The Financing of Gas Projects Enrico Grassi Principal Banker, Natural Resources EBRD

The Financing of Gas ProjectsThe Financing of Gas ProjectsEnrico GrassiEnrico Grassi

Principal Banker, Natural Resources Principal Banker, Natural Resources EBRDEBRD

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EBRD – Who are we?EBRD – Who are we?

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6

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'98 '99 '00 '01 '02 '03

International financial institution, owned by 60 countries and two inter-governmental institutions

Promotes transition to market-based economies in 27 countries from central Europe to central Asia

Capital base of € 20 billion

Cumulative commitments € 21.7 billion

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EBRD facilitiesEBRD facilities

LoansGuarantees Equity

All risk guarantees

Specific risk guarantees(e.g. political)

Commodity-backed instruments

Trade facilitation programme

Non/partial recourse to sponsors

Project specific

Hard/local currency

Medium and long term

Floating/fixed rates

New equity

Privatisation

Quasi-equity

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EBRD Natural Resources portfolioEBRD Natural Resources portfolio

€1.7 billion committed to €10 billion projects

Future portfolio will be more diversified:

– 60% oil / 40% gas

– 20% pipeline and downstream projects

– significant growth in “regional” projects involving several countries

11% 6%

69%

14%

Oil and Gas Extraction

Metal Ore

Mining

Pipeline Transportation

Petroleum Refineries

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The Financing Gas/LNG ProjectsThe Financing Gas/LNG Projects

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Why the world go for Natural Gas?Why the world go for Natural Gas?

Improvements in combined cycle gas turbine power generation drove increase in gas consumption

Environmental concerns

Concerns regarding stable oil supplies

Reduction in investment requested along the whole chain

Big gas reserves in the oil companies books

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How to bring gas to the market How to bring gas to the market which is far?which is far?

The answer is LNGThe answer is LNG

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What are the challenges to the market players What are the challenges to the market players who want to participate in LNG rush? (1)who want to participate in LNG rush? (1)

LNG projects require huge investments and have long payoff periods:

today prices are high but what may happen if they collapse?

High gas prices is good news for the oil companies not for consumers:

will the market reconsider coal and re-evaluate nuclear power?

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What are the challenges to the market players What are the challenges to the market players who want to participate in LNG rush? (2)who want to participate in LNG rush? (2)

LNG prices have been historically indexed to oil but more and more starting being priced against hub gas prices:

how to understand the trend of “new” pricing?

Market see many greenfield projects:

to which extent the financial world will accept the risk and on which terms?

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How LNG market has changed in the How LNG market has changed in the recent years?recent years?

Contracts are characterised today by flexibility in:

destination

volumes

duration

Development of the spot market

Shipping arrangements are moving from DES to FOB

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Why oil companies look for MLA/ECAs Why oil companies look for MLA/ECAs financing?financing?

To share the risk and to receive:

Political cover

Longer maturities

Flexible repayment profile

Leadership in large scale financing

Knowledge of and experience in gas/LNG projects

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What are the classic challenges in What are the classic challenges in financing gas and LNG projects? (1)financing gas and LNG projects? (1)

Construction / Completion Risk

– contractual structure (delays, cost over-runs, etc.)

Operational Risk

– technological integration and experience / viability

Utilisation / Supply Risk

– type of throughput arrangement

– fundamentals (Market/Competition)

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What are the classic challenges in What are the classic challenges in financing gas and LNG projects? (2)financing gas and LNG projects? (2)

Competition / Market

– effect of oil price (linked to gas and oil products)

– regional supply / demand

– impact on tariff

Political & Regulatory Risks

– regulatory intervention (tariffs & export volumes)

– political turmoil / disputes / violence / nationalisation

– discriminatory taxation

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Risks and their mitigationRisks and their mitigation

Economic & financial

– minimised through financial package and due diligence

Technical risks

– reliance on strong and technically competent sponsor

Environmental risks

– sponsor commitment to appropriate guidelines

Political risks

– minimised through involvement of IFI’s and ECA’s

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Available Financing Sources Available Financing Sources

Equity– Strategic investors (oil and gas majors)

– Investment funds (limited scope)

– IFI’s (EBRD, IFC) Debt Financing

– IFI's (EBRD, IFC) (own funds)

– EIB (European portion)

– Commercial banks (participating in IFI B Loans)

– ECAs (Hermes, Coface, JBIC, Exim…) Capital Markets

– Equity (IPO's)

– Bonds

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Debt as Financing Source Debt as Financing Source

Loans

– Tailor made instruments with negotiated conditions

– Bank lenders familiar with different structures

Bonds

– Relatively rapid issuance process

– No covenants for straight instruments

– Tradable instruments

– But lack of flexibility

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Each LNG project consists of a continuous chain of activities linking the gas production to the gas user

Production Oil & Gas field development and

pipelines

Regasification LNG receiving terminal

Shipping LNG tankers

Liquefaction LNG plant and oil & LNG export

terminal

This Project

Sakhalin II Project (1 of 3)Sakhalin II Project (1 of 3)

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Supervisory

Board

Supervisory

Board

100%

25%

Mitsui & Co. LtdMitsui & Co. Ltd

Mitsui Sakhalin Holdings B.V.


20%

100%

Mitsubishi Corp.Mitsubishi Corp.

Diamond GasSakhalin B.V.


