LNG INSIGHT

LNG?|?DAILY GPI?|?INFRASTRUCTURE?|?MARKETS?|?NGI ALL NEWS ACCESS?|?NGI THE WEEKLY GAS MARKET REPORT?|?SHALE DAILY

https://www.naturalgasintel.com/u-s-midstream-earnings-growth-said-to-slow-on-weak-natural-gas-prices/

Bank Failures Add Another Wrinkle for LNG Projects Already Facing Soaring Costs

BY?JACOB DICK

April 25, 2023

Share on:TwitterFacebookLinkedIn

While a global banking crisis doesn’t appear to be crashing a wave of new LNG infrastructure projects just yet, finance experts say it’s adding pressure to an already tight development cycle.

Through most of March, the collapse of institutions like Silicon Valley Bank (SVB) and Switzerland’s Credit Suisse captured headlines and?dimmed market outlooks. During the same month, two U.S. companies reached a final investment decision (FID) on respective Gulf Coast liquefied natural gas projects with a combined $15 billion in financing.

Rapidan Energy Group’s Alex Munton, director of global gas service, told NGI the latest FIDs show massive LNG projects can still receive financing under the right conditions, but the bar for those conditions could be moving as banks adjust to increasing risk.

“Putting together financing for one of these projects is already very complex, and I think you’ll see trends that are further complicating the process will be reinforced in the wake of the crisis,” Munton said.

Munton said the?recent financial backing?secured by Venture Global LNG Inc. for the second phase of its Plaquemines LNG project in Louisiana serves as an example of where project financing could be heading.

The More, The Merrier

When the Virginia based company reached FID on the 13.33 million metric ton/year (mmty)?first phase of Plaquemines?last year, it secured $13 billion from18 banks. With the FID for the 6.67 mmty second phase 10 months later, Venture Global secured $7.8 billion from 23 banks.

When measured on a dollar-per-ton basis, financing for both phases of Plaquemines LNG equals about $1,050/ton, according to data from Rapidan. It is a more than 48% increase over Venture Global’s Calcasieu Pass project, also in Louisiana, sanctioned in 2019. The 10 mmty first phase of the project was financed at around $710/ton.

Munton said the comparison highlights both the precipitous rise in?construction costs?developers have had to adapt to since the Covid-19 pandemic and how banks have adapted to governmental efforts to fight inflation. As federal interest rates have been ratcheted upward, banks have looked to reduce their individual exposure, resulting in syndicated loan packages with more participants.

While the fallout from the collapse of SVB has rattled some regional banks and likely increased caution around future big-ticket investments, it doesn’t appear to be slowing down LNG projects.

In a recent webinar, Poten & Partners financial adviser Melanie Lovatt said regional banks have been a part of syndicated deals in the past, but have typically contributed relatively small portions of the overall loan package.

In a ranking of this year’s top-10 LNG lenders assembled by Poten, Japanese banks Mizuho Bank Ltd. ($2.4 billion), Sumitomo Mitsui Banking Corp. Group ($1.9 billion) and Mitsubishi UFJ Financial Group Inc. ($1.7 billion) took the top three spots, respectively. U.S. banks Bank of America ($1.4 billion), JP Morgan Chase and Co. ($1.3 billion) and Goldman Sachs ($1.2 billion) also cracked the list.

While some European banks have indicated they are pulling back from LNG investment, Lovatt said the overall appetite for LNG projects from major banks “seems to be continuing unabated.”

“Really, funding does seem to be available and it’s the ability to sell production that is slowing projects rather than an issue of getting bank funding,” Lovatt added.

However, while both Venture Global and the other firm to reach FID this year, Sempra Infrastructure, both sold?most of their nameplate capacity?before securing financing, Munton said simply signing offtake agreements may not be enough to push a project across the finish line in the future.

How Much Equity?

While developers generally seek to finance construction with a balance of 70% debt and 30% equity investments with partners,?inflation and the risk of financial crisis?could push banks to call for more equity contributions.

The 13 mmty first phase of Sempra’s Port Arthur LNG,?also sanctioned in March, is financed by around $6.8 billion in debt and $7.6 billion in equity contributions. Sempra inked a 30% equity and natural gas supply agreement with ConocoPhillips last year, followed by a 20% agreement to be held by KKR & Co. Inc.’s infrastructure investment fund.

Munton said other projects might not have to reach Sempra’s threshold of more than?50% equity contributions?to financing, but Port Arthur LNG could serve as a template of how to push a project through in a period of costly headwinds.

However, Munton said it isn’t a strategy most firms will be able to emulate, limiting project FIDs at least into next year.

“If you don’t have the relationships, it will be difficult to get powerful companies to join in,” Munton said. “The majors being involved is a no brainer… but you don’t see them putting their money on the Gulf Coast right now. They are indicating they don’t want the?construction cost risks?either.”