Considerations and Strategies for Financing Integrated LNG-to-Power Projects

Abstract

The role of liquefied natural gas (LNG) in the global energy system is increasing. In 2000, 11 countries were importing LNG. By 2017, that number had risen to 40 (International Gas Union, 2017). In the Middle East alone, LNG imports have increased by more than 380% over the last three years (S&P Global Platts, 2017). This trend is expected to continue as countries throughout the region, along with others across Asia, Africa, and South America seek to capitalize on cleaner burning and abundant natural gas supplies worldwide. With increasing population growth and deficits in power generation capacity in many developing parts of the globe, the LNG-to-power concept has emerged as an important driver of future sustainability. However, the costs involved in transitioning power projects to make use of LNG are enormous. One significant challenge that these projects face is the co-development and potential co-financing of the LNG plant, along with supply, distribution and underlying power infrastructure. LNG-to-power projects can also potentially suffer from "project-on-project" risk due to the interdependency of the construction and commissioning of facilities and infrastructure. Overall, the ability to secure financing from a variety of debt and equity sources throughout the project lifecycle is critical to success. Innovative project financing structures allow for the generation of large debt capacities, while passing project risk to the lenders. In such cases, sponsors are able to assume limited recourse after project start-up and in many cases, enjoy flexibility of loan repayment, thus contributing to overall project economics. Co-financing also alleviates investment risk and helps raise capital at a relatively low cost, which benefits sponsors and investors alike. Financing solutions must be tailored to meet the needs of the project, with risk and returns being borne by the sponsor and different classes of investors (i.e., equity holders, debt providers, quasi-equity investors, etc.). This paper will discuss the many challenges that must be addressed in order to bring LNG-to-power projects to life, with a particular focus on the unique risk elements that are presented to lenders and investors throughout development.