at Old Harbour, with a shuttle tanker delivering LNG to Montego Bay.

An emerging example is Avenir LNG, which has been formed to meet the needs of stranded gas demand through small scale LNG. Avenir LNG was launched by Stolt-Nielsen, and received investment from Höegh LNG and Golar LNG, large established players in the LNG industry. Likewise, Mitsui O.S.K. Lines (MOL, a large shipping company and part of the Mitsui group of companies) has partnered with Karpowership (a builder of power barges) in a joint venture, KARMOL. KARMOL is developing small scale, ship based, LNG-to-Power solutions and its first project is under development in Senegal. It is telling that these players considered that the needs of new, smaller, markets were better served by a focused spin-out company with its own business model rather than by themselves. Will other large players follow suit? Having arms-length subsidiaries or affiliates developing innovative offerings or serving niche and new markets is not uncommon in many industries.

It is not an ‘either, or’ between the large and small players. The market has room for both; and in some markets a symbiotic relationship between the two could well develop. Smaller companies are able to develop first-in-country projects in markets which may be initially too small to attract the attention of bigger companies. Subsequently, with the establishment of a working gas industry and demand growth, markets may then become targets of the more established player-models.

In those markets with existing private sector demand, the gas buyers are in a powerful position in what will be an LNG and gas buyers’

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market for the foreseeable future. They may well have LNG supply projects and LNG suppliers competing for access to their demand. That said, if their demand has previously been met by indigenous or regional production, these gas buyers can face challenges in successfully managing the new exposure to international gas pricing and the affordability of gas from LNG for their customers.

Akin to LNG suppliers moving down the chain, gas buyers can also be keen to move ‘up the chain’, to increase their margin and secure supply reliability. This can leave project developers exposed as the smallest player in the chain, and at risk of being ‘squeezed’ in the middle. They can protect their position through strong commercial acumen, particularly if unique in their access to end-customers, concessions and/or permits, and infrastructure.

Key to any market with private sector demand is effective regulation and legislation. Market liberalisation is one route that governments have taken to encourage and enable private sector driven LNG import projects.

Figure 2 – The Commercial ChainLNG Suppliersl Gas supplyl Flexibilityl Large balance sheet

Project Developerl Concessions/

permitsl Infrastructure

Gas Buyersl Customers and

demandl Source of revenue


Governments – Different Routes to the Same GoalThe public sector was involved in more than 75% of the ‘first-in-country’ projects analysed in the “New LNG markets: time for change” 2018 ViewPoint, through direct government involvement or state-owned companies. The state is often happy to be involved in establishing initial projects. Once a gas market has become established, government may then encourage the private sector to take a larger role, to reduce both government borrowing needs and the extent of government support. Irrespective of the structure however, government involvement and/or support in some shape remains critical to success.

There are different models that countries are taking to make this happen. What can be learned by examining them?

Brazil: Liberalisation and Market Auctions

The first tranche of import projects into Brazil were all owned and operated on a monopoly basis by state run Petrobras. Subsequently, through market liberalisation and power auctions, Brazil has successfully encouraged private sector participation in LNG import projects.

Unlike other rapidly growing LNG markets, gas does not have a large position in the energy mix of Brazil. LNG import projects are being developed primarily for direct power generation (LNG-to-Power), rather than to serve existing gas networks or demand. That said, given the scale and population of Brazil, this small slice of the energy mix equates to not insubstantial demand (38 Bcm). And gas import needs are expected to more than double by 2040.

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The Brazilian power auction process plays a critical role, awarding the Power Purchase Agreements (PPAs) which underpin LNG import projects. The auctions provide a highly regulated platform to connect the needs of power distribution companies with potential suppliers. As a result of these auctions, one LNG-to-Power project recently started up at Sergipe (January 2020), the GNA Port of Açu project is under construction in two phases, and a further project, Barcarena in the State of Pará, was awarded a 25-year PPA in the latest A-6 power auction (October 2019)2.

Despite both the power generation and distribution elements of the chain being privatised, the state regulator plays a key role. The regulator is responsible for awarding winning bids in the auction and selects these primarily on price, using a pre-determined set of global oil and gas commodity indices and its view of forward prices. The methodology used exposes the state to price risk, from contract award through the duration of the PPA.

