new players new models march 2019 pb - oxfordenergy.org · • the equity/cost model seeks to move...
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2DAVIDLEDESMA&MIKEFULWOOD NATURALGASPROGRAMME
AuthorsDavidLedesma,SeniorResearchFellowMikeFulwood,SeniorResearchFellow
Note:• Thecontentsofthispaperaretheauthorssoleresponsibility.Theydonotnecessarily
representtheviewsoftheOxfordInstituteforEnergyStudiesoranyofitsmembers• Sourcesaredetailedinthelastslidewithnumberreferencesintheslides
3DAVIDLEDESMA&MIKEFULWOOD NATURALGASPROGRAMME
MARKETCHANGE
Firm long-term supply contracts were needed to underpin LNG supply security
Low cost US shale growth and subsequent development of US liquefaction capacity gave an alternative supply and contract choice
Middle East LNG supply growth globalised the LNG business
2011 Fukushima disaster and subsequent Japanese fiscal deficits drove the need for market change
Market driven change led to new ways of contracting • China and SE Asia
market growth • Price & volume
sensitive market growth
• Liberalisation of the Japanese market
The‘oldmodel’haschangedThechangeshaveledtoincreaseduncertaintyandtheneedforgreater
contractualflexibility
4DAVIDLEDESMA&MIKEFULWOOD
• TheLNGbusinesshasevolvedfromitsoriginalsecurityofsupplybased‘EstablishedModel’thatwasbasedonfixedlinksbetweentheLNGsupplierandtheLNGbuyer
• NewplayersandchangesinthestructureoftheLNGmarkethavedriventheLNGvaluechainmodeltoonewherenewandexistingplayerscanintroduceanadaptiveLNGchainwheredifferentlinkagescanoperatemoreindependentlyofeachother
• Thishasbeenmadepossiblebythepresenceofhighcredit(AAAorAA)intermediariesunderpinningofftakeagreements
– SeenmostrecentlyintheUSmodelandFLNGstructures• Willtheseaggregators/portfoliocompanies/intermediarieshavethefinancialand
commercialcapacitytounderpinthenextwaveofLNGliquefactioncapacity?• Inresponsetothisuncertaintynewplayersarecreatingnewmodels.Thequestionis
–willthesemodelswork?
Hypothesis
NATURALGASPROGRAMME
5DAVIDLEDESMA&MIKEFULWOOD
Thepathtoatrulytraded/merchantmodelfromtheestablishedliquefactionmodelhasseveralsteps
NATURALGASPROGRAMME
EstablishedModel
Market Change
CheniereModel
Equity/CostModel
Trading/MerchantModel
6DAVIDLEDESMA&MIKEFULWOOD
Thepathtoatrulytraded/merchantfromtheestablishedliquefactionmodelhasseveralsteps
NATURALGASPROGRAMME
• FourModels• The‘EstablishedModel’usedintheliquefactionplantdevelopmentsofthe1980-1990swas
basedaroundfixedlinkageswithintheLNGchain.Themovetotollingagreementsinthe2000s*gavethefirststepstowardscargooptimisationandtrading
• TheinnovationoftheChenieretollingmodeltotheUSmarket,basedonlowcostofUSfeedgas,sawUShubpricedLNGwithgreateroperationalflexibilityofLNGcargoes,butthestructureisstillbasedaroundlong-termcontracts
• Theequity/costmodelseekstomovefurthertowardsamerchantmodel,butstillrequireslargeequityinvestmentstobemade,whichinthemselvesmeanonlylargecompanieswithlargeportfoliosareabletobeinvolved.Thisstructurealsorequiresmediumtolongtermcontractstounderpinthelargeinvestments
• InatrulytradedmarkettheabilityofthemarkettoactasahomeforLNGcargoes,atthemarketprice,meansthatthechaincanfullydisaggregate,contractscanbeflexible,andnewliquefactionplantscanbefinancedwithoutanyvolumerisk.Allfinanceisbasedonmarketbasedprices
• Thispapercomparesthedifferentmodelsonthewaytothisfullytradedmarketandchallengeshow,intheintermediateperiodbeforewereachthismarket,newliquefactioncapacitycanbedeveloped
* Indonesia did use tolling structures before this but still based around the fixed point-point LNG supply structure
7DAVIDLEDESMA&MIKEFULWOOD
The‘EstablishedModel’hadacleardelineationofactivities
Transfer pricing project structure Integrated project structure
NATURALGASPROGRAMME
Source: OIES, ’LNG Markets in Transition, The Great Reconfiguration’5, Chapter 3, Ledesma
8DAVIDLEDESMA&MIKEFULWOOD
The‘EstablishedModel’hadacleardelineationofactivitiesthatsupportedinvestmentbutlimitedflexibility
NATURALGASPROGRAMME
• Theestablishedmodelusedintegratedandtransferpricingstructures(withafewusingthetollingstructure).Longtermsupplycontractsbetweensellersandbuyersunderpinnedthedevelopmentofcapitalintensiveupstreamgasreservesandliquefactionplants
• ProjectstructuringusuallyincludedafewcompaniesinvolvedfromwellheadtoLNGdeliveryattheLNGbuyersfacility
• Projectswereonshore,largescale,withincreasinglybiggerLNGtrains• Buyerswereoftenend-userutilitiesorgascompanieswhosoldgasintoregulated
marketswheretheenergycostswerepassedthroughtotheendbuyer• LNGsalesweremainlymadeonadeliveryex-ship(DES)basis• Limitedcontractflexibilitywithlimited,ifany,cargodiversions• LNGwaspricedonanoilrelatedbasis,basedontheJapanCrudeCocktail(JCC)oilprice.
