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Risk and reward to determine project financing

Sep 19, 2018
4 min read
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Investment bankers and gas companies spoke at Gastech on Tuesday about investment and credit risk for gas and LNG projects and whether these are in competition with renewables.

In the conference session Global Leaders’ Panel: “Financing Future Energy Projects: Are Gas & LNG Projects in Competition with Renewables for Investment?” Rodrigo Díaz, Chief Development Officer at Reganosa said pitting natural gas against renewables in not comparing like to like.

“This focuses the debate on power generation, and natural gas plays a big role in the industry that no other fuel can,” he said.

Spain’s electricity demand last year was 250 TW per hour, while demand for gas was 350 TW per hour and just around 20 per cent of that gas was used for power generation, he said. Additionally, natural gas will be the energy source with the highest growth up until 2040, according to the International Energy Agency.

Moreover, electricity alone will not be able to cover the peak energy demand for Europe, at least in a way that will be cost effective for consumers. It doesn’t mean Europe isn’t going to be able to reduce its carbon footprint in the future. For example, renewable resources such as bio-methane and hydrogen can integrate with natural gas infrastructure and they are going to play a key role, he added.

“A study says that Europe can save 140 billion euros per year by 2050 if they use these schemes compared to a full electrification of the energy system.

“If we focus on the European sector, during 2000-2016 the growth in renewables mix has

reduced coal, nuclear and oil mainly, but natural gas has increased its share by 22 per cent. So it seems at least up to now that renewables are affecting the share of other fuels rather than natural gas,” Diaz said.

Meanwhile, questions remain on how investment in energy in going to take place, including how CAPEX will be financed, whether this will be based on spot market pricing and what contract duration will look like, he added.

Rajeev Kannan, Executive Officer and Head of Investment Banking Asia & Pacific, at SMBC, said that although the case for gas investment is stronger because it has more uses than renewables, demand perspective will drive the way forward. He said more financing has been raised recently for renewable projects than for LNG and a significant amount as well.

“From an Asian perspective, energy infrastructure has not been developed for increasing gas consumption,” he said, adding that enhancing the infrastructure has to be looked at.

Philip Roberts, Managing Director Head of Investment Banking Division EMEA, MUFG said that while the energy sector is key for them, whether in gas or renewables, project financing is defi ned by the underpinning demand, economic return and risk profile of the energy project.

“Going forward, the questions will really come down to risk and reward and what is the demand for that project,” he said.

Ryosuke Tsugaru, Chief Executive of Diamond Gas International Pte. Ltd (DGI) a subsidiary of Mitsubishi Corporation said that the world is experiencing rapid and substantial change in the global energy market, the biggest in the last 40 years, with a lot of demand coming from emerging markets.

“We need to work together with the banking sector to adapt to the changing market dynamics,” he said.

“Europe has a great opportunity to push the energy transition and natural gas together to meet the COP21 goals. If all the electricity produced last year in Europe from coal was replaced by natural gas, the power sector would have reduced the CO2 emissions by 33 per cent.

“This is something Europe can do even now,” he added.