Total SE’s announcement last month that it had landed nearly $15 billion in funding for a Mozambique liquefied natural gas (LNG) project came as a surprise given the economic impact of Covid-19, but financing massive export terminals is a complex and lengthy affair even in the best of times.
The global gas supply glut and the coronavirus have combined to complicate the sanctioning and funding of newbuild LNG projects and expansions as financial institutions have been squeezed in the down economy. As a result, many projects have been delayed or cancelled this year.
However, Total’s ability to secure $14.9 billion of financing for what would be Africa’s first onshore LNG development in the midst of a virus outbreak offers insight into how projects are generally sponsored. The funding includes direct and covered loans from eight export credit agencies (ECA), 19 commercial bank facilities and a loan from the African Development Bank.
While large export projects often have been financed entirely by their sponsors, the funding often is a staged process. Given the large amounts of required funding, there’s typically more than one sponsor and various sources.
Mozambique LNG, a two-train liquefaction plant with total capacity of 13.1 million metric tons/year, represents a post-sanctioning investment of $20 billion. Total would operate the facility with a 26.5% stake. Mitsui & Co., India’s ONGC Videsh, Mozambique state-owned Empresa Nacional de Hidrocarbonetos, Thailand’s PTTEP, Bharat Petroleum and Oil India Ltd. have also partnered on the project.
Debt typically comes from a syndicate of lenders, and each creditor has separate lending standards with various terms. For example, ECAs finance the operations of domestic companies to limit the uncertainty of exporting to various countries. Commercial banks were long the primary source of funding for LNG projects, but in recent decades, more parties were brought into the financing process.
Naturally, lenders want to limit their risks, which makes long-term supply agreements with offtakers generally required for the bulk of a facility’s operations. For example, Cheniere Energy Inc., the largest gas exporter in the United States, has about 85% of its production under long-term, take-or-pay contracts that underpin the Corpus Christi and Sabine Pass terminals.
According to the Department of Energy (DOE) and the United States Energy Association (USEA), which compiled a helpful primer on LNG fundamentals, a project company generally obtains its regulatory approvals and the project agreements “structured, negotiated and executed by stakeholders.” The financing talks begin as the front-end engineering studies get underway, DOE and USEA said.
“Often, companies and their advisors will hold initial talks with the banks — known as soundings — in order to gauge their interest in participating in the project financing and to pinpoint any impediments to fund raising,” the agencies said.
The time it takes to arrange financing is a lengthy process that can take up to two years and depends on a variety of factors including risks, project costs, the host country and market conditions at any given time, according to DOE.
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