Liquefied natural gas projects are extraordinarily expensive. Chevron's Gorgon and Wheatstone projects require a capital outlay of $US72 billion. The Ichthys project, which received investment approval in January, has an estimated capital spend of $US34 billion. And on the east coast, the coal seam gas to LNG projects could each cost from around half of that.
Even for oil and gas industry behemoths such as Chevron, Shell and Total, these numbers are big - particularly when those sums of cash are tied up in a single project. Notwithstanding strong oil prices in recent times, LNG project sponsors remain under "capital pressure". Internally, there are the competing demands for expenditure for exploration, production, R&D, acquisitions and other project developments. Shareholders too want to see a redeployment of capital to assets and projects that yield even more attractive rates of return. One way for LNG project proponents to free up capital is through project finance - although that can have timing, cost, complexity and control considerations. Another is through divestments. These typically take one of two broad forms - either a holistic sale across the entire part of the LNG production chain, or alternatively, a sale of an individual "free-standing project" within those parts of the chain.
Such is the size and scale of these Australian upstream to liquefaction projects that they generally comprise at least four projects within a project: the extraction/production of gas; the initial processing of gas to remove impurities; the transportation of gas to a liquefaction plant (that is, pipelines); and the liquefaction plant itself. Disposing of a percentage of the entire part of the upstream and liquefaction parts of the LNG chain exposes a buyer to two key risks - an upstream reserve risk and a downstream oil price risk. The "reserve" risk is essentially an issue of sufficiency of gas reserves and the cost at which they are recoverable. The "oil price" risk derives from the fact that most LNG pricing is now oil-linked - which is prone to significant fluctuations over medium term horizons. There is a more limited pool of buyers for these sorts of disposals - typically to LNG offtakers or trading houses - who may be able to use their investment in the liquefaction chain as a natural hedge against their LNG purchases or portfolio. To date, the overwhelming majority of sell-downs have been of this nature, with Woodside's Browse sell-down this month the most recent example.
For those projects structured to allow it, a sell-down of discrete parts of projects (particularly infrastructure) allows a proponent to align assets classes and risk profiles, with "types" of investors. For example, a pipeline, gas processing plant, a water treatment facility can be structured as a use-or-pay arrangement, delivering a rate of return commensurate with the level of asset and performance risk the owner (and operator) is willing to take. The infrastructure investor (say, a superannuation fund) could thereby acquire a quality asset, backed by the credit of a major oil and gas player. Critical to any infrastructure divestment within the LNG chain is the need to ensure continuity of service regarding the relevant asset. Further, any divestment of critical infrastructure must facilitate future project flexibility for proponents, for example, in financing, expansions or consolidations. These requirements can be structured into the divestment to maintain project integrity and value.
Market activity and investments in Australian LNG projects reaching FID (final investment decision) has been significant over the last few years. As capital utilisation becomes an ever-growing consideration, a secondary market for these projects (or at least part of them) could unlock a new wave of investment in the sector.
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