Theformulawasfairlystandard:JCCx14.85(theslope,where17.1representoil/gasparity)plusaconstantusuallyrepresentingtheshippingcost
• Projectsstructuredwithjointventurecompaniesassellersusinglimited/nonrecourseprojectfinancingthatallocatedrisktomaximisefinancingandoftenoptimizethefinancecapacityofthegassupplyingcountry
9DAVIDLEDESMA&MIKEFULWOOD
The‘CheniereModel’tookthetollingmodelandadapteditfortheNorthAmericangasmarket
Cheniere’s modified transfer pricing structure The established tolling structure
NATURALGASPROGRAMME
Source: OIES, ‘LNG Markets in Transition, The Great Reconfiguration’5, Chapter 3, Ledesma
10DAVIDLEDESMA&MIKEFULWOOD NATURALGASPROGRAMME
• TheestablishedtollingmodelallowedforthesamecompanytooperateintheupstreamandLNGsalespartsofthechainwithathirdpartyowningandoperatingtheliquefactionplant
• Longtermtollingcontractssecureddedicatedgasreservesfromupstreamcompaniestousetheliquefactionplantcapacity
• Thesecontracts,withhighcreditratedcompanies,underpinnedtheplantfinancing
• LNGwassoldbytheupstreamcompanies,thattolledthroughtheliquefactionplant,notthejointventurecompany.InEgypt,thisenabledthedevelopmentof’BrandedLNG’whereLNGissoldinthenameofthesellercompany
• BuyerswouldbuyLNGfromtheupstreamcompanies.LargeIOCsorcompanieswithmultiplesupplycontractscouldofferLNGfromtheirportfolioratherthanaspecificsupplysource.ThiswasthestartofaggregatorLNGandrealcargodiversions
• LNGsalescouldbeonvaryingcontractsandunderdifferentpricingmechanisms• LNGwassourcedFOBforcargoflexibility.
• The‘CheniereModel’adaptedthetollingmodelfurthertosourcefeedgasfromthelargelowcostUSgasmarket(notdedicatedreserves),selltollingcapacitywithfeedgassupplyandpipelinesupplycapacityatcost,separatedfromthetolling.
• Theunbundledmodelremoveddestinationrestrictionsandgavevolumeflexibility
The‘CheniereModel’tookthetollingmodelandadapteditfortheNorthAmericangasmarket
11DAVIDLEDESMA&MIKEFULWOOD
The‘Equity/Cost’modelseekstosecureequityinvestorstofundnewliquefactionandsupplyequityLNG
NATURALGASPROGRAMME
Investor1
Investor2
Investor1
Investor1
Investor2
Investor1
Projectdevelopmentcompany(investmentinLNGchain/liquefaction)
CorporateLenders
Equity ownership
Equity LNG offtake
ProjectFinanceLenders
Alternatively equity holders may decide to finance at a project level on non-recourse basis
Equity holders may finance through corporate financing – debt or equity
12DAVIDLEDESMA&MIKEFULWOOD NATURALGASPROGRAMME
• Projectcompanyshareholdersfundtheliquefactionplant(andpotentiallytheupstream)throughtheirownequity.LNGofftakeisbasedonequityshares-allLNGisdestinationfreeandcompletelyflexible
– Equityholdersareresponsibleforsourcingtheirowngasandsecuringpipelinecapacitytomovegastotheliquefactionplant
– TheinvestorreceivesequityLNGatshiploadingflangeoftheliquefactionplantatcost• ProjectequityholderstaketheLNGintotheirownportfoliosandmanagethe
marketingrisk– LNGmaybesoldfromtheprojectcompanytotheequityholdersownLNGmarketing
company– LNGon-soldundercontractsofvaryinglengthsanddifferentcontractpricesandterms
• LNGCanadatookFIDwiththisprojectstructureinOctober2018• Tellurian’sDriftwoodLNGprojecthasadaptedthismodelfurthertoofferequityin
theproject(whileprojectfinancingisaround66%).LNGbuyersbuyequityandreceiveLNGinproportionofthatequityamount
– Theprojectismanagedandoperatedbyaprovendeveloperandoperator.Anycost-overrunswillbebornbytheequityholders.Projectfinancecompanieswilllikelyneedsecurityofofftakeandsomeformofconstructioncompletionguarantees
The‘Equity/Cost’modelseekstosecureequityinvestorstofundnewliquefactionandsupplyequityLNG
