Boom to Bust?
Boom to Bust?
Is future LNG project financing in for a
stormy ride?
This first issue of LNG Business Review goes to press at a time of a deepening world financial crisis
whose final ramifications are impossible to predict. But whatever the fall-out for global economies and
markets, the immediate impact is on the banking and finance sector, raising concerns that financing
difficulties may put a further brake on the rate of LNG capacity growth, adding in turn to the tightness of
global supply.
We assesse the impact the crisis may have on financing for new LNG projects. While we recognise that
most financing is thin on the ground at the moment, the global financial crisis is not all bad news for
LNG. The very drivers for plant cost rises of recent years are the ones which reverse as economic signals
reverse and - solid assets are now attractive financing targets rather than the unfashionable exotic
products bankers are now shunning.
Following the bumper year of 2005, when final investment decision (FID) was taken on some 50 mtpa of
new LNG capacity, the rate of approval of new projects has slowed considerably. In the last three years,
only five LNG supply projects took their final investment decision (FID), and many planned projects have
seen their schedules for investment decision slip substantially. This slow-down in investment decisions
has not, however, really been due to financing difficulties – various factors can be cited, such as gas
supply issues, increasingly assertive host governments, lack of partner alignment and, particularly,
escalating construction costs.
Indeed, over recent years banks have been increasingly eager to lend to LNG projects, with a consequent
squeezing of lending margins
1
– which have fallen from around 150 basis points
2
in the mid-1990s to
55-75 basis points in more recent financings. In this favourable climate for raising debt, LNG projects
were able to refinance and thus reduce their cost of debt: the 2006 refinancing of Qalhat LNG being an
example of this trend. But now the world financial crisis, which has seen some of the principal actors
in LNG finance tottering – most spectacularly Lehman Brothers, which played a key role in the bond
3

financing of the RasGas expansion – seems set to put an end to this “golden age” of LNG financing.
LNG project financing
4
took off during the mid-1990s. This expansion coincided with falling LNG
development costs relative to sales prices and the global expansion of credit. The main reason for project
financing was initially to facilitate the participation of consortium members who did not have the cash
resources to inject their share of the required funds as equity – for example, state-owned companies
lacking strong balance sheets. Thereafter banks became more comfortable with the technological and
market risk and were therefore happier to lend, especially when the high creditworthiness of traditional
LNG buyers such as the major Japanese utilities – but more recently the IOC majors themselves – was
taken into account.
1
The lending margin is the interest premium the banks charge over LIBOR (the London Inter-Bank Offered Rate,
which is the rate at which banks lend to each other in the London wholesale money market, and which is often used
as a marker rate for financial instruments).
2
A basis point is 1/00th of 1%: i.e. 100 basis points = 1%
3
Bond financing is a method of financing whereby companies raise finance by selling bonds which have a certain face
value and a set interest rate. The bonds are then traded in the markets at a price which will reflect the market’s view
of the risk of non-repayment.
4
Project finance is a means of raising debt to finance a project whereby the project company itself (rather than its
shareholders) borrows the money. The security for the loan is the assets and cash flow of the project company and,
in the case of default, the lenders cannot generally recover the money from the shareholders (for this reason project
finance is sometimes called “limited recourse” finance).
LNG Business Review - OCTOBER 2008 - WWW.LNGBUSINESSREVIEW.COM 
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