LNG Finance – will lenders accommodate the changing environment?
Since the 1980s the growth of the LNG business has been underpinned by third party finance, predominantly from international banks, under limited recourse project finance. Financings were also often backed by political risk cover from Export Credit Agencies. Under these arrangements the project itself borrowed money to fund its development enabling financially weaker shareholders to participate in the project. Key to the funding was the existence of reliable revenues from the project secured though long-term offtake contracts with creditworthy buyers. The LNG business is changing as it transitions from its historical structure to a more merchant structure where buyers seek greater flexibility of volumes and price, often linked to hub prices, and in many cases shorter-term contracts. With an expected 70-100 mtpa new LNG FIDs over the coming years, the question is, are lenders willing to loan funds based on these more flexible terms?
Robin Baker has authored this, his first paper, with the OIES, based on over 35 years experience in the banking sector at Chase Manhattan and Société Générale. He examines, from a finance perspective, the approach of the various lending markets to the sector and the challenges faced in raising debt finance for major future LNG projects.