13DAVIDLEDESMA&MIKEFULWOOD
Theendgame‘Trading/Merchant’modelwillnegatetheneedforlong-termcontractsandenablefullmarketflexibility
Globally traded LNG market
NATURALGASPROGRAMME
PLUS MULTIPLE RESALES
LiquidMarket
AvailableLNG
Vessels
Seller
Buyer
14DAVIDLEDESMA&MIKEFULWOOD NATURALGASPROGRAMME
• AtrulymerchantmarketwillmeanmultipleLNGsellers,buyers,tradersandindependentscanfreelytradeLNGonthebasisofglobalorregionalLNGpriceindiceswith‘basisdifferentials’betweentheseindicesequaltosupply/demandLNG
– Tradeoncommoncontracts– BuyersareconfidentthattherewillalwaysbeLNGcargoesavailabletomeettheirdemand
thusensuringsecurityofLNGsupply– Volumeriskhasdisappearedandriskhastotallybeentransferredtotheprice(i.e.takeor
payis100%asthebuyerknowsthatitcanalwaysplacethecargoonthemarket)
• AllLNGisflexible,nolong-termcontracts(thoughsomebuyersmaysecure1-5yearsforeaseofoperations).Volumeofftakeriskisremovedbymarketliquidity
• Lendersarehappytolend,andinvestorstoinvest,onthebasisoftheeconomicsofaprojectandtheLNGpricelevel,notvolumerisk(long-termcontractsmaynotberequiredtounderpintheirinvestments)
• EquityinvestorswillseektomaximizeleverageandeachsegmentoftheLNGchaincanbefinancedindependently
Theendgame‘Trading/Merchant’modelwillnegatetheneedforlong-termcontractsandenablefullmarketflexibility
15DAVIDLEDESMA&MIKEFULWOOD
ButtheLNGmarketisintransitionbetweenastructuredandfullyflexible/liquidstructure.Operatinginthegreytransitionperiod
betweentheseendstatescreatesuncertainty
NATURALGASPROGRAMME
1970-1990structuredLNGmarket
Merchant/tradedmarket
(expectedtobe43-50%by2020)3
Movingto
Greyfuzzyareaoftransition
Question:Whenisthe‘tipping
point’
Source:Authorresearch
In2018~32%LNGtradedwasin‘pure’spottrades(in2015itwas15%)4
16DAVIDLEDESMA&MIKEFULWOOD
• Whenthemarketisfullymerchantandliquid,thenLNGcanbetradedundershort-term/spotcontractsconfidentthatthereisamarketthatcannotbemanipulated.Lenderscanlendmoneywithouttherequirementforlong-termofftake/capacityagreementswithoutimpactingongearinglevels
• ThepathtowardsafullytradedLNGmarketisunstoppable,thequestioniswhenwillthe‘TippingPoint’be(i.e.whenacargocanbedeliveredintomultipleliquidtradingmarketswithoutlimit)
• IncreasedvolumesofLNGareavailablewithoutcontractualdestinationrestrictions• ThevolumeofPureSpotTradesincreasedto32%LNGin20184• By2020,70cargoes/monthwillbesuppliedfromtheUSwith24differentlifterscreating
realFOB
• ThevolumeofLNGtradedbyaggregatorsandtradersisincreasing• IncreasingvolumesofLNGarebeingsoldfromtermbuyersandsellersusingtheLNG
spot/short-termmarkettocoverdisposalandsourcingofshort-termvolumes• End-userbuyersaresourcingLNGthroughaportfoliooflong,medium,short-term
andspotcargoestomanagegasofftakerisksandpriceexposure
Asthemarketchangestowardsafullyliquidbusiness,thewaythatLNGistradedischanging
NATURALGASPROGRAMME
17DAVIDLEDESMA&MIKEFULWOOD
Marketestimatesarethat~150-170milliontonnesadditionalLNGcapacityisrequiredby2030?Howwillthissupply-demandgapbemet?
NATURALGASPROGRAMME
Source: 2018 BP Energy Outlook2
Source: Shell LNG Outlook 20181
18DAVIDLEDESMA&MIKEFULWOOD
• Anadditional150-170mtpaLNGcapacityisrequiredby2030whichmeansthatanestimated$150bninvestmentisneededbetween2019-2025inliquefaction,associatedfacilitiesandships*.(assumingacostof$600/MT+associatedinfrastructurecostsandships).Over6yearsthisequatesto$25billion/year
• Inordertosecurefinancing,andsupportthislevelofinvestment,projectdeveloperswillneedtosecureofftakeagreementstounderpintheinvestments
~150milliontonnesadditionalLNGcapacityisrequiredby2030?Whatisthecapitalcost?WhatisthevalueoftherequiredLNGinvestment?
