The shift in demand growth from developed to emerging markets, presents several challenges for the LNG sector – as these new buyers’ deteriorating credit-worthiness will make it harder to raise finance to invest in new liquefaction projects, a new report suggests.
BMI Research says growing debt among existing and prospective LNG importers presents “a rising concern for the industry”. It quotes figures from the Jubilee Debt Campaign (JDC), showing that 27 countries are in debt now and 80 more are at risk.
“Deterioration in the creditworthiness of key emerging-market buyers will exacerbate difficulties in securing financing for prospective liquefaction plants, increasing the risk of a longer-term supply crunch in the global LNG market,” BMI says.
“Supply-side financing in the LNG sector is heavily reliant on the demand side. That is because the bulk of liquefaction projects are funded via non-recourse financing mechanisms. That is, finances are raised against the project’s future revenue streams… It is the credit-worthiness of the buyers, rather than the sellers, that is key.”
The countries in question include new and growing LNG importers Lithuania, Pakistan, the Dominican Republic and Jordan, and would-be importers Lebanon, Ghana and Sri Lanka. BMI says emerging markets account for more than 90 per cent of new regasification capacity due to come on stream in the next five years, see table one.
JDC defines a country in debt as one that has a negative net international investment position equal to at least 30 per cent of its GDP and if its payment of external debt obligations exceeds 15 per cent of government revenues.
BMI expects Asia to drive LNG-demand growth to 2021, see table two. However, existing markets in the Middle East and North Africa will grow too, and so will sub-Saharan Africa, Central America and the Caribbean, albeit from a very low base.
It says uncertainty over levels of emerging-market demand is only heightening the problem. “Unless more final investment decisions are taken on proposed liquefaction projects in the next two or three years, there is a risk of a supply crunch developing in the market in the mid-2020s as strong demand growth ultimately eclipses supply,” it concludes.