2 https://www.gasstrategies.com/information-services/gas-matters-today/golar-hails-lng-power-win-brazil-auction-low-prices-freeze

Figure 3 – Clearing Price for Brazilian LNG-to-Power Projects

GNA Port of Açu/Novo Tempo (2014)

Sergipe (2015)

GNA Port of Açu ll(2017)

Barcarena (2019)

0 50 100 150 200 250 300

R$MWh

207

279

214

189

-32%

Source: CCEE


The auctions have proved successful in increasing competition and driving down prices. The latest project was awarded at a clearing price around one third lower than the high of the project at Sergipe in 2015. The recent A-6 auction saw significant competition, brought about by a combination of lower than expected demand from the distributors (due to economic uncertainty) and many project developers entering the auction. It may well be that the winning bidder, Golar Power, a joint venture of Golar LNG and Stonepeak Infrastructure Partners, has been particularly aggressive in the auction in order to secure the PPA that underpins the import project development, and sees returns coming as much from other routes to monetise LNG through the terminal (commercial and industrial sales, transportation and bunkering, and sales to other power producers)3.

It is yet to be seen whether future auctions attract the same level of interest, or if developers are discouraged by losing out in the 2019 auction and the lower price precedent that has now been established. A situation that will remain unclear for longer than expected as the next power auction, scheduled for Q2 2020, has been delayed as a result of COVID-19.

Midstream reforms are also giving private sector players another opportunity to import LNG into Brazil. Petrobras began (in December 2019) a process to lease out capacity in its Bahia LNG import terminal and associated pipeline following an agreement with the anti-trust regulator to open infrastructure to third parties and for it to exit gas distribution and transportation4. This is intended to increase utilisation of the terminal, which has been low under the Petrobras monopoly.

3 http://www.golarlng.com/site-services/pr-211020194 https://www.reuters.com/article/brazil-petrobras-gas/brazils-petrobras-to-lease-lng-operations-

in-bahia-State-idUSL1N28J0GU

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A further LNG import project made possible by midstream reforms, Terminal Gas Sul in Santa Catarina, is going through approval processes, not to meet the needs of new power, but to replace gas imports from Bolivia5. Replacement of existing gas supply is a common driver for new LNG import projects seen in other parts of the world such as Pakistan and Bangladesh.

Pakistan and Bangladesh: Strong Demand Driving Fast Growth

Only two markets which had no LNG import projects prior to 2013 now have a second-in-country project developed (or under construction): Pakistan and Bangladesh. With fossil fuels dominating the energy mix, existing gas markets, and declining indigenous production, LNG is critical to avoiding further energy crises in these countries.

Having developed their first projects through government involvement, both Pakistan and Bangladesh are looking, as Brazil did, to encourage private sector participation in future import projects.

“MostnewLNGimportingcountriesareinthedevelopingworld,andmanyoftheseinvolvestate-ownedentities.Wewanttodosomethingdifferent.”

NadeemBabar,SpecialAssistantonEnergytoPrimeMinister(Pakistan),

Gastech2019

Vietnam seems set to soon join this group of growing markets, with LNG projects being developed both through a significant state backed gas plan, and by private investors seeking to develop integrated LNG-to-power projects with the support of local governments.5 https://www.argusmedia.com/en/news/1741165-golar-plans-southern-brazil-regas-terminal


PakistanPakistan recognises the current and future importance of LNG imports to ensure it can meet its gas demand needs. Expansion is planned for the existing import terminal6 and Pakistan has given the green light to five new import projects, each of which is backed separately by a large LNG player; ExxonMobil, Shell, Mitsubishi, Trafigura and Gunvor7. The government sees the interest shown by these five, highly credible, commercial operators as a vote of confidence in the changes being made to regulation, policies and the market.

“Thatisaringingendorsementthat(Pakistan’s)policiesareclearandtransparent,it’sacompetitivemarket.”

OmarAyubKhan,Pakistan’sMinisterofPowerandPetroleum

For these projects, the government has freed the LNG sector from the previous strong government control8. It has significantly cut the number of laws, regulations and approvals which apply broadly across the energy sector and, for LNG import projects, Pakistan is providing no government involvement. This extends to there being no sovereign guarantees, no capacity charges and no offtake commitments. Instead, terminal operators only need a site allocation, and are then responsible for LNG import and supply to their own private customers. Project developers pay a royalty to the government.