CompanieswillbeexpectedtounderpinthisinvestmentandLNGofftake
NATURALGASPROGRAMME
* 150 million mt @ 52 Tr Btu/million mt LNG = 7800 Tr Btu @ $6/MMBtu = Cost LNG of $46.8 billion/annum
• AssuminganLNGpriceof$6/MMBtu,thiscontractualcommitmentisequivalentto~$46billion/year.AtanLNGpriceof$8/MMBtuthisrisesto$62billion/year*
• $108bninvestmentinliquefactionandassociatedfacilitiesequatesto$18billion/year
• Assuminggearingof67%then~$12bn.debtrequiredeachyear
Estimatedcapitalinvestmentrequired150 millionmtnewcapacityrequired
Cost:600 Capex$/MT newcapacity90 $billion Totalinvestmentinliquefaction18 20% associatedcostsforinfrastructure108 $billion Totalshorecosts(excludingupstream)
214 Nonewships [email protected] $billion @$200million/ship
151 $billion TOTALnewinvestmentrequired
NOTE:Theamountonevesselcancarry/year:cargo:62000mt,30daysroundtrip=11.7voyages/year(@350days)=0.723millionmt
19DAVIDLEDESMA&MIKEFULWOOD
0
5
10
15
20
25
30
35
20042005200620072008200920102011201220132014201520162017
US$billion
Thirdpartydebtraisedforliquefactionplantfinancings2004-2017
Historicallythevolumeofthirdpartydebthasaveraged~$12bn/year.With$12bndebtrequiredeachyear2019-2025,thereshouldbesufficient
debtavailabletocoverfuturerequirements?
NATURALGASPROGRAMME
Source: Poten data, OIES analysis
Average $11.6bn.
NOTE: Third Party Debt includes commercial loans, export credit agency debt, multilateral debt, shareholder loans, bonds and sovereign wealth fund debt
20DAVIDLEDESMA&MIKEFULWOOD
Bankssaythattheyareflexibletochangingcontractualstructuresbutarethey?• Lendersseeklong-termstablerevenueflow.Projectfinancetodatehasreliedonlong-
termtakeorpaycontractsfromA+buyers(oftenwithgovernmentsupport)– Withoutasuitablefinancingpackagetherewillberecoursetoshareholdersandthislimits
thenumberandfinancialqualityofcompanieswhichcandevelopprojects– ImmaturityofthespotLNGmarketstillmeansthatlong-termcommitmentsareneeded–thoughbankssaythatperiodof‘long-term’hasreduced
• Ittendstobethesmallerplayerswhoareofferingcontractualflexibilitytosmaller,lowercreditratedbuyers.Lendersseethisasincreasingprojectrevenueuncertainties
• Aggregatorscanbundlebuyersofdifferentcreditratings– Riskslicingbuyersofdifferentcreditratingscanoptimisefinancinglevels– Aggregatorscanalsooffertodevelopdomesticinfrastructure
• Lendersmustgetcomfortablewiththeriskstooptimisedebtpackagesandthatspot&short-termcargoescanbesoldata‘marketlevel’but...theyneedaliquidmarket
• Accesstonewcapitalsourcesisonlypossibleifrisksareclearlydefined– Shorter-termcontractsareOKinmatureeconomiesthathavealiquiddebtmarket– Newsourcesoffundsstillneedclearriskallocation– Equityinvestmentisthemostexpensivesourceoffunds
ThefinancingcommitmentforthenextwaveofLNGcouldbe$150bn.Istheresufficientfinancingcapacityavailabletosupportsuchalarge
investmentrequirement?
