Some floating liquefaction projects in Africa achieved significant milestones in 2018, writes Poten & Partners advisor Melanie Lovatt, but financing remains an issue for others.
The first of Golar LNG’s FLNG conversions, the Hilli Episeyo, started commercial operations offshore Cameroon in June, and UK major BP and Kosmos Energy made a final investment decision in December on their Tortue-Ahmeyim FLNG project which would use a second converted Golar unit sited on the Senegal and Mauritania maritime boundary.
But use of these vessels, which could potentially allow sponsors to unlock stranded gas reserves more affordably, have not been without setbacks.
The Fortuna project in Equatorial Guinea, which also intended to use an FLNG conversion, had been targeting FID in 2018. But project sponsor Ophir Energy, which is now in the process of being taken over by Indonesia’s Medco Energi, announced in early January that the government of Equatorial Guinea had denied it another extension on the Block R license containing the Fortuna gas discovery.
The problem there lies with financing for smaller sponsors. UK-listed Ophir and its partners were unable to secure funding by the end-2018 deadline.
For the Hilli Episeyo, the first ever FLNG conversion, Golar received initial financing from Chinese sale and leaseback provider, CSSC (Hong Kong) Shipping Co., in the form of $700 million in construction financing. Of this, $640 million was drawn down and then repaid, at which point CSSC provided a $960 million sale and leaseback facility. Once the vessel was accepted under its liquefaction tolling agreement in June by Anglo-French independent oil and gas company Perenco Cameroon and Cameroon’s state-owned Societe Nationale des Hydrocarbures, the sale and leaseback funding could be drawn on.
Notably, Golar needed less funding for the 126,200-m3 Hilli Episeyo than Ophir had been seeking for Fortuna. The Hilli Episeyo was budgeted at $1.2 billion, while Ophir, which was to have used Golar’s 126,000-m3 LNGC-to-FLNG conversion Gandria, budgeted at an overall cost of $2.1 billion for Fortuna. The higher price tag reflects the inclusion of an upstream financing component, with the debt target pegged at $1.2 billion. The intent was to buy Gandria for the Fortuna project, rather than use it as a tolling facility as is the case with Hilli Episeyo.
Schlumberger was blamed for difficulties securing financing on the project when it made an exit in May from Fortuna. At the same time, Schlumberger exited its OneLNG joint venture with Golar which had targeted other potential FLNG opportunities.
Golar indicated that despite the difficulties in securing financing, asset-related projects like Fortuna were still an attractive proposition but said the company did not want to lose the first-mover advantage in FLNG it has created through the Hilli Episeyo project.
“Recognizing that asset-based projects take more time, we will concurrently pursue tolling or time-related arrangements, such as Hilli, to develop our FLNG offering and keep the production line moving,” Golar CEO Iain Ross said on the company’s May 31, 2018, earnings conference call.
Golar suggested that the experience it gains from tolling projects will help minimise risk on any integrated, asset-based project in the future. As the first FLNG unit to be converted from an LNG carrier, funding Hilli Episeyo required Golar to seek funding sources with an increased risk appetite.
International commercial banks typically fund liquefaction operations or LNG shipping units like LNGCs or even floating storage and regasification units, but they will not take risks on new technology such as FLNG conversions.
The problem, in their eyes, is the lack of an operating track record. Especially if they are providing the funds via project finance structures with limited recourse for the sponsors and debt-servicing coming from the scheme’s cash flows.
If all goes to plan and the Hilli Episeyo builds up a good operating track record, this could smooth the way for financing of similar projects in the future, allowing projects based on FLNG conversions to become bankable and thereby putting their development within reach of smaller companies.
For larger companies looking to use FLNG conversions, the path to FID is easier, for obvious reasons. They can decide to balance-sheet fund projects and are able to carry their smaller partners or they can use project finance, for instance. In short, they have the wherewithal to provide a guarantee to cover construction costs until the project becomes operational and brings in revenue.
BP plans to equity-fund its Tortue-Ahmeyim project rather than use project finance, as one example. A $553-million development carrier from BP funds a substantial portion of Kosmos’ share of the initial 2.5M mt/y development.
When BP farmed into the asset with Kosmos a year and a half ago, it carried Kosmos on costs already incurred and also agreed to carry it for future exploration and development. As the development stage begins, Kosmos will start to use up the carry, and any leftover financing is expected to be immaterial.
Phase 1 of the Tortue development, using the FLNG unit leased from Golar, will be equity funded, but as capital demand grows with further phases, BP is considering alternative funding models including project finance.
BP and Kosmos retain an option for a second near-shore Golar FLNG unit and a third phase is also under consideration.
Melanie Lovatt is Finance Advisor at Poten & Partners’ growing business intelligence division and is the team leader on the company’s LNG Finance in World Markets quarterly report. She is also a regular contributor to the company’s monthly commercial report, LNG in World Markets.