The Total-led Papua LNG project looks set to enter its Front End Engineering Design (FEED) phase. It’s a good sign: according to the ANZ’s PNG Economic Outlook, 97 per cent of the gas projects that enter into FEED have a positive final investment decision. David James explores.

Liquified Natural Gas (LNG) carrier. Credit: DevPolicy

The Papua LNG project is ‘bankable’, according to ANZ’s latest PNG Economic Outlook.

The document notes that, historically, resource projects, including gas investments in PNG, have been project financed: debt has been used to finance the project, which is then paid back from the cash flows generated by the development.

‘Over the last 20 years, 15 resource developments in PNG have been financed that way—10 in the oil and gas sector and five in mining.

‘Given the depth of this market and precedence, we expect future LNG and mining projects (both greenfield—new—and brownfield—expansions—) to follow in the footsteps of previous developments and also access project financing.’

Financing

The ANZ’s Jonathan Bloch. Credit: CWC

Securing financing is ‘almost always the final part of the jigsaw for an affirmative FID [final investment decision],’ according to the report.

Jonathan Bloch, Executive Director/Head of Strategic Banking at ANZ’s Resources, Energy & Infrastructure Division, warns that there is intense global competition for finance among resources projects.

The return on capital employed of ‘some of the big players who are in PNG’ is at least 12 per cent across their portfolios, Bloch says.

‘They have projects in countries where the risk profiles are high, so the returns (in those countries) will be higher than the 12 per cent.’

Bloch points to many oil and gas projects that the majors have around the world: in the Arctic, Nigeria, Mozambique and the US$10 billion liquefaction Golden Pass LNG project in Texas, which will have capacity to produce around 16 million tonnes of LNG per year.

‘LNG financing in the region has been a positive experience for lenders. They understand the market and reserves risk.’

‘It is not a level playing field. Some countries have a very political agenda.’

He believes the current LNG investment cycle is not like the last one, which ran from 2010 to 2014.

‘Companies are going to be a lot more discriminating in taking final investment decisions.’

Bloch points to the need for innovative funding solutions that ‘may not just provide more flexible capital, it may also may provide funding which may be executed more rapidly and possibly even ahead of the FID decision.’

Cash available

Location of the two LNG sites. Credit: Oil Search

Liquidity (available capital) will be available from lenders, according to the ANZ Outlook.

‘LNG financing in the region has been a positive experience for lenders. They understand the market and reserves risk.

‘However, the market is evolving, with new buyers bringing different credit risks into the market, different pricing formulae adopted and a mix of short-term and long-term contracting tenors preferred.

‘In terms of liquidity, we believe the growing market will attract banks to greenfield LNG projects, increasing the pool of funding.

‘LNG prices are likely to be stable in the near term and rise over the longer-term.’

‘With PNG enjoying a strategic position on the natural resource map (it is close to key markets) and having successfully hosted major LNG investments, we believe lenders would be supportive of financing the Phase II developments.’

Future LNG demand

LNG prices are likely to be stable in the near term and rise over the longer-term, according to the bank.

‘On the demand side, we see a strong growth story, particularly for Asia. Gas is a cleaner burning fuel.

‘LNG generally has 40 per cent lower greenhouse gas emissions than black coal.

‘Further, we see new sources of demand such as LNG powered trucks in India and, possibly, LNG-powered vessels to meet new sulphur emission standards due to take effect in 2020.

‘Strong demand growth, and a lack of FIDs and project commencements over 2018 to 2022, mean the market is likely to move into deficit from the mid-2020s.’