NATURALGASPROGRAMME
21DAVIDLEDESMA&MIKEFULWOOD
BuyersandSellersincreasinglyhavedifferentcontractobjectiveswhennegotiatingnewsales&purchaseagreements
NATURALGASPROGRAMME
Buyersrequirements SellersrequirementsPricing Lowerlevelsandvaryingindicestomitigate
changingmarketstructureStablepricingacceptabletolenders,thatsupportsprojecteconomics
Volume Flexiblevolumeclausestoenablemanagementofmarketrisk
Manageableflexibilitytosupportfinancing
Contractperiod
Short/medium(3-10years)withpricereviews
Medium/longterm(7-15years)tosupportsecurityofofftaketosupportfinancing
Destinationrestrictions
Flexibledestinationtoenablebuyerstodivertcargoesforoptimizationandmarketreasons
Limiteddestinationflexibilitywithsharingofanyfinancialupside
Risksharing CurrentUSmodelwherebuyertakesvolumeandpricerisknotsustainable
Limitedreallocationofriskssoastosupportfinancing
Financing Limited/manageablefinancialsupportinthecasethatbuyerisnotsuitablycreditrated
Buyersneedtobeofsuitablecreditratingtosupportfinancing
Partnerselection
Flexibleapproach,ifthecontractisnoteconomic/fitforpurposeatalltimesthenareviewmaybenecessary
Needtoensurethatbuyerwilltaketheofftakethroughoutthecontractperiodandnotseekcontractreview
22DAVIDLEDESMA&MIKEFULWOOD
ButthereisanimpassebetweenLNGbuyersandsellers.Buyersareseekinggreatercontractualflexibilityinordertomeettheirdomestic
gasdemanduncertainties
NATURALGASPROGRAMME
• Price-buyersarelookingfordifferentpricingindicestomitigatetheirrisks– ReportsthatsomesmallerbuyersarelookingtobuyLNGusingaformulalinkedtofertiliser
prices,steelpricesandfocusingonshort-termrequirementsratherthanlong-termmarketswhicharesouncertain(itisviewedthatsellersareunlikelytoagreetothis)
• Volume-marketliberalisationandtheneedtobecompetitiveintheirchangingmarketshasledtodomesticgasdemanduncertaintyandLNGbuyersseekingsmallercontractamounts,greatervolumetolerances,shortercontractperiodsandcargodestinationfreedomsotheycandivertcargoesincasetheyarenotrequiredintheirhomemarket
• Thethreatofpricedisputes/arbitrationmeansthatsellersfeelatriskthattheircontractsmaybechallengedinthefuturedespitecontractualprovisions.Thisremovesthetraditional‘markettrust’andcommoditizestheLNGmarket.
• TheUSmodelthathasbeenusedforLNGexportprojectstodatepassespriceandvolumerisktothebuyer–thismodelisnotsustainableforthenextroundofLNGFIDsasbuyersarebeingaskedtotakeontoomuchrisk
• Thisleadstothequestion-whatarethepossibleevolutionarypathsforLNGpricingandcontractsthatcanmatchtherequirementsofbothLNGbuyersandsellers?
Source: Input from Heren 30/3/17
23DAVIDLEDESMA&MIKEFULWOOD
BuyersandSellersincreasinglyhavedifferentcontractobjectiveswhennegotiatingnewsales&purchaseagreements
NATURALGASPROGRAMME
Buyersrequirements SellersrequirementsPricing Lowerlevelsandvaryingindicestomitigate
changingmarketstructureStablepricingacceptabletolenders,thatsupportsprojecteconomics
Volume Flexiblevolumeclausestoenablemanagementofmarketrisk
Manageableflexibilitytosupportfinancing
Contractperiod
Short/medium(3-10years)withpricereviews
Medium/longterm(7-15years)tosupportsecurityofofftaketosupportfinancing
Destinationrestrictions
Flexibledestinationtoenablebuyerstodivertcargoesforoptimizationandmarketreasons
Limiteddestinationflexibilitywithsharingofanyfinancialupside
Risksharing CurrentUSmodelwherebuyertakesvolumeandpricerisknotsustainable
Limitedreallocationofriskssoastosupportfinancing
Financing Limited/manageablefinancialsupportinthecasethatbuyerisnotsuitablycreditrated
Buyersneedtobeofsuitablecreditratingtosupportfinancing
Partnerselection
Flexibleapproach,ifthecontractisnoteconomic/fitforpurposeatalltimesthenareviewmaybenecessary
Needtoensurethatbuyerwilltaketheofftakethroughoutthecontractperiodandnotseekcontractreview
24DAVIDLEDESMA&MIKEFULWOOD
• LNGliquefactionprojectcostsarefallingbuteconomicsdictatethattheymayneedtofallfurtherinordertosupportthelowpricelevelsthatbuyersseek
• Thisiscompoundedbythelowmarketgaspricesandbuyerpriceformulaaspirationsthattogetherchallengeoverallprojecteconomics
• Buyer’swishforshort-termofftakeorcapacitycontractsgivesconcernstolendersandsponsorsthatrevenuesmaynotbeashighasrequiredtosupporttherequiredeconomics.ThisriskisexacerbatedastheLNGmarketisnotfullyliquid
• ThenewermarketsthatareunderpinningLNGdemandgrowthoftenhaveapoorcreditrating.ThischallengesthevalueandreliabilityofLNGsalesrevenuesthatarerequiredtounderpinfinancing
• Projectsrequirelargeupfrontinfrastructurerequirements,thequestionis–whopays?Theeconomicsofnewgreenfieldprojectsmaynotsupportsuchlargeexpenditureandsomegovernmentsarenotabletopayorgivethenecessarytaxincentivestosupporttheinvestment
• SellersandlendershaveconcernsthatiftheycommittosellLNGlong-termandthemarketmovestobemoremerchant/traded,thebuyermayseekareviewoutsidethetermsofthecontractbecausethey‘have’to.Partnerandbuyerselectionisbecomingevenmorekey
ButthereisanimpassebetweenLNGbuyersandsellers.Sellersneedsecurityofofftake/revenuesthatarefoundinastructuredmarketbut
arenotinamarketintransition
NATURALGASPROGRAMME
25DAVIDLEDESMA&MIKEFULWOOD
Economiclowcostproject
Lowtechnical&operating
risk
Guaranteedcreditworthy
offtake
Acceptablefinance
structure&terms
• Costiskey• Newmarketsneedlowerprices
• Reductionsincapitalcostsrequired• Projectneedstostart-upontime• Reliableoperations
• Priortomarketreachingits‘tippingpoint’buyertakeorpayrequired
• Lowcostprojectsgivesomestructuringflexibility
ThechallengefacingtheindustryissecuringFIDsforadditionalLNGcapacity.Whatfactorsareneededtoenablecommitmentstobemade?
