Boom to Bust?
LNG tank under construction at the Isle of Grain
The LNG project track record has been exemplary; no project has come remotely close to defaulting and,
with steeply rising LNG prices, the profitability of existing projects has soared, generating cash flows
which covered debt repayments several times over. So as time progressed the banks competed to win
LNG financing and their margins declined. At the same time, banks became increasingly confident in
their assessment of LNG project risk, with a combination of proven technology, strong project sponsors
and cash flows underwritten by highly creditworthy buyers providing an attractive risk mitigation
package. The observation that LNG projects continue to produce their cashflows, even in countries such
as Algeria and Nigeria which have – to say the least – a turbulent business environment, meant that
country risk was not seen as a major factor of. For example, Yemen LNG secured a total of $2.8 billion
in financing from a combination commercial banks and Japanese, Korean and French credit agencies.
Similarly Peru LNG secured $800 million in financing from the Inter-American Development Bank.
Global downturn and LNG financing
It is early days in this economic downturn and there are a variety of paths LNG industry financing could
take in reaction to the crisis. Discussions with NOCs, IOCs and banks reveal a wide diversity of views on
the possible consequences of reduced liquidity in lending new funds. Likewise, there seem to be several
possible directions that project sponsors faced with a changing finance climate may take. The first point
to make is that LNG projects have shown themselves to be very solid investments in the past, and the
degree of risk in lending to an LNG project is nowhere near that associated with the notorious CDOs
(Collateralised Debt Obligations
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) which have proved to be the nemesis of many banks. Therefore, LNG
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Collateralised Debt Obligations are a way of packaging debt which allows the lenders of the debt to on-sell the debt,
thus raising funds to conclude other loans. The circulation of large volumes of CDOs based on US sub-prime mortgage
lending, and the subsequent loss of confidence in the assessment of the risks of these CDOs, was one
of the main factors triggering the credit crunch in the US.
LNG Business Review - OCTOBER 2008 - WWW.LNGBUSINESSREVIEW.COM 
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