[NGW Magazine] Floating regas: easier said than done
This article is featured in NGW Magazine Volume 2, Issue 11
By Mark Smedley
For all the size and promise of the global LNG market and the dramatic surge in floating storage and regasification projects, investors can still lose money.
The number of specialist owners of floating storage and regasification units (FSRUs) has only recently increased from a handful to a dozen or so. In part that is due to credit risks faced not only by such ship-owners but also by the sponsors of projects to which they charter their FSRUs.
International oil companies at times have talked about ordering their own FSRUs, but so far that’s largely been just talk. Despite their appetite to create new markets for a structural global LNG glut that looks set to remain until at least 2023, so far the international majors – even LNG tanker owners such as Shell – have preferred to work with, rather than compete against, established FSRU owners.
More than a tenth of global trade
Global LNG trade in 2016 increased by 7.5% to 263.6mn metric tons, according to the latest annual report by GIIGNL, the International Group of LNG Importers.
Egypt imported 7.5mn mt last year through its two FSRUs, but other FSRU-reliant markets such as Kuwait, Jordan, UAE, Argentina, Brazil and Pakistan each imported 3mn mt or more.
There were 24 FSRUs afloat at the end of last year, according to GIIGNL. Their 2016 throughput accounted for 30mn mt – or 11% of world trade – according to data compiled by WoodMac for Hoegh LNG, a leading operator with seven FSRUs now in operation and 3 under construction. Golar LNG is a similar-sized operator, while other established owners include Excelerate, Exmar and BW Gas.
LNG demand meanwhile continued to rise year-on-year to around 75mn mt in 1Q 2017, according to data published May 24 by Hoegh LNG. The world’s top 3 markets – Japan, South Korea and China – were among the greatest contributors to year-on-year demand growth – but so too were Egypt, Turkey and Pakistan where FSRUs were deployed to fill gas deficits with competitively-priced LNG.
Even southeast Australia, Poland and Hong Kong are thinking about deploying FSRUs for the first time for various reasons, said Hoegh in its 1Q results, adding that for LNG giant Australia the rationale is to fill a regional gas deficit – with cargoes from the west of the country.
Global overall LNG supply is growing rapidly on the back of expanding production capacity and could increase by another 100mn mt, or 35%, by 2020, forecasts Hoegh perhaps conservatively.
A recent blog by London-based consultancy Timera Energy suggests that figure could be even 150mn mt, as export projects like Wheatstone and Ichthys in Australia and Yamal in Russia are not expected to start until the second half of this year.
Hoegh says that floating regas is “key to opening up new markets for LNG” and it sees FSRU market activity reflecting the increase in global LNG supply: six new FSRU contracts awarded to shipyards in 2016, and a further 3 to 5 FSRUs likely to be awarded in 2017.
Market requirements can also be met by converting older LNG carriers to FSRUs – something which Hoegh itself began doing last year.
FSRU project numbers could double by 2025, says Poten
There are 22 floating regasification terminals in operation worldwide, with a further nine under construction, shipping expert Amokeye Adede of LNG consultancy and brokerage Poten & Partners told an industry briefing in London, May 24.
That’s a little more than the 24 FSRUs recorded by GIIGNL at end-2016, as some were not deployed as terminals, but rather working on short-term charters as LNG carriers.
Adede and her colleague, Jan Bruil, said the number of operational floating regas terminals could double to “more than 40” by 2025.
Acknowledging that Poten is “bullish” about FSRUs’ prospects, Bruil said the high case for 2025 could be 50, with the low case in the low-30s.
They listed more than 30 FSRU projects at various stages of planning – including ones in South Africa, Namibia, Poland, Croatia, the UK, Benin and Curacao – not all of which would come to fruition. “Many of these projects come with a health warning,” said Bruil, a senior LNG consultant at Poten.
Small is beautiful and flexible
FSRUs can provide a fast solution to a country’s scarcity of power generation feedstock, as was the case a decade ago in Argentina. In Egypt and, more recently, Colombia they were used because gas demand was outpacing domestic supply. In Kuwait, they have served to displace oil from power and desalination plants, and also provide cleaner air quality.
FSRU-based regas projects can also be developed very rapidly with the record being 6 months, but one year being not untypical, according to Poten, if the FSRU is already built. They also have low start-up costs for sponsor projects. Niche markets can be very small, and the typical 750mn ft³/d sendout of a standard FSRU tends to be lower than that of most onshore plants. They can also be chartered for a long fixed-term, or a short five-year term after which they can be taken elsewhere or the charter extended.
Such a newbuild FSRU today would cost $130,000/day ($47mn/yr) to charter, said Adede – down from a 2012 peak of $170,000/day. Smaller and older FSRUs of 500mn ft³/d are sometimes available. The cost of ordering newbuild FSRUs has trended lower, and so too have charter costs.
But as well as converting existing LNG tankers to FSRUs, some proven FSRUs have come back into the market. Some earlier FSRUs on five-year charters in Brazil and China have been redeployed. Others will be removed in 2020 from Egypt, because of the discovery of giant offshore fields there like Zohr, and Kuwait, where a large onshore terminal will be built now given its long-term demand for LNG.
More ship providers
Adding increased variety to the established quintet of Hoegh, Golar, Excelerate, Exmar and BW Gas are new providers that either already own one or two FSRUs or else have them under construction at Asian yards. They include Japan’s NYK Line, Malaysia’s MISC, Monaco-based Gaslog, Canada’s Teekay, Greece’s TMS Cardiff and Maran Gas, and French utility Engie – although the latter is more a sub-charterer. Most are established owners of LNG carriers.
