Abstract

Major gas infrastructure projects present some of the most demanding and complex financing challenges, even during the best of times. In the wake of the worst global credit crisis on record, and the ensuing market and political uncertainties, this session will bring current perspectives from the industry and the financial community with recent experience in funding such projects ? in LNG, in pipelines and in gas storage.

1) Introduction

Like other capital-intensive infrastructures, LNG infrastructures and gas pipeline projects are usually funded through project finance. This specialised form of debt finance involves lending to a project company set up for the sole purpose of developing an individual project. The debt has to be repaid from the cash flows generated by the project, and debt holders have only a limited recourse back to the corporate sponsors of the project. A specific debt ratio can therefore be associated with each project, which is not the case for corporate-financed projects1 (i.e., projects financed on the owner's balance sheet).

In general, project finance seems an efficient way of maximizing debt financing - backed by the future project revenues - since empirical studies conclude that projects funded through project finance are highly leveraged. Shah and Thakor (1987) invoke asymmetry of information to explain why project finance involves higher leverage than does conventional corporate financing. Brealey et al. (1996) stress that project finance allows the allocation of specific project risks (i.e., completion and operating risks, price risks and geopolitical risks) to those parties best able to manage them. Surprisingly enough, Kleimeier and Megginson (2001) find that floating-rate project-finance loans have lower credit margins than do most comparable non project-finance loans. They conclude that project finance solves important agency costs in the creditor-borrower relationship.

More specifically, for a National Oil&Gas Company (NOC), going through a project-finance scheme in an LNG project may lower the cost of debt, as the resulting project's credit risk during operation may be lower than the NOC's credit risk. In addition, when the project's sponsors have to guarantee2 the loans during the construction period, partnering with a major international oil company may lower the overall credit risk, as project-finance loans become non-recourse loans only once a set of completion tests have proved to be successful. This correlates the cost of project-finance debt with the credit worthiness of the sponsors involved in the project. Furthermore, as stressed by Morrison (2008), transnational gas pipeline sector is driven by geopolitics, but once projects approved project finance is an obvious funding option: "the schemes have high upfront costs, steady tariff payments during their lifetimes and many sponsors in the project company - all ideal conditions for project finance".

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