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

3

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

5

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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