6 https://www.hydrocarbons-technology.com/news/excelerate-engro-sign-hoa-lng/7 https://www.reuters.com/article/us-pakistan-energy/exxon-mobil-shell-among-groups-picked-

to-build-five-pakistan-lng-terminals-idUSKBN1W50FU8 https://www.dawn.com/news/1502517

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“It’sagreatopportunityforprivateinvestorstosetuptheirownterminals,importtheirowngasanddeveloptheirownmarkets’’

AliZaidi,MinisterforMaritimeAffairs,Pakistan

Like in Brazil, opening of the midstream is enabling private companies to enter the distribution and marketing business. Universal Gas Distribution Company (UGDC) is the first private company to obtain a gas marketing licence and has signed an LNG supply agreement with ExxonMobil to serve the transport sector using the existing terminals9.

Despite much positivity, none of the five proposed projects have progressed to take FID. Private companies have begun questioning whether these reforms are working. Trafigura, clearly keen to access this market, has suggested that “something is missing” in enabling private LNG imports.

“Customershavetheirfaithinthenewopportunity,yet…somethingismissing,thefirstprivateLNGcargohasnotyetarrived”

FadiMitri,HeadofBD(GasandLNG),Trafigura

(PakistanEnergyReformSummit2020)10

9 https://www.geo.tv/latest/248019-exxonmobil-expected-to-supply-lng-parcel-next-month10 https://tribune.com.pk/story/2156322/2-pakistan-asked-open-gas-sector/


Potential project developers in these markets face a difficult decision. Does the prize of being an early mover and serving growing unmet demand outweigh the risks associated with these markets? Allegations of corruption in awarding the first set of projects led to several arrests being made by the National Accountability Bureau. A recent tender for long-term LNG import was cancelled due to a lack of firm demand commitments, with volumes instead being procured on the spot market11. Application of the rule of law is considered to have been flexible, and concerns exist on the security of fixed asset ownership. Is the ‘missing’ piece, ironically, the government commitment which the reforms themselves have removed?

BangladeshFor its part, Bangladesh is seeking private sector participation to build the first onshore project in the country. Two FSRUs are already in place. Bangladesh has received Expressions of Interest from twelve companies including Total, ExxonMobil, Qatar Petroleum and Mitsui for involvement on a 20-year build-own-operate basis, after which ownership will transfer to the government12. Unlike in Pakistan and Brazil, the state is responsible for LNG procurement through RPGCL, a subsidiary of Petrobangla. Subsidised gas prices have been increased to help fund further LNG imports.

Capital is at risk on the ground in this instance, with the import terminal being land based rather than an FSRU. The question here is whether the project and market, which is forecast to quadruple by 2040 from 3.8mtpa today, will be sufficiently attractive for developers to take on this risk.

11 https://www.gasstrategies.com/information-services/gas-matters-today/pakistan-scraps-10-year-lng-tender-raising-doubts-around

12https://pubs.spe.org/en/ogf/ogf-article-detail/?art=5690

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Ghana: Straight to Private Participation

Few, if any, first-in-country projects get realised without state backing. However, there are examples of markets which have been developed without direct government involvement.

The Tema import project in Ghana, now under construction, is a case in point. Ghana has remained eager to have LNG imports, despite domestic gas discoveries, to avoid gas supply lagging behind demand and to ensure supply reliability.

The state enabled the project somewhat indirectly in this case, with the Ghana National Petroleum Company (GNPC) signing a 12-year gas supply agreement with Rosneft. Rosneft in turn has contracted regasification services from the Tema LNG Terminal Company, which is owned by private equity firm Helios, and a Chinese engineering firm which is providing construction services and funding to the project. It is anticipated that after 12-years ownership of the terminal will be transferred to the Ghana government.

This structure will have helped the project take FID. At that time, Rosneft took the credit risk with GNPC in what was in effect a government to government agreement. Capacity in the Tema LNG Terminal was then contracted to Rosneft, rather than GNPC, which lowered the counterparty risk. Additionally, being financed by private equity and foreign direct investment from Chinese State companies, the risk tolerance would have been higher than that of private sector debt finance. 12 years is a much shorter time horizon than the typical 20- or 25-year paybacks seen in other locations, providing some indication that the developers may be anticipating more rapid returns.


Finance – A Gap to be Filled?Securing appropriate finance is key to success in any project, and financing of LNG imports is not always straightforward, given geopolitical, local market, currency and regulatory risks in many of the new importing countries. Many financiers draw significant parallels between the financing of LNG import projects and the financing of power projects in those same markets.

To understand what has enabled recent projects in new and growing markets we look at those commissioned within the last two years, and those currently under development. From this we identify the anchor financial partners and see what trends are emerging in financing of new LNG import projects (Table 1).

