Oil Price Slide Threatens LNG Funding Surge

12 Feb 2015: LNG financing activity maintained strong momentum through to the end of 2014, with transactions totalling a record $53 billion. LNG sector funding jumped sharply higher on 2013 levels and the US dominated the scene with two giant deals – Cameron LNG and Freeport LNG brought in over $15 billion. Beyond projects, financing was raised for mergers and acquisitions, LNG vessels and development of gas fields to feed liquefaction facilities. This was accomplished by a variety of means, including tapping the bond and equity markets, securing corporate loans from banks, and using reserves based lending to bring in upstream funding. But 2014 also brought some disappointments. Russia’s $30 billion arctic Yamal LNG project and its $5 billion clutch of Arc7 LNG icebreakers should have approached financiers for funding. But project funding was delayed by US and EU sanctions against Russia. The precipitous drop in the ruble – despite the Central Bank of Russia’s unprecedented 17% interest rate hike – is set to make fund raising even more challenging for Russian companies. With Yamal off the table, banks were awash with cash and eager to supply funds to other LNG deals. Shunning volume risk, they like the security of long term offtake or tolling contracts that characterize LNG schemes. Also, these project financings typically offer better upside on pricing than the wafer thin margins seen on corporate deals. Financings had been buoyed by robust energy prices – until 2014 started to draw to close. Brent crude’s plunge in December to five and a half year lows of $60 per barrel – down 45% on June levels – ushered in a new era of uncertainty and sent jitters through the hydrocarbon sector. It has already wiped billions of dollars off oil and gas company share prices. Some had already started to rethink new projects and expansions as implementation costs ratcheted higher and more will delay final investment decisions or mothball schemes as a result of the sharp crude price drop. The initial impact is spooking equity and bond investors, but it is hard to gauge how protracted crude’s fall would need to be to reduce bank funding to the energy sector. Banks participating in LNG project finance tend to take a long term view. In the short term the falling oil price is not expected to reduce bank appetite. Cheniere, for example, saw good support in December from banks when 18 committed to providing $11.5 billion to its Corpus Christi project in Texas. But even if lenders remain willing, there will be fewer deals on the immediate horizon to mop up their cash. Malaysia’s Petronas has already delayed final sanction on its $36 billion Pacific Northwest LNG development in Canada and Woodside said that it would put back FID on its Browse floating liquefaction facility from 2015 to mid-2016. Download here