When a floating regas project is selected, there’s no hazardous onshore site to deal, and permitting can be quick. Also the ownership of the FSRU asset can be structured separately from the sponsor project – which can be helpful when financing new ventures, and which is not really possible for land-based LNG import terminals.
Credit risks in FSRU-ideal markets
At the Poten presentation, attended by gas company representatives, FSRU shipowners and lawyers, issues of credit risk in small developing economies, for example Ghana, were raised. With FSRUs, the owner has the option of taking the ship back into their portfolio if the charterer won’t pay and the letter of credit has been used, as the ship is fully mobile.
“If you think you have problems as an FSRU sponsor, think of the guys who develop an onshore LNG terminal that may become a $500mn-$600mn stranded asset,” said Poten senior adviser Jim Briggs.
Ghana: Ghastly or Golden?
Fresh in most minds is the case of Golar Tundra, which arrived late May 2016 on schedule, ready to be connected to the Ghanaian gas grid. The FSRU was to have become the first to enter service in sub-Saharan Africa, but instead it became clear that the project sponsor, a joint venture of Nigeria’s state NNPC and private partner Sahara Energy, had omitted to secure consent to import LNG first.
This has since happened, but the ship remains idle at anchor some 5 km offshore, with no pipe to connect it to the gas system. This is despite the country’s latent demand for gas in its power generation plants. That demand, however, will not last indefinitely as new oil fields such as Eni’s OCTP and Tullow’s TEN oil will soon be supplying large volumes of associated gas to what is already supplied by the Tullow-operated Jubilee field.
After initially refusing, the NNPC-Sahara joint venture – WAGL – began paying the charter fees due to Golar. It has gone to arbitration to recover $45mn of unpaid charter fees from WAGL. But given the buoyant market for FSRU projects, Golar has said it has discussed an early release from the charter with WAGL.
That WAGL has not petitioned for this yet suggests it still holds some hope of making money in the Ghanaian market, with NNPC a co-owner in the 678-km West African Gas Pipeline (WAGP) that nowadays carries little if no spare gas exports from Nigeria into its western neighbours’ markets.
The Golar Tundra saga has proved an ominous start to what should have been such a promising launch for LNG regas in West Africa. Yet two other FSRU projects are gearing to start up there – eying demand for electricity from the country’s business sector, particularly mining. Hoegh expects a final investment decision mid-2017 on a Ghana project, sponsored by Israeli backed Quantum Power, that it expects to enter service mid-2018; Hoegh expects to earn $36mn/yr Ebitda from the charter to Quantum.
Whereas WAGL expected to berth Golar’s ship in the busy port of Tema, Quantum is relying on building a 12-mile pipe to where the Hoegh Giant will be stationed offshore. Hoegh already took delivery of the ship on April 27 and has it booked out on short-term LNG carrier jobs until mid-2018.
Carrying the Sponsor Credit Risk
Ghana remains a risky place, where power generators aren’t always paid by customers, and in turn ask for credit from gas suppliers who sometimes refuse – with the debt-laden government expected to step in with guarantees. But the government has guaranteed a price for Ghana’s new OCTP gas.
In many of the unlikely success stories for making FSRUs work such as Egypt and Pakistan, governments have stepped into the breach to provide guarantees for LNG purchases. Argentina’s state Enarsa has been the anchor customer since 2008 in that country, and likewise state Egas in Egypt and Petrobras in Brazil have provided this role – all seen as creditworthy. Many offtakers in non-OECD markets though are not big utilities with high credit ratings, such as exist in more developed markets. Some of the 30 identified regas projects being planned worldwide are in places like Benin, Namibia, South Africa, and the Caribbean.
The issue of whether ship-owners may take more risk by going further downstream – by building pipelines themselves, or even taking equity in sponsor consortia – in order to ensure their projects succeed, was explored at the Poten briefing. There was less discussion though of whether majors, like Shell, Total and Eni, might do this. So far some have hinted at this, but not followed through.
In Cote d’Ivoire, the sponsor company for a FSRU-based project due for delivery 2018 is a seven-way consortium (CI-GNL) headed by Total, including Golar, Shell and Azerbaijan’s state Socar, plus local Ivorian entities. But the mechanics of this planned 3mn mt/yr scheme remain somewhat opaque. Total though says it “illustrates Total’s strategy to develop new gas markets by unlocking access to LNG for fast-growing economies.”
Brazil Offers a Template
Across the Atlantic in Brazil, one such case where Golar has joined a sponsor consortium – in a much more significant manner – is the Sergipe LNG-to-power venture in Brazil.
Golar Power – a joint venture owned 50-50 by Golar LNG and New York private equity fund Stonepeak Infrastructure Partners – took final investment decision in October 2016 on a 1.5-GW combined-cycle gas fired power plant to be built by 2020, with 26 committed offtakers for its power over 25 years under previously executed power purchase contracts awarded by the Brazilian government in 2015. Golar Power owns 50% of the CCGT and 100% of the FSRU earmarked to the project Golar Nanook. The ship will be delivered to Golar LNG later this year.
The Golar Power partners, who were advised by New York law firm Shearman & Sterling, moreover say they expect to deploy this investment template in other countries. The Sergipe venture will be supplied under a long-term LNG agreement by the Ocean LNG joint venture of Qatar Petroleum and ExxonMobil, the most significant large LNG supply contract yet for Brazil. The $1.3bn CCGT will be the largest non-hydro power plant in South America and help meet Brazil’s growing electricity needs particularly during dry seasons.
LNG: Fuel for a Changing World– A Nontechnical Guide (2nd Edition) by Michael D Tusiani and Gordon Shearer, pp594, was published 2016 by PennWell books. Tusiani is Poten’s chairman emeritus while Shearer, a former CEO of Cabot LNG, rejoined Poten in 2015 as a senior adviser.