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The Keys to Success of the Qatargas II Project - LNG Review 2005
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Taylor-DeJongh
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Originally printed in:
LNG Review
- 2005
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As the global market for LNG is undergoing significant evolution and expansion, the business of LNG is itself changing rather dramatically. Therefore, the structures of the projects and their financing are also moving quickly.
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As the global market for LNG is undergoing significant evolution and expansion, the business of LNG is itself changing rather dramatically. Therefore, the structures of the projects and their financing are also moving quickly. A prime example of these trends is the recent financial closing of the 15.6 million metric tonnes per annum (MMTPA) US$9.3 billion Qatargas II (QGII) upstream and liquefaction project. QGII is unique not only in size, but also in its financial and contractual structure.
Integrating the Value Chain
Traditional LNG models have generally entailed an upstream investor group comprising state-owned enterprises and international oil and gas companies selling to a downstream credit-worthy off-taker on whose strength the entire capital commitment was based. However, with the evolution of the LNG industry, upstream participants have become increasingly more interested in downstream investments – and vice versa – as project sponsors search for greater participation throughout the value chain and lower overall risk profiles. Among the exceptional features of QGII is the integrated model of the project, in which almost the entire LNG value chain is controlled by one sponsor group. In the case of QGII, fully integrated ownership has allowed the project sponsors to internalise many of the risks, while providing netback in full.
Qatar Petroleum (QP) (70%) and ExxonMobil (30%) have partnered to sponsor the joint upstream and liquefaction project, being, initially, a single train with LNG export to the UK. Total recently signed a heads of agreement with QGII participants to take a 16.7% equity interest in the project’s second train and to purchase up to 5.2MMTPA for 25 years. The shipping component is being represented by two consortia in which QP and other Qatari state-owned entities have made large equity investments. On the downstream segment, gas from the first train is destined for the South Hook Terminal in Milford Haven, UK. ExxonMobil Gas Marketing Europe Ltd (EMGME), a wholly owned subsidiary of ExxonMobil, has signed a 25-year gas sales and purchase agreement (GSPA) for 100% of the volume of train 1.
Although the project sponsors were integrated from upstream development to off-take agreements, each segment was financed separately, which created a challenge for lenders to ensure that each part of the LNG value chain was technically and financially sound and had obtained the necessary legal documentation. Issues arising at any one point in the value chain could potentially undermine the viability of the other LNG component projects. Consequently, upstream and liquefaction lenders were keen to address downstream issues, such as regulatory risk, third-party access, interconnection with the UK gas grid and the UK gas supply and demand equation, in order to fully assess the future success of the Qatar-based liquefaction project.
Risk Allocation
As with any successful project financing, project risks were allocated to those most willing and able to accept them in order to obtain the necessary financial support. Traditionally, upstream LNG developments were made on the back of long-term GSPAs, which largely shielded lenders from volume and price risk by requiring off-takers to commit to volume obligations and crude-linked price indexing with floor price guarantees. However, as the growing European and North American gas industries have liberalised over the past few years, off-takers in these regions have sought to reduce the risks they bear by negotiating more flexible contract provisions.
QGII is one of the first LNG projects to break the mould of crude-linked pricing by setting the purchase agreement against the UK gas market price without a floor agreement. This element has, in effect, passed on UK (and even Northern European) market price risk to the lenders in the period after commercial operation, when sponsor guarantees fall away. Price risk pass-through was possible due to the integrated nature of the project and the strong current and forecast future demand/supply imbalance for the UK natural gas markets, driven, in part, by decreasing North Sea gas production. In addition, lenders were assured by the high credit rating of EMGME as the train 1 off-taker.
Category:
LNG
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