MODELLING AN LNG PROJECT
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MODELLING AN LNG PROJECT

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MODELLING AN LNG PROJECT

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MODELLING AN LNG PROJECT Introduction Essentially, the model needs to work backwards to ensure that Recently Navigator has provided services to several LNG, another construction phase commences at the start of year seven petrochemical transport and storage projects in locations including with all the associated costs and expected schedules and profiles in Australia, PNG, Indonesia, Singapore and Iran. place. Whilst working with developers, financiers, governments and other For efficient, flexible timing mechanics, it is crucial that the project is advisors, I realised that the challenge of rigorously analysing and modelled using a consistent time basis. Switching from say monthly communicating the economics and financing structures of these to a quarterly basis when additional construction phases remain will projects is a regular cause of frustration. In this article, I share my make the model unnecessarily complicated, especially for later insights on how to smoothly analyse an integrated LNG project, considerations such as debt service, covenant testing, reserve whether the transaction is Greenfield, Brownfield or a refinancing. calculations and, of course, shipping schedules. Nick Crawley, Managing Director, Strategic Analysis Navigator Project Finance In the early stages of project development, stakeholders face the challenge of deciphering which project will maximise the value of the LNG projects are, by their nature, strategic, long term assets on adiscovered field. While this decision is driven significantly by megascale compared to typical projects. They are usually multigeology, project stakeholders typically consider product types and billion dollar projects, with contracts for the feedstock gas rangingproduction profiles in the context of capital requirements, forward from 10 to 40 years. Owing to their size, LNG transactions need apricing and the forecast macro economics. large working team comprising commercial lenders, ECA houses, As such, sophisticated operators require the development of multilateral agencies and a who’s who of global engineering, law, complex financial models so they can identify the proposed project’s markets, gas storage and transport experts. The scale and key risks and value drivers. complexity of a typical LNG project gives us a clue as to why they often take years to reach financial close. With such huge economics, Financial modeling must be sufficiently sophisticated to allow errors in their analysis can have significant consequences. evaluation of the project’s variable physical parameters as they shift from one structure to another. In this article, I describe how to successfully analyse and communicate the economics of an LNG project amidst the Construction Cost challenges of its transaction environment. The main areas to Due to the scale of LNG projects, construction costs are a key driver consider are of their economic returns.  Timing Typically, different components of capital expenditure are funded, escalated and constructed differently. Developers look to drive  StrategicAnalysis efficiency through their projects by flexing these assumptions.  ConstructionCost A key functional feature is the ability to allow developers to solve for a minimumDay 1 investmentthen consider expansion of the and  ProjectStructure initial production and capital investment as the resource is proven over time.  Funding Increasingly, financial models are structured to capture the modular  Tax components of capital expenditure. They allow for flexible timing of investment and associated ramp up of production.  Scenarios Through this process, project directors can carefully manage the Timing development risk and lift their project’s equity returns. A characteristic of project financings is that proceedings rarely go to plan. If it can change, it probably will. Consequently, the projectProject Structure model needs to be flexible, especially on key dates, so that financial Many projects are developed as vertically integrated Upstream + close, construction, construction delay, commissioning and Midstream + Downstream businesses. While each business has a operations can all change with quite generous ranges. From the different risk profile, all require significant debt and equity capital to initial plan, financial close may need to shift five years out; a build. As a result, financial modeling needs to be structured so new scheduled construction period of three years may need to withstand participants and capital can be injected into the different levels of the delay scenarios of an additional 18 months for bank downside project. analysis. In these situations, it is crucial to utilise a specific construction delay phase. This isolates the nonscheduled Fundingconstruction costs and associated offsetting liquidated damages. LNG projects are capital intensive and due to the maturity of the market they are often located in remote and sometimes hostile LNG projects are constructed intrains. The ability to flex when an environments. The physical location combined with market risks lift additional train is commissioned is key to evaluating a project’s the cost of debt for these projects. Typically, debt pricing on non value, and the assessment and structuring of a Gas Supply OECD based LNG projects is well over 10%. Consequently, project Agreement. Let’s say a new train is expected to be operating in year developers need to consider a variety of capital sources to reduce ten, but that the construction takes three years. their overall weighted cost of capital. Funding sources include:
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