How Much a Threat Is Downstream Liberalization to Traditional LNG? And How Concerned Should a Project Lender Be?

(CEPMLP) Conventionally, Gas Sales Agreements have been on long-term basis characterised by take-or-pay implementation arrangements. However, setbacks arising from the lack of transport system pipelines and bureaucracies in pipeline tariffs made pipeline gas, although still desirable, somewhat unattractive, thereby necessitating gas supply via LNG ships across oceans. With the capital intensive nature of LNG, project financing is a mainstay in LNG projects. From the lender's perspective, LNG is one of the most bankable energy projects informed by several reasons amongst which are its long-term contracted ships with creditworthy buyers as a safeguard for LNG security of supply, and cash flow certainty.

However, with the wind of liberalisation, which undercuts long-term contracts, LNG trade seems to have taken another twist as phenomena such as 'ad hoc' or 'spot market' and non-contracted LNG ships on short-term basis seems an emerging trend; thereby, casting doubts on lenders' perception of cash flow expectations. Despite the increase in demand for LNG, is the lender impressed by such demand, or would it rather be concerned as to whether a real threat to debt service exists?

This paper seeks to discover the extent of liberalisation on LNG trade, and how prospective lenders to spot market bound LNG ships may mitigate the market risks arising therefrom