presented by robin tayal impact of spot trading on project finance
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Presented ByRobin Tayal
Impact of Spot Trading on Project Finance
Contents
1 Introduction
2 Development of LNG Industry
3 LNG Spot Trading
2
4 Impact of Spot Trading on Project Finance
5 Conclusion
Introduction• Natural Gas has emerged as one of the
primary sources of energy.• It is environmentally clean, highly efficient,
and abundant in nature• Natural Gas Consumption has increased
rapidly since last decade, consumption grew by approximately 3.1% from 2006 to 2007
• Preferred fuel in electricity generation industry
• Heavy investments in natural gas industry owing to the entrance of new players
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Contents
1 Introduction
2 Development of LNG Industry
3 What is LNG Spot Trading
4
4 Impact of Spot Trading on Project Finance
5 Conclusion
• International Natural gas markets have gone through substantial institutional and economic change
• The emergence of LNG industry has provided a new way of transporting gas to the new markets
• LNG project is a chain of investments poised for collective performance but prone to total failure by the under functioning of the most insignificant link
• Long Term Sale Agreements with take or pay clause, contracts of exclusivity and destination restriction clauses are the salient features of LNG industry
• Though capital intensive, has developed rapidly.
Development of LNG Industry
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LNG Industry Overview and TrendsLiquefaction Plant Shipping Regasification Terminal
• Most Capital Intensive Link ( 58% of the Project Cost)
• High Costs due to remote locations, strict design and safety standards, and use of cryogenic material
• Big Plants so as to exploit economies of scale
• Significant Reduction in construction costs (about 35% - 50%)
• Emergence of new players
• Increase in size
TRENDS
• LNG vessels committed to specific LNG Projects
• Project Financed along with the whole Project
• Charter rates offering guaranteed cash flows
TRENDS
• Significant Reduction in costs (about 60%)
• Increase in size and players• Speculative ship building• Increase in number of ship
building and ship routes• Better understanding of
Markets
• Accounts for 14% of the total Project Cost
• Costs depends on Size, Annual Temperature, Marine Conditions
TRENDS
• Significant Reduction in costs
• Increase in size and players• Increased interests of
more and more countries
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Rise of LNG
Growth in Electricity Markets
• Rapid Increase in Electricity demand
• Investments in CCGT which uses liquid fuel
• Re-structuring of Electricity Markets
Cost Reduction in LNG Chain
• Significant cost reduction in LNG Chain
• Investments in LNG Industry has become more attractive
Demand
• Large number of countries have invested in LNG Markets either to diversify, secure its supply of sources or due to sudden increase in demand
LNG Industry has grown by leaps and bounds since 1990
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Rise of LNG
Environmental Concerns
• Natural Gas emits lesser CO2 & no SO2 when compared to other fuels
• With Environmental issues being the forefront in the energy policies, natural gas has become the preferred fuel
Ship Building
• Increased ship construction activities
• More number of ship routes
• Increase competition
• Cost Reduction in ship construction has reduced the cost of LNG Plant.
Price Indexation
• Price being linked to gas rather than oil
• Price differential amongst the different markets decreasing
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LNG Industry and Project Finance
- Main concern is security of
Supply- Inter Creditor
Arrangements to align the
objectives of the parties- Sale
arrangements of by product
such as condensate
- SPAs can either be “depletion
sale arrangements
“or on portfolio basis
- Construction Risk poses
greatest risk to the lenders
- Fixed price turnkey
contract with LD’s
- Review of construction and finance schedule
of ship - Political and
country risks are examined
- Link is important
because delivery of ship might
occur in radically different
circumstances
- The focus of recent attention as the potential market of LNG
emerges - Lenders want
SPA’s to be watertight
- Take or pay , destination
clause with fixed price formulas
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Upstream Midstream Shipping Offtake
Contents
1 Introduction
2 Development of LNG Industry
3 LNG Spot Trading
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4 Impact of Spot Trading on Project Finance
5 Conclusion
• LNG Spot Trade is defined as “ one or less than one year period contract trading”
• LNG Spot Trading though a recent phenomenon has grown substantially in last decade
• It accounts for around 12% of the global LNG Trade
• US and UK were the early entrants in LNG spot trading
• Japan and Korea though the late entrants have emerged as the biggest spot traders
LNG Spot Trading
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LNG Spot Trading
Emergence of a spot cargoes and diversions
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• Liberalization and Restructuring of Energy Markets• Increased Competition• Speculative Tanker building• Innovative Dispute Resolution Mechanisms• Innovative Project Finance Mechanisms• Cost Reduction• Flexibility in contracts• Higher Margins• Acceptability of LNG Spot Trading Risk
Factors driving the Growth
• Project Finance is based on the fundamental that the debt shall be recovered from the isolated, identifiable and secured cash flows
• Risk shared through contractual obligations between the project participants
• Rigid clauses like “ Take or Pay”, destination clause and exclusivity clause guarantees the return on investments
• Fundamentals of Project Finance shaken by increase in LNG Spot Trading as it is difficult to guarantee steady and consistent cash flow
Impact of Spot Trading on Project Finance
Risks due to Spot Trading• Volume Risk
• Commissioning of large number of Projects with the part of the capacity reserved for the spot sale, resulting in the possibility of not being able to sell the untied part.
• Price Risk • “ S-curve “ Mechanism used to protect the participants against
extreme price movements.• With prices linked to the competing gas , no such mechanism• Flexible contracts with no destination clause allows the movement
of cargoes to more price advantageous markets resulting in the uncertainty of cash flows
• Spot Trading has aggravated risk as gas price fluctuate based on gas supply and demand
Impact of Spot Trading on Project Finance
Contents
1 Introduction
2 Development of LNG Industry
3 LNG Spot Trading
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4 Impact of Spot Trading on Project Finance
5 Conclusion
• LNG Spot Trading is a way to go• It has grown from 0% in 1990 to more than
13% in 2007 and the trend is indicating an upward direction
• Large number of countries are participating in the spot trading
• According to an estimate 20%-25% of the tanker fleet is working on flexible basis
• LNG Spot trading risks are well understood
Conclusion
• Finance fraternity needs to adapt to the changes
• Need to accommodate the participants requirements of more flexibility
• An approach of portfolio investment with appropriate exposure in both kinds of projects could be handy
• There is no fixed formula.• Each project should be handled on a case to
case basis
Conclusion
Thank You
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