Due diligence offers banks peace of mind
The easiest way for a bank to ensure that a company investing in an LNG project is able to repay credit, is to perform a due diligence investigation into the feasibility of a company’s role in the project.
As technological solutions become ever more complex in the field of offshore LNG, project financiers require third party providers of due diligence services to possess both in depth financial and technical know-how.
In the early 1960s when the trade in LNG became significant, plants were located in stranded areas and were not served by pipe-lines, which made the cost of treating and transporting LNG enormous. Constructing a receiving terminal also cost billions of dollars, meaning that only the biggest oil and gas majors could afford to take part. But at the turn of this century an influx of smaller companies began to pop up, many of whom had profited from the development of new technologies that simultaneously helped to reduce the costs involved in LNG production and transportation.
So gone are the days when the LNG business was regarded as a game for players with financial clout equal to that of developing nations. But the more players the industry attracts coupled with increased technical innovation, the greater the risk for a financial institution offering the credit to finance a project.
The easiest way for a bank to ensure that a company investing in an LNG project is able to repay credit, is to perform a due diligence investigation into the feasibility of a company’s role in the project. Such an exercise should, in addition to technical issues, cover a thorough review of elements such as project management, execution strategy, yard, suppliers and sub-contractors.
“When it comes to straightforward ships, such as tankers, financial due diligence is the most important element for us, there isn’t necessarily such a strong emphasis on technical information regarding the vessel,” explains Bard Veldhuizen, head of the Ship Finance department at Lloyds TSB in England.
“LNG vessels are a different story however, as the ships vary so widely in terms of design, with varying propulsion systems for example, or a ship may be fit for one kind of terminal, but not another. So, due diligence for LNG tends to be a lot more technical. And then on the floating terminal side of the LNG business, the technology has to be fully understood during the project finance assessment.
“What we do here at Lloyds TSB is finance a whole range of shipping assets, but one of the biggest mistakes a shipping bank can make is to pretend that they are a connoisseur of all the technological assets, because ultimately we are financial experts. We do have a dedicated Equipment Management Team, but even they would admit that they don’t have the technical background to assess all of the transactions and projects. So this is why we rely on companies such as DNV to assist us in executing due diligence for LNG-related projects.”
Calculating risk
As cutting edge technology penetrates the LNG value chain, then banks are required to be even more aware of project-related risks:
“Technical due diligence also enables us to calculate the risks relating to a vessel that has been re-delivered from its contract. We need to know, what’s the redeployment capability of such a specialised vessel? Is it such a bespoke vessel that it can only be used for this particular project? If this is the case then from a financial point of view it is necessary to structure finance accordingly, which also applies if the vessel actually has a good redeployment capability,” according to Mr Veldhuizen.
He continues: “From a due diligence perspective, many of the transportation solutions within LNG are quite flexible.
So if the re-gasification is planned on board that means that you actually have very quick access to the market, and thus high returns in the short term. But most
of these projects tend to be temporary solutions, as the more sustainable projects look to build a permanent onshore terminal. So we’d very much look at the re-deployment of these assets in the case
of a re-gasification vessel.”
Green elements
LNG is widely perceived as a greener source of energy, due to its limited CO2 emissions when burned in a gas-fired power station, which is also a driver for it becoming a more important element of the energy mix for a growing number of nations.
“From our perspective the green element associated with LNG is a driver. My predecessor, for example, just went on to become the head of sustainable energy within the bank, which just goes to show that within shipping LNG is high on the agenda.
“From a market driver perspective, the fact that LNG is more environmentally friendly is an important factor. Also, the high price of oil has caused a growing number of countries to rethink their energy strategies, to avoid dependence on oil. So there are a lot more import terminals being built,” says Mr Veldhuizen.
Global slowdown
The financial turmoil that has hit markets around the world has raised uncertainty in the majority of sectors that make up the global economy. On a positive note, the EU leaders came to the conclusion that they will continue to pursue their climate change goals despite the economic downturn. So the LNG market looks set to grow in the long term, although in the short term it may suffer, as Mr Veldhuizen explains:
“The global economic turndown will slow down some of the projects simply because there is not enough money around. I think that has to be sorted out over the coming months, perhaps even the next year.
“There will definitely be more rules imposed upon the export credit banks as a result of the injection of capital that many of us have received from our respective governments. So it’s the export credit banks that will take on the huge majority of the financing of upcoming projects, especially within the onshore business,”
he says, and continues:
“It will be interesting to see how many LNG ships we will need in the coming years, as coincidently a lot of the LNG import terminals have been quite delayed. So a lot of the ships that have been specifically built for that trade have been delivered. So the ships are there, the LNG production facilities are there, and these ships are being used to basically service the spot market right now. And once these import terminals are up and running, then these ships will be used for what they are built for. But right now I can’t see anyone going out ordering new LNG ships on spec,” Mr Veldhuizen warns.
But there is still plenty of hope on the horizon for LNG: “Although the oil price has been going down I can’t see it going down forever, it is very much tied to the dollar. So as the dollar weakens, the price of oil goes up, it’s one of the balancing acts you always see. And, if that happens, it will make stranded gas a promising option,” concludes Mr Veldhuizen.