Issue 140 • 6 June, 2008

Equity not project finance holds key to Angola LNG

Equity investment by the Angola LNG partners, rather than any major debt financing operation, is expected to fund the lion’s share of the Soyo liquefaction plant’s development, writes Kevin Godier.

Banks and other debt providers look unlikely to be approached for financing to cover the liquefied natural gas project now under way in Angola, which carries an estimated $4bn development cost. The 5.2m t/yr train is intended to monetise some 200bn m3 of gas across a period of 28 years, beginning in 2012. Bechtel was given notice in February to proceed with construction of the plant near the town of Soyo in the northern province of Zaire, along with storage and loading facilities.

The Angola LNG partners Sonangol, Chevron, BP, Total and Eni, have given no indication that they will go to the commercial market to fund what will represent the largest single investment in Angola. “You may well find that they don’t go for finance,” African Energy was told by a project financier with one of western Europe’s leading project finance banks. “BP and Chevron both seem to dislike using project finance, so much will depend on Sonangol’s attitude,” he said. In this respect, he stressed, “there has not been even the smallest whiff that Sonangol is seeking a bank to advise on financing the project”.

A similar message came from another banker heavily involved in the LNG sector. “To the best of my knowledge there is no plan to raise financing – it will probably be done through equity,” he said. “There was some debate a while ago on that. I think that the shareholders concluded that the nature of the gas supply agreements wouldn’t support a non-recourse financing, and put aside any plans for that.”

He said the real issue was the gas supply agreement, which he described as “more like a best efforts agreement, rather than any deliver-or-pay commitment”. An underpinning factor, here, he added, was the nature of the gas that would be pumped to the liquefaction plant.

The project will utilise about 28.3m m3/d of associated natural gas initially from the Cabinda Association and from Blocks 14, 15, 17 and 18, as well as previously discovered non-associated gas reserves in shallow water in Blocks 1 and 2, from the Quiluma, Enguia North, Atum and Polvo fields. “A potential problem with the associated gas, produced in conjunction with oil, is that the latter can be subject to OPEC quotas and other commercial decisions. The suppliers are the only players that are really able take a view on this and they did not want to commit to supplying gas,” this banker explained.

The first banker observed that there were some loose parallels between the Angola LNG set-up and the cluster of LNG projects being developed in Nigeria. “It is all about gas supply in Nigeria, also. Four possible LNG projects are vying for gas, the West African Gas Pipeline wants some, and the Gas Masterplan has been announced – bringing all sorts of questions as to how much gas can go to export and domestic projects.”

It would be popular with PF banks

Were the Angola LNG sponsors nonetheless to elect for a debt financing, bankers predicted they would have no trouble finding takers (AE 136/4).

“I am not aware of anything so far but I would think it would be popular,” said a financier heavily focused on sub-Saharan Africa. “Export credit agencies and local banks could take some of the risks – some of the southern European ECAs have recently shown some appetite for Angola, and the domestic Angolan banks are holding considerable liquidity. But there is also a group of international banks – often big banks with a large deposit base, or banks from Japan or elsewhere a country imperative – that focus on the big ticket, long-money risks thrown up by LNG projects. The lending is not highly remunerative, but the risks are generally mitigated by Triple A-rated offtake contracts.”

In terms of laying off risks to the insurance markets, a London-based broker forecast that some capacity could be available for individual banks, or even for a syndication of lenders, dependent on the timing of any application. “The private market is willing, but whether it is able is another question altogether. The size required might cause a little indigestion, due to the capacity constraints for Angola that are linked to ongoing risk exposures.

“In principle, providing that an LNG debt package for Angola was well structured, the private market would be happy to support it. But there is so much business tied up in multi-year policies that there is sometimes a log-jam, and sometimes chunks of capacity are freed up. The market for Angolan risk has undoubtedly got bigger, but for a huge project, it can be very difficult.”

The project makes progress

The last public statement on the project came in February, when Angola LNG gave Bechtel’s Oil, Gas & Chemicals global business unit notice to proceed with onshore construction of the plant, including a loading jetty sized to accommodate ships of up to 210,000m3.

Bechtel and ConocoPhillips – whose Optimised Cascade LNG process will be used at the complex to produce LNG, and LPGs such as propane and butane, condensate and domestic pipeline gas – have been involved in detailed engineering and procurement for Angola LNG since early 2007.

In early November, project affiliate Angola LNG Supply Services ordered four 160,000m3 LNG carriers for delivery beginning in the summer of 2011. The vessels will be built by Samsung Heavy Industries of South Korea. The consortium of Teekay, Mitsui & Company and NYK Line has signed an agreement to charter the vessels at fixed rates – inflation adjustments – for 20 years to the project sponsors, commencing in 2011. Teekay will operate two of the vessels and NYK will operate the other two.

First LNG from the project is expected to be delivered into the US natural gas market via the Clean Energy regasification terminal near Pascagoula, Mississippi, which is under development on the Bayou Casotte Ship Channel by Gulf LNG Energy LLC. This facility is expected to be complete in 2011.

While North America is Angola LNG’s main target market, Total has indicated that it might direct cargos to France, while BP has an option to deliver to the UK’s Isle of Grain terminal.

Looking further ahead, the Angola LNG project is expandable to four trains, depending primarily on whether gas reserves are larger than the government’s official estimate. Companies including Spain’s Gas Natural and Repsol YPF, and Portugal’s Galp have joined force to look at prospects for another gas project in Angola (AE 128/13).

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