LNG mega-projects face funding evolution

The shifting risk and reward equations created by LNG’s commoditisation will lead to fundamental changes in financing

 

Increasing industry confidence that gas, and LNG in particular, will grow in importance at least in the first stage of the energy transition has been tempered with concerns surrounding the huge costs, complexities and delays typically associated with major LNG projects.

The path ahead for LNG seems clear. Led by China’s rapacious appetite, trade in the liquefied commodity is estimated to rise at a CAGR of about 4pc during 2018-40 to 757bn m3, according to the IEA’s World Energy Outlook 2018, while LNG use in bunkering is projected to increase at a CAGR of 11pc during 2025-40 to reach 49bn m3.

This rising demand is expected to create a shortfall by the early 2020s, the anticipation of which has driven the approval of mega-projects such as the $40bn LNG Canada project. It has also heightened expectations over looming FIDs including the 12.88mn t/yr Mozambique LNG project, the 27.6mn t/yr Driftwood LNG proposal in Louisiana and the $25.5bn Arctic LNG 2 venture, which will access reserves of some 10tn m3—all due to take place this year.

But there are doubts that the traditional LNG project funding model—whereby traditional debt remains the mainstay of capital investment, as it has in the past decade—will survive this rapid evolution.

Changing contract structures could lead to a greater need for LNG export project developers to price and absorb increased market risk, while financiers will likely also seek to share more of the risk with developers—implying a greater share of equity funding. Already, the ratio of debt funding for LNG projects has seen an overall reduction over the last decade.

At LNG2019 in Shanghai, Petroleum Economist sat down with Andy Brogan, global oil & gas sector leader at consultancy EY, to gather his thoughts on the shape of future LNG project funding.

 

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