• Suitablesecuritypackageisrequiredtosupportfinancing• Lendersneedtogivegreaterflexibilityasthemarketchanges• Newfinancestructuresneedtofitnewmarketrealities
26DAVIDLEDESMA&MIKEFULWOOD
• Aneconomic,lowcostLNGsupplyproject– Costiskey,lowcostfeedgas,liquefaction,shippingandliquidscreditifpossible– Tollingfeesarecomingunderpressure,the‘olddays’of$3-3.50/MMBtuforUSLNGprojects
havegone,$2-2.25/MMBtutollingfeesarewhatnewcapacityofftakersareseeking– LNGmustbeabletobedeliveredtoAsiafor~$6/MMBtuifnewmarketsaretobeopened8
– Equityinvestmentmodelsreducetherequirementtoraiseprojectdebt
• Lowtechnicalandoperationalrisk– Tomitigateprojectconstruction,infrastructureconstructionandfinancingrisk
• ReliableLNGofftakeorcapacitycommitmentfromacreditworthybuyer– Needtomanagethematuringofthemarketasitgoesthroughthedifferentdevelopment
stepsfromilliquidtowhenitreachesits‘tippingpoint’(refslide16)andissufficientlyliquid– Suitablecontractstosupportfinancing,butthefinanciersneedtoincreaseflexibility– ThelinkingoflowcostLNGmeansalternativepricingformulascanbeoffered
• Lenderswhofinanceataneconomiccostunderacceptableterms–stillrequired– Onlylendmoneyifthesecuritypackagesupportsthelevelofdebt– WithgreaterflexibilityofLNGcontracts,lenderswillhavetoadapttheirdebtpackagesto
acceptanincreasedamountofrisk(seeback-upslide)– Developfinancingpackagesthatbalancethedifferentrisksofdifferentofftakers
NATURALGASPROGRAMME
ThechallengefacingtheindustryissecuringFIDsforadditionalLNGcapacity.Whatfactorsareneededtoenablecommitmentstobemade?
27DAVIDLEDESMA&MIKEFULWOOD
Stagestoatraded/merchantmodel–BusinessStructure
NATURALGASPROGRAMME
BusinessStructure EstablishedModel CheniereModel Equity/CostTrading/Merchant
Model
Buyer EnduserutilitiesIntermediarieswith
someendusersVaried Varies
SellerNOCorNOC/IOC
sponsoredjoint
ventures(SPV)
ProjectdeveloperVaried,equitylifting,
'brandedLNG'Varies
FinancingFinancewholechainor
liquefactionportion
Financeofliquefaction
&somemidstream
pipelines
Varied(underpinned
bysomeLTsecurityor
higherequity)
Novolumerisk,
projectsfinanced
basedonmarket
EquityMinimisedas
structuresoftenSPVs
Minimiseddueto
maximumleverage
strategy
Dependsonsponsor
financialpositionbut
likelymax.leverage
Dependsonsponsor
financialpositionbut
likelymax.leverage
Projectscale OnshorelargetrainsBrownfieldand
Greenfield
Brownfield,greenfield,
smallertrainsand
FLNG
Brownfieldand
Greenfield
GaschainInvolvedineverything
uptobuyerflangeLiquefactiononly
Combination/
unbundledLiquefactiononly
ProjectDeveloperIOC/NOCwith
upstreaminterests
Independent
developers,no
upstreaminvestment
Independent
developers,no
upstreaminvestment
Independent
developers,no
upstreaminvestment
Gassupplysource DedicatedgasreservesNodedicatedgas,but
fromthemarket
Nodedicatedgas,but
fromthemarket
Nodedicatedgas,but
fromthemarket
28DAVIDLEDESMA&MIKEFULWOOD
• AstheLNGmarketliberalises,thebusinessstructureschange– Thechaingetsincreasinglyflexible– Gasresourcescanbeflexibleratherthanfromaspecificfield(especiallyinNorth
America)
• Differentcompaniesoperateunderdifferentbusinessstructures– Greaterrangeofbuyerandseller– Differentcompaniesoperatealongthewholedisaggregatedchain
