Boom to Bust?
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Lenders will look less favourably on technological innovation than in the past. The experience of the
last few years has indicated that a “cookie-cutter” approach to constructing LNG plants, as seen in the
relative ease with which the very similar trains at Atlantic LNG, Egyptian LNG and Equatorial Guinea LNG
were started up, is much less risky than proving up new technology. The troubles of the Norwegian
Snohvit project will have underlined the risks of new technology. These lessons will be taken to heart by
lenders and the workability of relatively unproven technology in floating LNG plants or untested small-
scale technology will be questioned. Aversion to technical risk could also be an issue for the proposed
Coal Bed Methane (CBM) supplied LNG projects in Australia, where financiers will have to be comfortable
with a very different source of gas supply compared with conventional LNG projects, raising new
technical issues such as how CBM reserves are to be assessed.
Changing finance structures
It is not only the conditions of finance which may change. The respective roles of commercial banks,
Export Credit Agencies (ECAs) and the project sponsors may also change and new actors such as
Sovereign Wealth Funds (SWFs) may come into the picture.
One key change in financing future LNG projects could be increased funding from Export Credit Agencies
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(ECAs). The ECAs have worked at establishing themselves as credible partners in the project finance
world over the last ten years, and the key role of JBIC in the recently-closed tranche of financing for
the 9.6 mtpa Sakhalin Energy project is an example of this role. As debt financing becomes more
competitive and more expensive, the structure of project financing may move more to the group or club
approach or multi source funding rather than the underwriting approach. Under the club approach a lead
arranger puts together a group or consortium of banks who lend directly to the project on what is called
a “final hold basis” – in other words, banks in the consortium finance the project. In this context more
involvement will be seen from Export Credit Agencies (ECAs) in raising capital for LNG projects than in
the past, but ECAs are expected to use more stringent criteria than in the past..
But perhaps the greatest change the financial crisis could bring to LNG financing is that there will be a
lower overall reliance on project financing. Equity finance has always been an option – indeed often a
preference – for the IOC majors such as Shell, BP and Total. Often they have taken the project finance
route essentially because an NOC or other partners could not provide its own share of the equity. But
with NOCs’ coffers swelling in the wake of record oil prices, this relationship may no longer hold. A prime
example of the enhanced ability of NOCs to finance is provided by the decision last month of Algeria’s
Sonatrach to move ahead with on-balance sheet finance of the new 4.7 mtpa train at Arzew. With high
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ECAs are institutions set up to provide credit for exporters of capital goods and services. Some ECAs as well as
offering guarantees for commercial bank loans, also participate as lenders – a role played in particular in the LNG
context by US Exim, Japan Bank for International Cooperation (JBIC), and Korean Exim.
LNG Business Review - OCTOBER 2008 - WWW.LNGBUSINESSREVIEW.COM 
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