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FINANCING LNG PROJECTS. Contracting for and financing LNG assets April 2006.

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Presentation on theme: "FINANCING LNG PROJECTS. Contracting for and financing LNG assets April 2006."— Presentation transcript:


2 Contracting for and financing LNG assets April 2006

3  Gas extraction  Transmission  Liquefaction  Storage  Transport  Re-gasification  Distribution The “LNG chain”

4  Gas Suppliers  LNG purchasers  Governments  Trading houses  Ship owners  Terminal owners/operators Who are the investors?

5 Investment might cover:  Interest in production sharing arrangements  Liquefaction/re-gasification plant assets  Operation of liquefaction/re-gasification plant assets  Interest in LNG tonnage LNG Purchasers

6 Government entities  Export phase participation  Financial strength Trading Companies  Play a major role in Asian trades  Facilitate sale by identifying markets and negotiating contracts  Often own a small piece of a project Local entities  Depend on local political leverage  Might seek a share ownership of LNG carrier, participation in production sharing contract or license  Major supplier or contractor Other Investors

7  Commercial banks  Export Credit Agencies  Capital markets  Private equity  Inter-creditor issues Financing issues

8 Type of financing driven by:  Experience and creditworthiness of sponsors  Type and location of terminal facilities  Condition of capital markets Project company structure  Works for both debt and equity investors  Separation of assets/liabilities from those of sponsors’  Is flexible, allowing for different levels of participation and risk exposure Financing issues (continued)

9  Parent guarantees and security  Restrictions on use of facilities – negative covenants/negative pledge provisions  Take or pay provisions  Need to disclose proprietary information in connection with financing  Potential liability to creditors for misrepresentation in connection with such disclosure  Timing – dovetailing readiness of project documentation Financing issues (continued)

10 Key Documents:  Gas Supply Contract  LNG Sales Contract  EPC Contracts  Shipping documentation  Shareholder Agreements  Technical Services Agreements  LNG Project Agreement  Letters of Intent, Heads of Agreement, MOUs Documentation

11  Quantities  Transportation  Price  Scheduling  Delay Provisions  Force Majeure  Termination Gas Supply Contracts

12 Same list as for Gas Supply, but also:  Transportation – ex-ship or FOB?  Short/long term  Excess quantities LNG Sales Contracts

13  A superior force  An event which can neither be anticipated nor controlled  Consequences could not have been avoided through the exercise of due care  Allocation of force majeure risk as between seller and buyer  Incidence of force majeure will suspend affected party’s performance obligations Force Majeure – some pointers

14  Address risk and harmonize in project documents  Will the clause cover LNG buyer’s customers?  Does LNG buyer have to continue to pay seller’s transportation costs during a force majeure event preventing buyer from taking LNG?  Can force majeure be affected by negligence?  Unexpected depletion in recoverable reserves: force majeure event or breach of seller’s reserves warranty  Termination right if force majeure is lengthy  Will delay in construction of the facilities or the vessel(s) constitute force majeure? Force Majeure – principal discussion points

15  Allocation of remaining LNG supplies between buyer under sales contract and other purchasers of LNG from LNG plant  Allocation of LNG purchases between seller under sales contract and other exporters of LNG to buyer’s receiving facility  Future obligations of parties to sell or purchase quantities of LNG that could not be timely delivered/received due to force majeure  Payments made during disputed force majeure period to be held in escrow pending determination of validity of a force majeure claim  Vessels to be covered by force majeure clauses where there is loss or damage while carrying LNG in separate trade Force Majeure – principal discussion points (continued)

16  Important issues – integral to the success of the entire project  Ex-ship versus FoB  Sales contract obligations to converge with availability of transportation  Availability and cost of LNG carriers in world market not dedicated to a specific LNG trade  Potential to utilise short term excess shipping capacity LNG shipping issues

17  Method of calculation of LNG transportation fee  Cost allocation in case of carrier or terminal upgrading needs  Demurrage/excess boil-off costs if seller’s LNG carrier is not timely berthed and unloaded  Seller’s liabilities in contract where there would be no liability in tort (under local law) LNG shipping issues – ex-ship

18  Liability regime governing buyer’s use of loading facilities  Financial guarantees from buyer or vessel owners  Allocation of cost for upgrading of tanker or loading/receiving terminal to ensure compatibility  Seller to pay demurrage/excess boil-off if it does not timely berth and load buyer’s LNG tanker LNG shipping issues – FoB issues

19  Movement from fixed price, long term supply contract to market based, flexible framework  Delivery schedules – greater flexibility  LNG spot market  The above current trends create a stronger negotiating position for LNG importers  More uncertainty in developing additional LNG infrastructure  Impact on ability to project finance an LNG project Current trends

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