The Financing of Gas Projects
Enrico Grassi
Principal Banker, Natural Resources
EBRD
EBRD – Who are we?
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International financial institution,
owned by 60 countries and two
inter-governmental institutions
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Promotes transition to market-based
economies in 27 countries from
central Europe to central Asia
12
6
Capital base of € 20 billion
0
'98 '99 '00 '01 '02 '03
Cumulative commitments € 21.7 billion
2
EBRD facilities
Guarantees
Loans

All risk guarantees

Specific risk
guarantees
(e.g. political)

Project specific

Hard/local currency

Commodity-backed
instruments

Medium and long
term

Trade facilitation
programme

Floating/fixed rates

Non/partial recourse
to sponsors
3
Equity

New equity

Privatisation

Quasi-equity
EBRD Natural Resources portfolio

€1.7 billion committed
to €10 billion projects

Future portfolio will be
more diversified:
– 60% oil / 40% gas
Metal
Ore
Mining 14%
Petroleum
Pipeline
Refineries Transportation – 20% pipeline and
11%
downstream projects
6%
– significant growth in
“regional” projects
involving several
countries
69%
Oil and Gas Extraction
4
The Financing Gas/LNG Projects
5
Why the world go for Natural Gas?

Improvements in combined cycle gas turbine power
generation drove increase in gas consumption

Environmental concerns

Concerns regarding stable oil supplies

Reduction in investment requested along the whole chain

Big gas reserves in the oil companies books
6
How to bring gas to the market
which is far?
The answer is LNG
7
What are the challenges to the market players
who want to participate in LNG rush? (1)

LNG projects require huge investments and have
long payoff periods:
today prices are high but what may happen if they
collapse?

High gas prices is good news for the oil
companies not for consumers:
will the market reconsider coal and re-evaluate
nuclear power?
8
What are the challenges to the market players
who want to participate in LNG rush? (2)

LNG prices have been historically indexed to oil
but more and more starting being priced against
hub gas prices:
how to understand the trend of “new” pricing?

Market see many greenfield projects:
to which extent the financial world will accept the
risk and on which terms?
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How LNG market has changed in the
recent years?

Contracts are characterised today by flexibility in:
destination
volumes
duration

Development of the spot market

Shipping arrangements are moving from DES to FOB
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Why oil companies look for MLA/ECAs
financing?
To share the risk and to receive:

Political cover

Longer maturities

Flexible repayment profile

Leadership in large scale financing

Knowledge of and experience in gas/LNG projects
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What are the classic challenges in
financing gas and LNG projects? (1)

Construction / Completion Risk
– contractual structure (delays, cost over-runs, etc.)

Operational Risk
– technological integration and experience / viability

Utilisation / Supply Risk
– type of throughput arrangement
– fundamentals (Market/Competition)
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What are the classic challenges in
financing gas and LNG projects? (2)

Competition / Market
– effect of oil price (linked to gas and oil products)
– regional supply / demand
– impact on tariff

Political & Regulatory Risks
– regulatory intervention (tariffs & export volumes)
– political turmoil / disputes / violence / nationalisation
– discriminatory taxation
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Risks and their mitigation

Economic & financial
– minimised through financial package and due diligence

Technical risks
– reliance on strong and technically competent sponsor

Environmental risks
– sponsor commitment to appropriate guidelines

Political risks
– minimised through involvement of IFI’s and ECA’s
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Available Financing Sources

Equity
– Strategic investors
– Investment funds
– IFI’s

Debt Financing
–
–
–
–

(oil and gas majors)
(limited scope)
(EBRD, IFC)
IFI's (EBRD, IFC)
EIB
Commercial banks
ECAs
(own funds)
(European portion)
(participating in IFI B Loans)
(Hermes, Coface, JBIC, Exim…)
Capital Markets
– Equity (IPO's)
– Bonds
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Debt as Financing Source

Loans
– Tailor made instruments with negotiated conditions
– Bank lenders familiar with different structures

Bonds
– Relatively rapid issuance process
– No covenants for straight instruments
– Tradable instruments
– But lack of flexibility
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Sakhalin II Project (1 of 3)

Each LNG project consists of a continuous chain of
activities linking the gas production to the gas user
Production

