SMALL SCALE LNG CATALYST FOR GROWING GAS MARKETS April 24-25, 2018 - PowerPoint PPT Presentation

SMALL SCALE LNG CATALYST FOR GROWING GAS MARKETS April 24-25, 2018

Access to Reliable Energy In the Emerging Market context, small-scale LNG demand could comprise of small (<200 MW) LNG-to-Power, off-grid distributed LNG market, conversion of transportation fleets to run on CNG/LNG, conversion of industrials from diesel usage to LNG, etc. As an illustration, Emerging Market countries with scope for increased access to energy where LNG terminals currently operate, LNG developments underway or being contemplated: Bangladesh (62%) Nigeria (58%) Cameroon (57%) Papua New Guinea (20%) Cote d’Ivoire (62%) Senegal (61%) The Gambia (47%) Ghana (78%) South Africa (86%) India (79%) Botswana (57%) Kenya (36%) Lesotho (28%) Mauritania (39%) Swaziland (65%) Mozambique (21%) Zambia (28%) Myanmar (52%) Zimbabwe (32%) Namibia (50%) Tanzania (16%) Existing LNG terminals or potential for future terminals Source: World Bank, Sustainable Energy for All, 2014 LNG schemes are underway or being contemplated 2

Evolution of IFC’s Focus on Gas Value Chain Revamped focus area for IFC as it provides high economic value and development impact investment opportunities in Emerging Markets Primary area of focus for IFC the prior 20 years in O&G sector 3

What Has Made the Recent Emerging Market Gas Evolution Possible? A Confluence of Unique Developments… 1 • Growth of the North American LNG supply option Cheap and • Increased large gas finds has lead to LNG developments in Emerging abundant Markets and increased role of smaller producers LNG supply • The role of LNG aggregators/traders 2 • Advent of FSU/FSRU has significantly reduced the midstream constraints Rapid • Small-scale LNG liquefaction has enabled modular gas distribution schemes Evolution in • FLNG schemes have enabled stranded gas fields to be monetized into risk- Technical diversified LNG schemes with more manageable incremental LNG supply Solutions 3 Structural • Economic downturn-led disruption to longstanding SPA standards have Changes in actually made the supply of LNG more flexible, growth of spot market the LNG • Shorter and more flexible off-take contract appeals to new potential buyers Market • Acceptance of lower credit SPA counterparties => Emerging Markets • Integrated LNG-to-Power solutions even in merchant power markets New • Gateway (floating) LNG terminals to supply power and other usages Emerging • Distributed small-scale LNG concepts for off-grid solutions Market Gas • Open access (floating) LNG terminals on a willing buyer-seller basis Demand 4

The Case of Southern Africa Restricted regional zones where access to gas is available in constrained volumes and large portions of the coastal area deemed not suitable for LNG importation terminals The region has in excess of 40,000 MW of coal-fired power plants and heavy use of diesel oil for industrial energy needs. In addition to gas- Roughly 200 fired power bcf/year of natural generation, gas, equivalent of modernizing the 3.9 Mtpa LNG, flows economies through from Pande-Tamane gas usage is field essential . Western & Southern Cape deemed not suitable to host an LNG import terminal Diminishing offshore supplies to PetroSA GTL plant 5

The Case of Southern Africa Firm plans are in place to grow flexible, gas-fired power generation in the region Standalone L2P & G2P IPP schemes will significantly strengthen power supplies, promote lower carbon generation and RE penetration, but likely will not further the growth of the non-power gas market. 2,000 MW LNG-to- 480 MW Gas-to- Power IPP by 2025 Power IPP by 2022 1,000 MW LNG-to- Power IPP by 2025 6

The Case of Southern Africa Plan to grow the non-power gas market through small-scale LNG distribution network, on the basis of future LNG-to-Power schemes IFC promoting IFC promoting landed natural gas bring forward to be converted FSRU associated through small- with IPP, to 2022, scale LNG scheme to grow other gas into vast trucking usage, including operations to trucking of LNG for cover most of industrial and Western Cape mining usage. This industrial region demand is and part of estimated at 0.5 to Namibia and 1.0 Mtpa of LNG Botswana. Est. 0.3- 0.5 Mtpa demand by 2022 2,000 MW LNG-to- Power IPP by 2025 480 MW Gas-to- Power IPP by 2022 1,000 MW LNG-to- Power IPP by 2025 Viable estimated range for 20-tonne LNG truck around 1,200 km with good infrastructure & LNG-on-Diesel market 7

