Risk management FSRU himadri banerji

RISK MANAGEMENT IN LNG FSRU

PERSPECTIVES IN PROJECT FINANCE CONTRACT STRUCTURES IN LNG CHAIN & INSURANCE

Presented by Dr. Himadri Banerji at the 2ND FSRU Conference 26th to 29th Nov 2013 Singapore

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BY HIMADRI BANERJI EX CEO RELIANCE ENERGY

MD ECOURJA

PRESENTATION FLOW


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INTRODUCTION TO FSRUKEY RISK ISSUES RISK ALLOCATION AND CONTROLTHE CHANGING PARADIGM : NON RECOURSE FINANCING “A

REALITY IN LNG FSRU PROJECTS”EVOLVING CONTRACT STRUCTURES FOR R-LNG FSRUEVOLVING INSURANCE LNG FSRU TERMINALS


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The face of global LNG is changing.

Oil majors are shifting from 'Traditional LNG' to 'Frontier LNG' by employing cutting-edge technology to realize value in an increasingly tighter gas market.

Floating LNG , FSRU, is a ground-breaking innovation based on the integration of two existing technologies: Traditional LNG Processing and Yard /Shipping construction.

INTRODUCTION


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A series of key players are already positioned to develop mid-scale 'stationary' facilities (Shell, Petrobras, GDF) or working on smaller scale 'nomad' facilities, more appropriate for smaller LNG players (Delek, Flex).

Due to the relatively unproven technology of FSRU we will focus on assessing the main risks of the FSRU (during completion and operation) and delivering the appropriate structures to mitigate risks to make them bankable on the Project Finance Market.

INTRODUCTION


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There are currently 11 FSRUs in operation and an additional 33 in various stages of construction. In Asia alone, we may soon see as many as 20 new FSRU projects.

The region’s regas demand is expected to grow by 7.5 billion cubic feet per day over the next five years, while an FSRU has an average regas capacity of 350 million cubic feet per day.There are four types of construction that fall under the FSRU category:

•Jetty based ship-to-ship transfer where vaporizers are installed onboard one ship, is perhaps the most conventional.•Buoy import systems involving subsea gas pipelines and LNG vaporization ships.•Island jetty based ship-to-ship transfer systems.•Converted LNG carriers with turret, subsea pipeline and vaporizer systems.

INTRODUCTION


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It is often said that the essential characteristic of project finance is the methodology of risk identification and subsequent risk allocation.

Before entering into a discussion of the financing-specific aspects of FSRU it is worthwhile reviewing the various component elements of the LNG chain form the perspective of risk analysis.

THE LNG CHAINGenerally lumped together for obvious reasons, oil and gas are very different in a number of critical respects, transportation being the most important.

Within the gas industry, the LNG business is in a class of its own due to the enormous investment in infrastructure involved and the resultant rigidity of the contractual relationships throughout the chain. For these reasons, it is almost improper to speak of a global LNG market, as the industry is more an accumulation of contractual monopolies.

KEY RISK ISSUES LNG FSRU


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GAS MARKET

In North America and, to a lesser extent, in Northern Europe, the gas business is a commodity trade with numerous buyers and sellers and gas put into the system will be taken for a price, which will fluctuate in accordance with supply and demand.

Elsewhere, gas tends to be produced only in response to a long-term gas offtake agreement.

KEY RISK ISSUES LNG FSRU


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1.Project Interdependency

2.Construction Risk• Delays in construction• Cost-Overruns• Performance below guaranteed parameters• Materials and Labor Cost and Availability

3. Operating Risk• Operator performance• Equipment failures• Increased operational costs• Labor Availability (e.g., seafarers)

RISK ALLOCATION AND CONTROL IN LNG FSRU

4.Upstream Supply Risk• Insufficient Reserves• Failure of Supply

5.Downstream Market Risk• Lack of Market Demand• Competing Fuels• Downstream Buyer Credit Risk• Natural Gas Pricing• Regulatory / Legal Regime


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6. Credit & Payment Risk• Risk of Non-Payment• LNG or Gas Offtaker Creditworthiness• Charterer Creditworthiness

7. Liquidity Risk• Cost-overruns• Invoice and cash-flow mismatches• Commissioning and ramp-up periods



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RISK ALLOCATION AND CONTROL IN LNG FSRU TERMINAL

8. Force Majeure• “Unforeseeable” risk• Acts of God• Inter-dependency of force majeure clauses throughout LNG Supply Chain• Force Majeure Clauses frequently not back-to-back

9. Political Risk• Governmental support for project• Permitting and Authorizations• Role of State in Supply, Transportation and Offtake


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10. Legal Risk• Breach of contract and non-performance• Enforceability• Contractual ambiguity or silence• Dispute resolution• Developed vs. Developing Regulatory Environment

11. General Economic Risk• LNG and Gas Demand and Supply• LNG Vessel Demand and Supply



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Market Risks for FSRU


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Financing LNG FSRU Terminals


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The emergence of a new type of LNG buyers has stressed the need to adapt the finance structure of this capital-extensive industry.

Developing markets such as India and China represent the largest potential for the LNG FSRU business while European nations, Japan, Korea and Taiwan’s consumption have stabilized for the last couple of years.

Contrasting with investments backed on state-to-state agreements among high investment grade major oil companies and equivalent rated utilities, new LNG FSRU investments rely on below investment grade entities to ensure sufficient long-term revenues to support a multi-billion dollar investment chain…. the non recourse financing

The issues raised by this situation are compounded by the approach being taken towards the financing of the different in-country components of the chain; the LNG port / import terminal / FSRU unit and storage on the one hand and the distribution network and power plants on the other hand, with the emphasis being placed on the private sector, IPPs and Clean Energy Development

Non Recourse Financing a Reality in LNG FSRU Terminals


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Key factors to success of non recourse financing

The creation of a strong regulatory framework as well as

The limitation of project risks allocated to the LNG Terminal Company.

Risk Mitigated Project Contract Structure

A well defined project risk allocation and controlmethodology

Preference to Project Tolling Structure, which transfers some of the LNG import business risks such as supply and market risk on foreign or third parties.


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Non recourse Financing a reality in LNG Import terminals


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Until the 1990s, the industry was largely financed on the back of state-to-state agreements among strong national counter-parties with the active involvement of high investment grade-rated major oil companies and equivalently rated utilities.

The projects implemented over the past decade have seen an increasing reliance on limited recourse finance, but with high or medium investment grade countries on either end of the chain and very strong industry players managing the process.

Significantly, the only large project during the period not fitting that approach or benefiting from structural supports to achieve that result, Nigeria NLG, was developed from sponsors’ own equity funds.

Even those that were implemented using project finance for the most part involved a critical combination of host government’s supports and undertakings on the supply and offtake ends and the integration into the overall financing of multilateral agency or export agency credits.

Non Recourse Financing Reality in FSRU


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Evolving Project Contract Structure helps Risk Management

Merchant


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TOLLING STRUCTURE


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GAIL PETRONET CONTRACT STRUCTURE


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Evolving Project insurance Structure helps Risk Management


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Risk management FSRU himadri banerji

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