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FSRUs helping LNG to penetrate emerging markets

Floating storage and regasification units are allowing economies to access the lower-carbon fuel source without expensive infrastructure

Demand for floating storage and regasification units (FSRUs) is expanding rapidly, especially in developing Asian economies, despite legal and regulatory challenges, a panel of experts on the Emea leg of the Petroleum Economist LNG to Power forum series agreed last week.

“There is a huge demand for floating regas for many different reasons, [including] the development costs and the technology they provide,” says Aziz Kassim, vice president, development, Middle East, at Excelerate Energy.

“They enable a lot of countries to start quickly to import LNG and take advantage of the lower prices, with the abundance of LNG around the world,” he says, noting plentiful exports from the US, Australia and Qatar. “In a lot of these countries in the past, it was very difficult for them to even think about importing LNG. But with the floating regas… it makes it so much easier for [them] in terms of how they can take advantage of LNG.”

Don Victory, chief process engineer at ExxonMobil Integrated Solutions, notes there are successful small-scale LNG projects that range from Kogas’ 45,000m3 facility on Jeju Island in South Korea down to an “exciting opportunities in what I call micro LNG, especially for developing countries”.

“One of the big questions is always risk allocation across the project spectrum” Tiller, Hunton Andrews Kurth

Victory says there are “some fairly established” models, such as truck-based LNG transport on the island of Madeira in Portugal, that provide a blueprint for less-developed markets.

“In terms of development assistance… and trying to raise the middle class in various parts around the world, including Africa and India, that is a fairly established model,” he says. “We are seeing trucking in China at a large scale. We see it in India now developing. And I predict, somewhere down the road, we will probably see it in Africa.”

Finance challenge

Traditionally, LNG projects have been financed on the back of long-term SPAs, but that is no longer necessarily the case. “That is slowly changing even for the mega LNG projects because the LNG sale and purchase market itself is changing. Twenty-year contracts are no longer the norm—these days we see a lot of 10-year or 15-year contracts,” says Patricia Tiller, partner, Hunton Andrews Kurth.

Such two-decade contracts are “just not possible”, particularly for small-scale LNG, according to Tiller. “For small-scale LNG, or FSRU-to-a-powerplant, for instance, the business model is largely untested, and some of the technology is untested. It is very unlikely that project participants and offtakers are going to be willing to enter into a contract with that length of term for a model that does not have a proper market test.”

She suggests financiers will need to change their expectations for financial security and guarantees. “One of the big questions is always risk allocation across the project spectrum,” she says, referring to the alignment of risk between the entities involved in the FSRU time charter, LNG SPA and further downstream in power-purchase agreements. “That is a big risk for project participants.”

One way to manage this risk is to create a special purpose vehicle (SPV) that is jointly owned by the project participants. However, Tiller says this is “becoming less attractive” as market conditions mean participants may want to limit risk to their own sector. “The FSRU owner, for instance, would not be interested in becoming a part equity owner in a larger SPV that needs to take risk in the failure to deliver on an LNG supply contracts and failure to supply electricity.”

The increasing popularity of small-scale LNG projects in emerging markets reveals the problem that regulatory frameworks may not exist to import LNG, at least for entities other than the national power company.

“With small-scale LNG, we are now seeing new players wanting to… purchase LNG, which has never happened before,” says Tiller. “One of the reasons that some of the recent projects have failed is that the countries have not quickly enough developed regulatory, technical and legal frameworks to support importing LNG, regasifying it and selling to the grid.”

These challenges mean that multilateral lenders such as the IFC have a key role. “I think they are vital,” says Tiller.

Petroleum Economist's second virtual LNG to Power Forum took place last week with a focus on the opportunities and challenges for LNG across the Emea region. This virtual event included eight hours of high-quality content, with a focus on engaging and interactive live panel discussions. Content is now available on demand. Click here to access it

The next in the LNG to Power series is our North America event, to register for this, click here. To view last month's Apac event, click here.

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