Similar Small-Scale LNG Operations in… With increased likelihood LNG flow into Emerging Markets, IFC is experiencing an uptick in investment opportunities in small-scale LNG schemes India In appraisal to invest in a large-scale conversion of buses and heavy usage trucks currently running on diesel. Cheaper than diesel, reduces city pollution levels Jamaica May participate with NFE where LNG flows have already expanded beyond fueling power plants to also supply industries China Already invested in small-scale liquefaction, LNG transportation and 400 LNG filling stations for long-haul buses and trucks Indonesia Potential deal for breaking bulk of from conventional LNG terminals to serve the needs of smaller, distributed demand through dedicated LNG shipping and regasification infrastructure Dominican Republic Already invested in an LNG distribution scheme from an existing conventional LNG terminal 8

Unique Small-Scale LNG Investment Risk Factors Is the risk worth the reward? - Significant deviation from typical concession-based IPP project financing. Effectively selling energy into merchant markets, with price and demand variability, cross-currency risks, and extensive “retail” aspects to the business model - As much a logistics operation as an energy infrastructure investment, calling for cross- sector sponsor experience and operations - Gas price and gas transportation price regulations subject annual review and redetermination causing additional commercial risks. Full pass through of indices such as Brent and Henry Hub might be not always be possible - Unique technological solutions that primarily comprise of a small-scale LNG concept – custom made shipping vessels, ISO containers, road transport vehicles – are most often not readily transferable or adaptable to general LNG value chain elsewhere - Lack of scale within small-scale LNG solutions or inability to scale up to match demand Especially when combining small-scale LNG projects with LNG-to-Power project financing, the “project finance cultural difference” between the two types of investments should not be underestimated. But the underlying projects complement each other. 9

Financing Considerations for Small-Scale LNG Projects Common Sense Risk Mitigation Measures - If the investment is an add on feature to existing natural gas field operation or LNG import terminal operation, it is already significantly de-risked (i.e., break-bulk type operation) - Initially more conservative capital structure, gradually increasing leverage - Increases ability to withstand regulatory risks - Manage inability to readily pass through index variations - Reduces susceptibility to natural gas demand variation - Less of a focus on asset security and more on market growth - Local/regional currency long-term debt and therefore the ability of the local capital markets to finance the investment needs - Depend on lease arrangements to the extent possible reducing capital expenditure - Ensure fundamental commercial basis for the project is long-term gas-on-diesel value proposition - In most markets, first mover advantage critical to success Above all, partner with IFC who generally will have extensive local infrastructure- energy investment experience, access to flexible long-term local currency lending and a strong appetite for early equity through entrepreneurial partnerships! 10

Long-term, Flexible and Cost-Effective Financing One stop shop for full range of adaptable financing instruments › Private placement in listed equities › Traditional private equity › Risk capital aimed at project development EQUITY Typically 5-20% shareholding › › Not just financial investor, adding to shareholder value › Subordinated loans MEZZANINE / › Income participating loans QUASI EQUITY › Convertibles, preferred shares › Fixed and floating rates › Local currencies › Corporate loans - Reserve based lending, Straight corporate debt, Partial credit guarantees for bonds › Up to 20-year SENIOR DEBT maturity › Long-term project finance - Greenfield, Expansion & EQUIVALENTS › Mobilization of funds from other lenders and investors, through financings, syndications, underwritings and guarantees 11

Thank You Haran Sivam Alan Townsend Giancarlo Ortega e: hsivam@ifc.org e: gortega@ifc.org e: atownsend1@ifc.org o: +1-202-473-1113 o: +1-202-473-8654 o: +1-202-458-9738 m: +1-202-415-0356 m: +1-202-403-1694 m: +1-202-600-6982 12