55%

100%

Shell Petroleum NVShell Petroleum NV

Shell SakhalinHoldings B.V.


Shareholders Agreement


Production Sharing

Agreement (1994)

Production Sharing

Agreement (1994)

Russian Federation

Sakhalin Oblast

Russian Federation

Sakhalin Oblast

Sakhalin Energy Investment Company Ltd.Sakhalin Energy Investment Company Ltd.Supervisory

Board

Supervisory

Board

100%

25%

Mitsui & Co. LtdMitsui & Co. Ltd



20%

100%

Mitsubishi Corp.Mitsubishi Corp.



55%

100%

Shell Petroleum NVShell Petroleum NV





Production Sharing

Agreement (1994)

Production Sharing

Agreement (1994)

Russian Federation

Sakhalin Oblast

Russian Federation

Sakhalin Oblast

Sakhalin Energy Investment Company Ltd.Sakhalin Energy Investment Company Ltd.

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Poronaysk

Nogliki

Piltun

Okha

Nikolayevsk-na-Amure

Aleksandrovsk-Sakhalinskiy

Yuzhno-Sakhalinsk

SakhalinIsland

Russia

Katangli

DeKastri NyshDetail 2

Detail 1

Boatasyn

Gas Compression(BS#2)

172 km Piltun shoreline to OPF

636 km48” Gas Line

Oil Booster(BS#2)

636 km24” Oil Line

Detail 3

20” Gas Line

LNG Tanker

LNG Plant Oil Export Terminal

36”Loading Line

5.5 km

TLU

Domestic SupplyOff-Take

Detail 3

24” Liquid Line

48” Gas Line

636 km OPF

to OET

Detail 1

20” Oil Line

41 km PA-B to shore

17.5 km PA-A to shore

Boatasyn

PA-B

PA-A14” Oil Line

14” Gas Line

Onshore Tie-in point with pig traps for all pipelines

20” Oil line

172 km onshoreto OPF

Detail 2

Nysh

4.5” glycol return

LUN-A

OPF

BS#1

2 x 30” multiphase

20” Gas line

24” Oil

48” GasPoronaysk

Nogliki

Piltun

Okha



Yuzhno-Sakhalinsk

SakhalinIsland

Russia

Katangli


Detail 1

Boatasyn




Oil Booster(BS#2)


Detail 3

Poronaysk

Nogliki

Piltun

Okha



Yuzhno-Sakhalinsk

SakhalinIsland

Russia

Katangli


Detail 1

Boatasyn




Oil Booster(BS#2)


Detail 3

20” Gas Line

LNG Tanker

LNG Plant Oil Export Terminal

36”Loading Line

5.5 km

TLU

Domestic SupplyOff-Take

Detail 3

24” Liquid Line

48” Gas Line

636 km OPF

to OET

Detail 1

20” Oil Line

41 km PA-B to shore


Boatasyn

PA-B

PA-A14” Oil Line

14” Gas Line


Detail 1

20” Oil Line

41 km PA-B to shore


Boatasyn

PA-B

PA-A14” Oil Line

14” Gas Line


20” Oil line

172 km onshoreto OPF

Detail 2

Nysh

4.5” glycol return

LUN-A

OPF

BS#1

2 x 30” multiphase

20” Gas line

24” Oil

48” Gas

Oil & Gas pipelines stretching the length

of the island

Additional offshore platform

Development of Lunskoye gas field through offshore

platform

Construction of LNG plant and oil export

terminal

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Shah Deniz Project – Overview (1 of 4)Shah Deniz Project – Overview (1 of 4)

Reserves: proven and probable gas-in-place of approximately 31 trillion cubic feet (tcf) – world class reserves; likelihood of an additional 22 tcf

Project: 4-stage development of the Shah Deniz gas and condensate field with Stage 1 cost of USD 2.3 billion

Local participation: State Oil Company of Azerbaijan Republic (SOCAR) also holds a 10% interest in this project (through AzSD: EBRD will part-finance their cash calls)

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South Caucasus Pipeline – Overview South Caucasus Pipeline – Overview (2 of 4)(2 of 4)

Pipeline route: a 690 km gas pipeline starting at the Sangachal Terminal, traversing Azerbaijan and Georgia and connecting with the BOTAS domestic gas distribution system at the Georgian-Turkish border

Construction & timing: SCP’s Right of Way runs parallel to BTC and construction of SCP will occur concurrently with that of BTC

Capacity & cost: a peak capacity of over 20 billion cubic feet (bcf) per annum and will cost over USD 1 billion

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South Caucasus Pipeline – Route (3 of 4)South Caucasus Pipeline – Route (3 of 4)

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SD and SCP Project – Sponsors (4 of 4)SD and SCP Project – Sponsors (4 of 4)

BP (25.5%)

Statoil (25.5%)

TotalFinaElf (10%)

SOCAR (10%)

NICO (10%)

TPAO (9%)

Lukoil (10%)

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Contact DetailsContact Details

Enrico G. GrassiPrincipal BankerNatural Resources TeamEuropean Bank for Reconstruction and Development1 Exchange SquareLondon, EC2A 2JN

Tel. 44 (0)20 7338 6179Fax 44 (0)20 7338 6101Email: [email protected]

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More information: www.ebrd.comMore information: www.ebrd.com

Documents

The Financing of Gas Projects Enrico Grassi Principal Banker, Natural Resources EBRD