You’re chairing the session on LNG demand at the 17th World LNG Summit in December, where do you consider to be the best LNG demand growth prospects?
From an Asia Pacific perspective (as I am based in Singapore) we are seeing the emergence of ‘new’ LNG markets across South and South East Asia: Pakistan, Bangladesh, Sri Lanka, Myanmar, Philippines to name just a few. Other countries such as Singapore, Malaysia, Thailand, Indonesia have recently begun importing LNG through existing regasification terminal facilities, but are now looking to expand or develop new terminals. We are seeing a number of new buyers coming to the LNG market: some are major utilities who are looking to diversify their fuel supply sources (mostly away from coal or domestic gas), others are smaller, privately owned entities who are taking advantage of market reform and the introduction of third party access requirements across the region. Further afield, there are significant new market opportunities in Africa, Middle East and Central and South America: we are involved in a number of LNG import (FSRU) projects globally at the moment which, for the most part, are part of integrated LNG to power project developments.
How can the creditworthiness of smaller buyers be managed/improved?
This remains a challenge. The issue is not confined solely to the credit of smaller buyers, but of new buyers in emerging markets more generally. The credit issues are often perceived as being linked to, or part of, a wider country risk analysis. Credit enhancement may be achieved by way of sovereign or government-level support, which is less prevalent now (and in some cases, the relevant government may no longer be investment grade), or by bringing in more creditworthy, heavily capitalised equity partners. For shorter term or spot type deals, standard credit instruments such as SBLC or Parent Company Guarantee may be sufficient to alleviate buyer credit concerns. Also, certain sellers are purchasing credit default swaps and similar products from the finance market to improve longer term credit related issues.
We are seeing more and more the blurring of lines between buyers and sellers – how can partnerships be forged?
Agreed: it is becoming a more crowded market. There is a convergence of ‘traditional’ and new sellers looking to tie up mid to long term volumes, plus ‘new’ sellers who are trying to find a market for excess or overcommitted volumes. I think there are definitely more opportunities for sellers and buyers to collaborate and look at what each side can bring to the other in terms of a longer term relationship. That may mean, for example, partnering in the midstream, gas infrastructure component of the project: providing or co-investing in regas or gas transportation facilities. Certain utility sellers have many years of operational experience in that part of the gas chain, particularly onshore LNG RGT facilities, which is highly sought after by some of the newer LNG buyers. Also, many of the ‘new’ buyers in the market are procuring LNG in order to meet specific downstream requirements such as power generation, for example, in which case they will be looking for a more bespoke LNG supply arrangement which meet the needs of their own (downstream) facilities or customers: that entails a longer term approach.
LNG to power: what are the main challenges and opportunities?
There are many challenges, not least aligning all parts of the gas value chain: LNG liquefaction, LNG shipping and supply, LNG regasification, and the downstream power generation. That alignment has to work operationally in terms of scheduling and nominations, for example, and contractually in terms of the LNG SPA(s), LNG regas facility TUA or TCP and the PPA. Key areas will be risk and liability allocation, force majeure and co-ordination of maintenance and outages. If I had to highlight two key challenges, I would say the deployment of the regas facility, which in most cases would be offshore (FSRU) and financeability. The FSRU vessel will need to be designed around the specific requirement of the power project, which in turn may be dispatched on a baseload or peaking basis, so the operational requirements may fluctuate significantly. Inventory management on the FSRU will be critical. There are likely to be local legal and regulatory requirements which will govern the ownership of the FSRU vessel. Many LNG to power projects will ultimately hinge on whether or not they can be debt financed on a long term, limited recourse basis. That will mean achieving a bankable structure which addresses ‘project-on-project’ risks in the context of the LNG supply, FSRU and power plant components. Will all fuel related costs be passed through to the electricity offtaker? Will all project debt be repaid in a termination scenario? To date, very few of these fully integrated LNG to Power projects have achieved financial close.
We are seeing a rise in price review cases at present. How can the process be made more efficient?
We are seeing a rise in the number of potential price review cases, if not necessarily in the number of formal price review disputes. K&S (Philip Weems) authored an article on this trend which is currently on CWC’s LNG Hub. Many industry participants are actively reviewing their pricing strategy with a view to avoiding dispute proceedings. There is a still a huge divergence across the industry in terms of contractual price review mechanisms: some long-term contracts have no price review provision, others contain very general ‘meet and discuss’ type provisions whilst others contain a very specific, detailed price review mechanism. Some degree of standardisation, or more industry standard approach, may streamline the process.
What are the main reasons for King & Spalding’s support of CWC’s World LNG Summit this year?
We have been supporting CWC’s LNG conference series for a number of years now. Put simply, we believe that it provides us with the leading industry platform to display our brand and our expertise. We also see significant value in attending and sponsoring these events in terms of interacting with the senior level of attendees and delegates, plus follow-up business across our global network.
Richard Nelson will be moderating the session ‘It’s All About LNG Demand!‘ at the upcoming CWC World LNG Summit in Barcelona on Tuesday 13 December 2016.