Oil & Gas field development and
pipelines
Liquefaction

LNG plant and oil & LNG export
terminal
Shipping

LNG tankers
Regasification

LNG receiving terminal
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This Project
Sakhalin II Project (2 of 3)
Russian
RussianFederation
Federation
Sakhalin
SakhalinOblast
Oblast
Shell
ShellPetroleum
PetroleumNV
NV
100%
100%
Shell
ShellSakhalin
Sakhalin
Holdings
HoldingsB.V.
B.V.
55%
Mitsui
MitsuiSakhalin
Sakhalin
Holdings
HoldingsB.V.
B.V.
25%
ProductionSharing
Sharing
Production
Agreement(1994)
(1994)
Agreement
Supervisory
Supervisory
Board
Board
Mitsui
Mitsui&&Co.
Co.Ltd
Ltd
Mitsubishi
MitsubishiCorp.
Corp.
100%
Diamond
DiamondGas
Gas
Sakhalin
SakhalinB.V.
B.V.
20%
Shareholders
Shareholders
Agreement
Agreement
Sakhalin Energy Investment Company Ltd.
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Sakhalin II Project (3 of 3)
Detail 1
PA-B
Okha
Nikolayevsk
na-Amure
Detail 1
Piltun
Boatasyn
Oil & Gas
pipelines
stretching
the length
of the
island
172 km
Piltun
shoreline to
OPF
DeKastri
Russia
41 km PA-B to
shore
14” Gas
Line
14” Oil
Line
Onshore Tie-in point
with pig traps for all
pipelines
PA-A
17.5 km PA-A to
shore
Nogliki
Katangli
20” Oil Line
20” Gas
Line
Detail 2
Nysh
Boatasyn
AleksandrovskSakhalinskiy
20” Oil line
Sakhalin
Island
636 km
48” Gas Line
636 km
24” Oil Line
Poronaysk
Gas Compression
(BS#2)
Oil Booster
(BS#2)
Additional offshore
platform
Detail 2
20” Gas line
172 km onshore
to OPF
4.5” glycol
return
BS#1
48” Gas
OPF
Nysh
636 km
OPF
to OET
LNG
Plant
YuzhnoSakhalinsk
LNG Tanker
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2 x 30”
multiphase
Development of
Lunskoye gas field
through offshore
platform
24” Oil
Domestic Supply
Off-Take
Detail 3
24” Liquid Line
48” Gas Line
Oil Export Terminal
36” 5.5 km
Loading Line
Detail 3
LUN-A
TLU
Construction of LNG
plant and oil export
terminal
Shah Deniz Project – Overview (1 of 4)

Reserves: proven and probable gas-in-place of
approximately 31 trillion cubic feet (tcf) – world class
reserves; likelihood of an additional 22 tcf

Project: 4-stage development of the Shah Deniz gas and
condensate field with Stage 1 cost of USD 2.3 billion

Local participation: State Oil Company of Azerbaijan
Republic (SOCAR) also holds a 10% interest in this
project (through AzSD: EBRD will part-finance their cash
calls)
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South Caucasus Pipeline – Overview
(2 of 4)



Pipeline route: a 690 km gas pipeline starting at the
Sangachal Terminal, traversing Azerbaijan and Georgia
and connecting with the BOTAS domestic gas distribution
system at the Georgian-Turkish border
Construction & timing: SCP’s Right of Way runs parallel
to BTC and construction of SCP will occur concurrently
with that of BTC
Capacity & cost: a peak capacity of over 20 billion cubic
feet (bcf) per annum and will cost over USD 1 billion
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South Caucasus Pipeline – Route (3 of 4)
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SD and SCP Project – Sponsors (4 of 4)
BP (25.5%)
Statoil (25.5%)
TotalFinaElf (10%)
SOCAR (10%)
NICO (10%)
TPAO (9%)
Lukoil (10%)
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Contact Details
Enrico G. Grassi
Principal Banker
Natural Resources Team
European Bank for
Reconstruction and Development
1 Exchange Square
London, EC2A 2JN
Tel. 44 (0)20 7338 6179
Fax 44 (0)20 7338 6101
Email: GrassiE@ebrd.com
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More information: www.ebrd.com
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