Saudi oil optics

The release of the March Official Selling Prices begins to illustrate Saudi Arabia's complex and calculated moves in the global oil markets.

After years of trying to figure out the market dynamics of the brave new world with US shale and testing market responses to various signals, it knows that cutting its own production is not the only thing that matters (not to mentioned damaging to its own market share).

In fact, targeting data points that are strongly followed by the markets is more important, even if the signals they give are only superficial.

In March, Saudi Arabia increased its Official Selling Prices, pricing out its usual Asian buyers despite a market that is awash with light crude. However this is important in paving the way for more visible Atlantic Basin crudes (North Sea and West African) to be cleared,

In the first quarter, EIA data also shows that Saudi Arabia exported no barrels to its Motiva refinery in Port Arthur, USA, helping to manage storage levels in the US Gulf Coast and Caribbean, data from which drive global price sentiment.

Over the same time period, Saudi domestic inventory levels appear to have been rising.

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Waha gas pricing goes negative

Chart of the week: Waha hub gas pricing goes negative

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US resource play map

Reference map of major US L48 resource plays

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Sponsor completion guarantees in LNG construction financing: Part II

As the world of North American LNG financings continue to evolve, OGInsights explores the use of completion guarantees in construction financings.

In Part II of this two part series, we look at the conditions precedent to project completion which typically need to be satisfied for release of the completion guarantee by lenders.

Construction criteria requires "substantial completion" under the EPC Contract. In addition, operational tests must be satisfactory and includes production of on-specification LNG for a continuous 90-day period.

At completion, maximum stated debt to equity ratio is not to be exceeded - should the ratio be too high, project sponsors are required inject capital to bring the ratio within covenanted levels. Operating account and Debt Service Reserve Accounts are also to be funded to required levels.

From a legal perspective, project agreements and finance documents must be in full force and all governmental authorisations need to be in place, together with certification of environmental and social compliance in line with covenant requirements.

Financing structures continue to evolve to support LNG projects with lenders and sponsors driving the innovation to (i) enable projects and (ii) improve project economics whilst managing the risk that lenders are exposed to.

In Part I, OGInsights covered the use of and reasons for project completion guarantees from a sponsor perspective.

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Sponsor completion guarantees in LNG construction financing: Part I

As the world of North American LNG financings continue to evolve, OGInsights explores the use of completion guarantees in construction financings.

At a high level, the project sponsor guarantees debt service under a guarantee until the construction is complete. To the extent that a project does not reach completion (normally by a certain long-stop date), then the sponsor will be obliged to repay all of the debt under the guarantee.

The provision of a guarantee comes with a number of benefits:

1. Lenders are more likely to agree to the equity funding of a project to be back-ended (i.e. construction costs are first funded by debt before equity rather than pro rata). This improves project economics (NPV and IRR).
2. Lenders will allow use of pre-project completion cash flows as a source of “equity” funding towards the project, thus replacing “hard” equity contributions. In the absence of a guarantee, lenders typically do not give credit to such uncontracted cash flow and such cash generated is trapped until project completion is achieved (as normally insisted upon by lenders). When a guarantee is in place, lenders are more or less agnostic to whether pre-completion LNG sales are contracted or spot sales and can give credit to such cash flows.
3. Lower pre-completion debt costs – reduced commitment fees and margins, reflecting that of the sponsor corporate credit strength (with normal adjustments for pricing and tenor). Pricing could be c.15-30bps cheaper under a construction guarantee structure fr example

One possible downside is that higher amounts of debt are drawn in the early years of construction (vs. when no guarantee is in place) if equity funding is back-ended, and hence interest costs could be higher, although this is partly offset by the lower debt pricing mentioned above.

Note that in a financing without a completion guarantee, lenders require hedging at financial close of the facility with a substantial amount (typically >60%) under either fixed interest rate or hedged throughout the construction and operations period. A construction guarantee provides more flexibility with regard to hedging during the pre-completion/construction period as the interest rate risk is borne by the sponsor; at project completion, lenders will require fixed rate/hedging in place concurrent with the release of the guarantee.

Financing structures continue to evolve to support LNG projects with lenders and sponsors driving the innovation to (i) enable projects and (ii) improve project economics whilst managing the risk that lenders are exposed to.

In Part II, OGInsights explores the conditions that constitute project completion.

#US #LNG #financing

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US LNG: a snapshot of where things stand in 2018

US shale has been a game changer for the gas markets. Often overshadowed by oil story, US gas production is the unloved sibling of oil – oversupplied, low prices, unprofitable and sometimes an unwanted by-product of oil production in the form of associated gas.

However 2017 came to demonstrate the vast potential for US gas and a complete change in direction with the country becoming a net exporter of gas for the first time. This started with first export from Sabine Pass LNG in 2016 which has now grown to four liquefaction trains with trains 5 in the works.  LNG export capacity could reach 8-9bcf/d in 2020 up from the current 2bcf/d, with additional facilities already under construction:

• Cove Point commenced feed gas at the end of 2017
• Elba Island Phase I will come onstream in H1 2018 and Phase II in H1 2019
• Freeport train 1 is planned for operation in 2018 with subsequent trains coming online throughout the rest of 2018 and 2019
• Corpus Christi and Cameron will also come online towards the end of this decade

Source: EIA

US LNG has been somewhat of a disruptor – it has brought destination flexibility and shorter-term procurement to the market that was once characterised by entirely long-term, oil-price linked offtake. This will shake up the market place and how LNG sourcing will evolve is yet to be understood.

Asia is slated to be the big winner with this extra source of gas with South Korea, Japan and China being the largest importers. This is all helped by the recent expansion of the Panama Canal, enabling LNG from the US east coast to Asia with a cheaper and 11 day shorter journey time. This puts into question whether any US west coast and Canadian LNG projects will take off – very likely no in the near-term. The east coast’s proximity to upstream gas, existing pipeline infrastructure to get gas to liquefaction plants and adapted docks means it remains an advantageous location to host LNG terminals.

Related post: Canadian LNG: Wrong place wrong time for Petronas

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