Matthew Brown, Partner, Latham & Watkins

November 2017

The new wave of G2P: Smooth sailing ahead?

The number of new gas to power (G2P) project announcements has swelled in recent months across diverse markets, including Asia, Africa and Europe — but potential challenges need to be considered.

A perfect storm of increasing supply and demand

The rise in announced projects is unsurprising. Demand for power continues to far outstrip supply in many nations and more power-generation facilities are required to meet the needs of a constantly growing base of domestic and industrial users. Available fuel sources (including domestic gas) are declining or depleted in many countries.

Concurrently, various economic, social and political forces are encouraging new power sources to be greener, cheaper and more flexible. G2P projects tick all of these boxes. Gas is now widely accepted as a cleaner energy source with a lower carbon footprint than other conventional fuels for power generation. G2P projects may also utilise gas that would otherwise be flared. Global prices for gas (particularly liquefied natural gas – LNG) have dropped significantly in response to increased supply including from the US, and other new projects that are due to come on-line in other markets such as Australia.

New technologies, including floating storage and regasification units (FSRU), are also facilitating faster, cheaper and potentially less risky G2P projects. Developers can construct FSRUs offsite, readily install them and move them later if required —limiting the extent of required onshore development. These technologies can particularly address the needs of more remote areas with limited access or where onshore construction otherwise may be challenging.

All of these undercurrents have helped create an environment conducive to successfully financing and completing G2P projects; nonetheless, obstacles remain.

Keeping challenges at bay: Ensuring announced projects will be developed

Developers need to consider a myriad of complex issues in order to structure and finance G2P projects, as outlined below.

The full value chain. G2P projects span a full value chain of necessary components, from gas extraction and treatment (including LNG liquefaction), to transport (including pipelines or vessels), to regasification (if relevant), to power generation and transmission. All components of the value chain rely on each other to ensure full viability — regardless of whether the G2P project is structured and financed as a single project (integrated), multiple projects (non-integrated), or a hybrid. This inter reliance of all components occurs at every phase of development, including during construction and operation. Structures and project documentation need to provide many features and mechanics to ensure that the component-on-component risk is appropriately allocated and mitigated. For instance, documentation needs to address and mitigate completion risk, as well as title and risk of loss in gas, throughout the value chain.

Many and varied participants. The necessary sponsor-side participants include players from the oil and gas, transport and shipping, construction, and power generation sectors. All of these participants have differing requirements and appetite for risk, as well as different levels of willingness to engage in particular elements of the complex value chain. Although full alignment of ownership across the full value chain can appeal to lenders, this feature may not be possible for all sponsors.

Geographic considerations. In many jurisdictions, announced G2P projects represent first- of-their-kind developments. A lack of local precedent requires engagement with all key stakeholders. Local laws in many locations drive structuring decisions, including requirements for local ownership and participation, cash flow and currency conversion requirements, required involvement of State petrochemical and/or power enterprises (and attendant credit considerations), third-party access requirements, and lack of — or uncertainty regarding — existing regulatory frameworks.

Capital requirements and certainty of revenues. Projects of this scale by definition require considerable capital investment. Sponsors need to consider appropriate and bankable ownership and financing structures, necessitating analysis of both equity contribution arrangements (including for potential cost overruns and costs incurred as a result of delay in one or more components) and available third-party debt financing. Revenue sources for debt repayments and returns of capital need assessment for both certainty and for sufficiency of credit quality. Developers may need to consider various ways of ensuring this; for instance, through structural enhancements in the project documentation (including alignment of liability and force majeure, as well as other relief provisions), a comprehensive bespoke insurance program, and the provision of financial instruments (including guarantees and other credit support).

About Matthew Brown

Matthew Brown is a partner in the London office of Latham & Watkins. Mr. Brown’s practice focuses on representing sponsors, lenders and governments in all aspects of project development and project finance, particularly in the energy sector (including oil and gas, LNG and power generation related matters). He is also a member of the firm’s Africa, India, Oil & Gas, Power, Mining & Metals and Islamic Finance Practices.

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