• Projectscalecandeterminecompanyinvestment– Smallerscaleliquefactionopportunitieslowerthebarrierstoentrytosmallerinvestors
• Financingstructuresvary– Separatepartsofthechainarefinancedseparately– Changingstructureofthemarketmeanslenderscanrelyonthemarketforguaranteed
offtakeratherthanspecificbuyers– Disaggregatedmarketenablesinnovativefinancingstructures
NATURALGASPROGRAMME
Stagestoatraded/merchantmodel–BusinessStructure
29DAVIDLEDESMA&MIKEFULWOOD
Stagestoatraded/merchantmodel–ContractStructure
NATURALGASPROGRAMME
ContractStructure EstablishedModel CheniereModel Equity/CostTrading/Merchant
Model
Destination PointtopointDESNofixeddestination
FOB
Somerestrictionswith
diversionupsideFlexible
VolumeACQ Large SmalltoMedium SmalltoMedium
NoLTcontracts,liquid
marketremoves
volumerisk
Volumeflexibility Limited LargewithpenaltyWiderrangewithout
penalty
Noneforterm,cargo
max?
Duration Longterm–20years+ Longterm20yearsShorterterm-10+
yearswithoptions
Varied,long-term
contractsnotrequired
PricingOilindexation–
deliveredprice
Unbundled–hub
pricedseparatefrom
liquefactionfee
Portfolio/hybridof
differentindices(Oil,
hub,AsiaSpot)
Marketbasedprice
TakeorPay/capacitypayment
Yesat95%ACQ(with
make-up)
Onlyonliquefaction
fee(nomake-up)
Yeswithreduced
volumecommitmentTakeorpay100%
30DAVIDLEDESMA&MIKEFULWOOD
• AstheLNGmarketliberalises,contractstructureswillchange– Contractsbecomeincreasinglyflexible,passingthroughahybridstageuntiltheybecome
merchanttypeagreements– Contractdurationreduces,ultimatelytonolong-termcontractsoncethemarketisfully
merchant– Inamerchantmarketnotake-orpayisrequiredassecuritycomesfromthemarket
• Differentcompaniesoperatedifferently,buteventuallyamerchantmarketresultsinallplayersoperatingonalevelplayingfield
– Movetowardsmarketpricingandcommonalityofcontracts• Financingstructuresrelyonthemarket
– Marketgivessufficientsecurityofofftake,theprimaryriskispricelevelnotvolume
NATURALGASPROGRAMME
Stagestoatraded/merchantmodel– ContractStructure
31DAVIDLEDESMA&MIKEFULWOOD
• Compromisebetweenbuyersandsellersoncontracttermssuchthatbuyersagreetotermsthatsupportsellersprojecteconomicsandsellersgiveflexibilitytomanagebuyersmarketuncertainties
• LendersmustdevelopfundingpackagesthatsupportchangesintheLNGmarketstructure
– Projectsmusthavecrediblefinanceablebuyers/capacityholderstounderpinofftake/capacitycontracts
– SufficientfinancialcapacitymustbeavailabletomeetLNGfundingrequirements– Projectsmustbestructuredcorrectly
• Acceptancethatmedium/long-termcontractsarerequired(untilLNGmarkethassufficientliquiditysuchthatLNGcanbetradedwithoutperiodsofextremevolatilityandthatcargoescanalwaysbeboughtorsoldinthemarket).Couldthisbepost2020when~40-45%LNGsoldgloballywillbeunderflexiblecontractterms5?
• Managingmarketuncertainties-BuyerswilllikelypurchasenewLNGonaportfoliobasisonavarietyofpricingindiceswithdifferentcontracttermsasameanstomanagerisk
• Marketliquidityandtrustedpricingindices-Weareonthepathtoamerchant/tradedLNGmarket,butthereisstillalongwaytogo.AmajorblockeristheavailabilityofanindependentLNGpricingindices.
Conclusion1WhataretheissuesthatneedtoberesolvedtoenableFIDstohappen?
