Last June the Lebanese Ministry of Energy represented by Lebanon Oil Installations launched a tender for the supply of LNG and an import terminal consisting of floating storage and regasification units (“FSRUs”) in three different locations along the Lebanese Coast, starting in Beddawi in the North, passing by Selaata and ending in Zahrani in the South.
Leading international companies were pre-qualified to participate in this build, own and operate (BOO) project.
The project is of high importance to Lebanon, it will help the country reduce its energy import bill and contribute in preserving its environment by replacing heavy fuel and gasoil by natural gas as feedstock to its power plants.
To ensure the success of such a challenging project, a number of key considerations shall apply for the project’s developers, sponsors, lenders, off-takers and investors. The main ones are as follows:
As this kind of business is totally new to Lebanon, the approval and permitting procedures that needs to be navigated prior to deploying an FSRU is complex. This may require a number of different licenses and permits relating to, among others, environmental impact and management, marine operation, gas processing and trading, employment/social security of the ship crew and the business or commercial license. To ensure that all necessary permits can be issued for construction and subsequent operation, the project developers will need to work closely with the necessary permitting authorities. Finalizing and obtaining all the requisite approvals can take a considerable amount of time.
It will also be important to identify at an early stage which party or parties are responsible for obtaining which permits and approvals, as well as how the overall permitting ‘risk’ in the context of political complications.
It is conceivable that an FSRU and infrastructure project will include different financing arrangements for different component parts of the project. The interplay between the different financing groups will be a critical consideration as it may introduce complex inter-creditor issues such as security arrangements, termination and enforcement actions.
Ideally, a more holistic financing structure would be implemented with one lender group or similar lender groups involved in the financing of different components of the project. However, that structure may be more difficult to implement on integrated LNG-to-power generation projects, where the marine, pipeline and FSRU facilities may be, or may need to be, financed separately.
Whilst FSRU vessel financing has traditionally been on a corporate finance basis, project financers involved in the financing of other parts of the project (such as the marine infrastructure, for example), will often look to insulate the borrower entity from project-related risks. This may in turn make the process of negotiating the relevant project and financing agreements more complicated.
In terms of FSRU procurement, project sponsors will need to decide whether to elect for a new-build vessel or convert an existing LNG carrier or even procure an existing FSRU. Converting or purchasing and existing FSRU helps quick start the project swiftly, whereas building a new one takes 2 to 3 years. Although a new-build FSRU may introduce cost efficiencies, such as class exemptions from dry-docking during the start of the vessel’s life, reduced boil-off rates and improved send-out rates and low gas consumption.
However, new-build vessels may not be an appropriate solution for Lebanon as the gas is needed as soon as possible.
Flexible charter terms
If the project sponsors decide to charter an FSRU, as opposed to order a new-build or purchase an existing vessel, consideration will have to be given to the duration of the charter. If the vessel is a new- build, the vessel owner may have financing commitments on the vessel which will need to be repaid from the charter hire earned during the initial stages of the charter.
For the FSRU industry, charters were typically for a term of 10 years and the daily hire was determined in order to allow the owner to recover capital costs and finance costs over 8 years with the remaining 2 years as profit. Greater flexibility is taking place nowadays, in some cases with charter terms as short as 5 years with options for the charterer to extend at its sole discretion.
Whilst FSRU owners may charge a higher rate for such flexibility, owners of used vessels that are no longer subject to outstanding financing loans may be able to offer such flexibility on a more competitive basis.
An alternative structure, with obvious benefits to the project sponsors, is for the project company to order or purchase the FSRU and separately contract a specialized operating company to operate and maintain the vessel. This allows the project company to receive the benefits of the FSRU operator’s experience and expertise. However, this structure may give rise to unforeseen complexities, in particular in relation to the interface between operating and charter contracts and how matters such as the liabilities of the parties and the responsibility for the performance of the vessel / regasification services are allocated.
The growth of the FSRU industry during the last few years has allowed a number of LNG import projects worldwide to come online within budget and time, which may not otherwise have been feasible. There is therefore good reason to expect the industry to continue on its current growth trajectory. Whilst it is by no means a new industry, the challenges and complexities involved in executing these floating regasification solutions are not always foreseen and in some cases are still being learned. The ‘plug-and-play’ model sometimes described in the industry may not be achievable in the Lebanese case. Scrutinizing the project risks and factoring in the potential for complexity and delay at the outset should be taken into consideration. Project de-risking measures are needed from the side of the project ultimate owner to ensure the success of the tender award and its smooth implementation.
Author: Abboud Zahr – Oil & Gas Specialist