Development Banks

From this set of projects the important role of development banks and multilateral agencies is evident. The majority of first-in-country projects, and projects linked to new power generation, have had the involvement of these lenders.

Affordable and reliable energy is seen as a key development goal for the World Bank. Consequently, it is not surprising that LNG-to-Power projects sit firmly within its agenda. The International Finance Corporation (IFC – part of the World Bank Group) is very active in this space13,14, along with regional and national players such as the Inter-American Investment Corporation (IIC, part of the Inter-American Development Bank Group (IDB Group)), KfW IPEX-bank, and the Asian Development Bank (ADB).13 https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/

news+and+events/news/impact-stories/lng-fuels-lac-energy-options14 https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/

news+and+events/news/impact-stories/liquid-natural-gas-solutions-to-meet-energy-gaps-in-bangladesh

https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/impact-stories/lng-fuels-lac-energy-options

https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/impact-stories/lng-fuels-lac-energy-options

https://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/news/impact-stories/liquid-natural-gas-solutions-to-meet-energy-gaps-in-bangladesh



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Table 1 – Recent and Under Development LNG Import Projects

Country

Bangladesh

Panama

Turkey

Bangladesh

Jamaica

Russia

Gibraltar

Brazil

Bahrain

Ghana

Philippines

Brazil

Croatia

El Salvador

Indonesia

Kuwait

Thailand

Vietnam

Panama

Project# in

Country

1

1

4

2

2

1

1

4

1

1

1

5

1

1

4

2

2

1

2

StartYear

2018

2018

2018

2019

2019

2019

2019

2020

2020

2020

2020

2021

2021

2021

2021

2021

2022

2022

2022

Status+

Op.

Op.

Op.

Op.

Op.

Op.*

Op.

Op.

Op.*

U/C

U/C

U/C

U/C

U/C

U/C

U/C

U/C

U/C

U/C

MainDriver

Replace Domestic

New Power

Supply Security

Replace Domestic

New Power

Supply Security

New Power

New Power

Replace Domestic

Supply Security

Replace Domestic

New Power

Regional Hub

New Power

New Power

Supply Security

Replace Domestic

Replace Domestic/ New Power

Regional Hub/ New Power

Terminal

Moheshkhali (PetroBangla)

Costa Norte

Dortyol

Moheshkhali (Summit Power)

Old Harbour

Kaliningrad LNG

Gibraltar

Sergipe

Bahrain LNG

GNPC Tema

Pagbilao

Port of Açu

Krk

Acajutla

Java-1 (Cilamaya)

Al Zour

Nong Fab

Thi Vai

Colon

Prominent FinancialPartners

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

l

Deve

lop.

Ban

ks

Dire

ct S

tate

in

volv

emen

t

Com

m. B

anks

FDI

Proj

. Par

tner

s

*Commissioned but not currently being utilised. +Op. : Operational,U/C:UnderConstruction


SustainableDevelopmentGoal7–ensuringaccesstoaffordable,reliable,sustainableandmodernenergyforallby2030.

WorldBank

However, regional development banks, particularly in Europe, are facing increased scrutiny on fossil fuel related investments, and both the World Bank and the IFC have come under significant pressure from NGOs and protest groups to end future fossil fuel funding and even divest from existing fossil fuel investments. As this pressure mounts, it raises a challenging dilemma for these organisations. There are significant benefits associated with enabling gas import into developing economies, but can this case be made to investment committees and funding member states who sit in the developed world and are acutely aware of the ‘climate emergency’?

Gas Strategies sees this same dilemma in a number of its clients in the financial sector. We are increasingly being asked to help investment committees to understand the complexities of the gas market, how it will impact and respond to the energy transition, and how gas investments can be compatible with a decarbonisation agenda.

Private Companies and Private Equity

The first sections of this ViewPoint focused on the increasing role private companies are taking in LNG import projects, particularly in recently established markets; a result of the combination of a ‘push’ from private players and a ‘pull’ from governments wanting to take less direct involvement and lenders reflecting market risk in the level of debt they are willing to provide.

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We see LNG portfolio players taking equity positions in more LNG import projects in emerging markets. These players have rapidly expanding portfolios and have more recently recognised a need to play a greater role in establishing market as an outlet for these volumes. This increases complexity in business models and commercial agreements, as risk and return on equity must be weighed against risk and return on the LNG supply agreement. This is an important issue that Gas Strategies has worked to resolve first-hand with local and international partners on several projects in both South America and Sub-Saharan Africa.