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• Thethree2018/19FIDswereenabledbycreditworthycompanyequity/offtakeagreements– LNGCanadainOctober2018(14mtpa)wasbasedonanequityofftakestructurethatsupports
financingthroughshareholderequityandcorporatefinancing– TortueFLNGinDecember2018(~2.4mtpa)wasunderpinnedbyBP’sofftakeforallcapacity– GoldenPassinFebruary2019(15.6mtpa)wasbasedonanequityofftakestructure
• Whileotherprojectscanusetheequityofftakemodel(e.g.MozambiqueArea4),othergreenfieldprojects,suchasMozambiqueLNG(Area1),requireprojectfinancing
– LendersstillneedgreatersecurityofLNGofftake– Whetherthisprojectproceedswillbeakeyindicatorastohowthemarketisdeveloping– ‘Equity/CostModel’,canmakeeconomicsenseforcompanieswithlowcostofcapital
• Themarketisnotyetliquidenoughtogivesufficientcomforttolenderstonotrequirelong-termofftakeagreementstounderpindebt
– Lendersmustgivemorevaluetospot,notcommittedcargoes,thantheycurrentlydo.Ifnot,itwillbeamajorlimitingfactorforprojectdevelopment
– Ifthisisnotresolved,thennewLNGprojectscanonlytakeFIDiffundedbyshareholders(equityLNGmodel)orbuyerssupportlong-termLNGofftake.Thiswilllikelyhappen,butitwillreducethenumberofcompaniesinvestingandthereforedevelopmentofthemarket
• Expansionprojectscanusecorporatedebt,butdependsonthestateoffinancingoftheoriginalproject,performanceoftheplantandstrengthoftheshareholders
Conclusion2Wherearewetoday?
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1. ShellLNGOutlook2018,https://www.shell.com/energy-and-innovation/natural-gas/liquefied-natural-gas-lng/lng-outlook.html2. 2018BPEnergyOutlook,https://www.bp.com/en/global/corporate/energy-economics/energy-outlook.html3. “LNGMarketsinTransition,OIES,2016estimates43%&Cheniereconferencepresentationsestimate50%4. “TheLNGIndustryGIIGNLAnnualReport2019”,GIIGNL,March2019.“Pure”spottrades(PST)arecargoesdeliveredwithin3
monthsofthetransactiondate.5. ‘LNGMarketsinTransition:TheGreatConfiguration’,Ed.Anne-SophieCorbeauandDavidLedesma,p574,OIES2016,OUP,
https://www.oxfordenergy.org/shop/lng-markets-in-transition-the-great-reconfiguration/6. ICISGlobalLNGMarkets,8thMarch2018“Shelltopsupafurther1mtpawithUSVentureGlobal”7. Japan'sJERAintalksforLNGcontractwithnodestinationlimits”,Reuters11thOctober2017,
https://www.reuters.com/article/us-commodities-summit-jera/japans-jera-in-talks-for-lng-contract-with-no-destination-limits-idUSKBN1CG0SR
8. Stern,J(2017).‘ChallengestotheFutureofGas:unburnableorunaffordable?’,OIESNG125,https://www.oxfordenergy.org/publications/challenges-future-gas-unburnable-unaffordable/
9. LedesmapresentationtoOIESNaturalGasProgrammeSponsors,25thApril2017,‘LongtermLNGsupply–thechallengesofinvestingfor2025’
10. Reuters14thMarch2018,‘TokyoGastorenewMalaysiaLNGpurchasesfromPetronasunit”,https://af.reuters.com/article/commoditiesNews/idAFL3N1QW2GH
11. TellurianCorporatePresentation,1stOctoberhttps://ir.tellurianinc.com/presentations12. http://www.cheniere.com/terminals/corpus-christi-project/liquefaction-facilities-midscale-trains/13. https://www.macrobusiness.com.au/2018/03/energy-crisis-deepens-gas-reserves-evaporate/14. www.ventureglobalng.comand
https://www.federalregister.gov/documents/2017/12/05/2017-26139/venture-global-calcasieu-pass-llc-transcameron-pipeline-llc-notice-of-schedule-for-environmental
15. ThePrincipleofProjectFinance,RodMorrison,GowerPublishing2012,Chapter16ProjectFinancingLNGProjects,DavidLedesma
Bibliography/Sources
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1. Thesecuritypackagecanincludetheequityinvestmentofsponsorsmadepriortoloandisbursement,engineering,procurementandconstructioncontracts,sponsorcompletionguarantees,availabilityofstart-upworkingcapital,implementationofatrusteerevenueaccountoffshore(i.e.escrowaccount),prioritisationofinsuranceproceeds,anyliensoverproperty,sovereignassurances(ifapplicable)andprioritisationoffundallocation(thecash‘Waterfall’)
2. ‘TippingPoint’asdefinedinthispaper-thepointinthemarketatwhichacargoofLNGcanbeboughtandsoldandcanbedeliveredintomultipleliquidtradingmarketswithoutlimitandhavingamajorimpactonthemarketprice
3. DefinitionsJV–JointVentureLT–Long-TermSPV–SpecialPurposeVehicleIOC–InternationalOilCompanyNOC–NationalOilCompanyHighcredit(AAAorAA)–highestcreditratedcompaniesthatcantradeusuallywithoutbankorparentcompanyguarantees
Glossary/Definitions
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