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  • 1ViewPoint

    Collaboration and Complexity:

    Solving the Puzzle of New

    and Growing LNG Markets

    Gas Strategies Group

    10 St Bride Street London EC4A 4AD

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

    ViewPoint

    Collaboration and Complexity: an

    Solving the uzzle of NewPu and Growinga LNG MarketsL

    ViewPoint

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

    Chris Levell Managing Consultant Email: c.levell@gasstrategies.com

    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 Consultant Email: e.shires@gasstrategies.com

    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.

  • 3ViewPoint

    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

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

    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.

  • 5ViewPoint

    A Rebalance of Power The 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).

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

    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

  • 7ViewPoint

    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

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    LNG Suppliers l Seeking market outlets for burgeoning

    portfolios l Offering greater supply flexibility or

    smaller volumes l 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