Some private companies have even started to take on a position beyond that of just a project participant on purely commercial grounds. As corporate responsibility has moved up the agenda of large companies, some see their role in enabling projects in developing markets as a key concern. Siemens, which is involved in several LNG-to-Power projects, is one such organisation playing a “partner” role. Siemens itself provides financing, as well as helping partners secure financing from other sources “to diversify and mitigate their risk”15. It sees opening new energy markets as “a matter of corporate social responsibility” as part of its ambition to be an energy transition company.

Private equity has played a role in establishing import projects in Jamaica and Ghana and we expect to see more of this type of participation. For example, New Fortress Energy (the private equity backed developer of the Jamaican project) has recently announced intentions for an LNG-to-Power project in Nicaragua funded entirely from cash-on-hand and existing operations16. Recognising that private equity firms conventionally also look to bring in debt with their investment, debt providers will still need to be comfortable with the risks involved. This, along with relatively low rates of return of infrastructure compared with competing investments, could explain why private equity investment in LNG import is yet to fully ‘take off’.15 https://www.gasstrategies.com/information-services/lng-business-review/arja-talakar-ceo-sie-

mens-oil-gas-business-unit-technology16 https://www.lngindustry.com/liquid-natural-gas/18022020/new-fortress-

energy-signs-agreement-for-nicaraguan-gas-power-plant/

https://www.gasstrategies.com/information-services/lng-business-review/arja-talakar-ceo-siemens-oil-gas-business-unit-technology

https://www.gasstrategies.com/information-services/lng-business-review/arja-talakar-ceo-siemens-oil-gas-business-unit-technology


Foreign Direct Investment

The final trend to briefly comment on in financing of LNG import projects is that of foreign direct investment. In Ghana the China Harbour Engineering Company (CHEC), a state-owned enterprise, is taking an equity position in the LNG terminal company and providing port construction services. In Kuwait, finance has been provided by the Export-Import Bank of Korea, with engineering contracts awarded to South Korean firms. Are these investments purely linked to securing contracts for domestic construction firms? Or could LNG import projects become part of the Belt and Road investment drive from China?

LNG import assets are highly strategic, particularly when one of a limited number in a country. Therefore, governments are likely to be more wary of taking foreign direct investment. However, if multilaterals are less willing to lend, the commercial sector is unwilling to provide debt, and the private sector does not want to take on all the equity, governments may be left with limited options.

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‘Solving the Puzzle’ in a Post COVID-19 WorldEarlier in this ViewPoint we recognised that gas demand now is scarcer and more difficult to secure than LNG supply. However, in a post COVID-19 world, and one with low commodity prices, the likelihood is that finance will become a new constraint.

It is now expected that the pandemic will push the global economy into a deep recession17. Combined with the crash in oil and gas commodity prices, this will put significant limits on the ability of LNG suppliers, midstream developers and demand side players to invest. The availability of private finance for projects is also likely to be severely reduced.

This creates a “catch-22” situation for LNG suppliers. Demand is not going to quickly recover to the growth levels seen before the pandemic, resulting in even greater length in their portfolios. However, capital reduction programs will make it very challenging for these companies to make the investments necessary to create new outlets for this volume.

For gas buyers and potential projects in new and growing markets, the price environment presents a fantastic opportunity. Plentiful, cheap, LNG is available from multiple sources. The gas price was low before COVID-19, and is likely to remain low for some time afterwards. This is driven by market fundamentals, and further emphasised by virus induced demand disruption. However, the opportunity created by low prices risks being missed if finance cannot be found.

17 https://www.fitchratings.com/research/sovereigns/deep-global-recession-in-2020- as-coronavirus-crisis-escalates-02-04-2020


In this ViewPoint we have set out how governments carry a critical role in new project development, albeit a role that can evolve over time. Once again, government holds a large part of the answer to “solving the puzzle”. State investment in gas infrastructure may make a lot sense in a post COVID-19 world and can act to pump-prime the economy, for example by underpinning demand and/or providing financial guarantees. Increasing the availability of cheap and reliable energy is a proven way to kick start economic growth, combat recession and potentially act as a catalyst for further energy projects.

The COVID-19 pandemic has undoubtably made ‘solving the puzzle’ of new and growing LNG markets more difficult. However, it has also raised the stakes for all involved. The opportunity for consumers and governments has become even greater, and the risk of lack of demand growth for LNG suppliers has become even more acute.

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Collaboration and Complexity:

Solving the Puzzle of New

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