COP21 may boost LNG-to-power - Chris Down

This article first appeared in Interfax’s Natural Gas Daily

Chris Down is a partner at global law firm Norton Rose Fulbright. He has vast experience of advising on projects in the oil, gas and power sectors. He told Interfax that the development of LNG-to-power projects could be accelerated if a global deal is reached at the COP21 climate summit in Paris this December.

Interfax: How do you see LNG-to-power projects developing in the future? Can we expect to see a growing number of them?

Chris Down: LNG-to-power is an increasingly popular topic because of reduced prices for LNG and growing demand for power in many regions, including Asia and Africa. A global deal on carbon dioxide emission reductions at the COP21 summit in Paris in December could also favour gas-to-power over coal-fired generation. Consequently, a deal in Paris could accelerate investment in LNG-to-power projects.

Interfax: The news broke this week that Egypt has signed a deal for a second FSRU, mainly to supply its electricity sector. Do you expect a wave of LNG-to-power projects in North Africa in the near future?

Chris Down: Potentially, yes. Morocco, for instance, has great potential. It is looking to build 6.3 GW of combined-cycle gas turbine power plants, all of which would be fuelled by LNG imports. This is a large-scale development, and it will be interesting to see how the government structures these projects.
There are essentially two options. The government could import the LNG itself and either toll the gas through the power plants or sell it to independent power producers. Alternatively, it could require the power producers to procure their own LNG imports, which would require the projects to secure capacity rights at the LNG terminal. The Moroccan government has historically required developers to take the fuel supply risk on its other thermal power projects.

Interfax: Where else do you see potential for LNG-to-power projects?

Chris Down: There are already a couple of projects underway in Ghana. This is obviously an interesting dynamic, given the level of investment in Ghana’s offshore Jubilee and Offshore Cape Three Points gas reserves. South Africa is another candidate for LNG-to-power projects, with its power deficit and huge demand.

[South Africa’s] Department of Energy recently issued a request for information, which includes the possibility of structuring power projects using imported LNG as the fuel source. Moreover, indigenous gas production in South Africa is probably some way off. South Africa could potentially import LNG from East Africa or the United States. One of the challenges, however, would be the ability of South Africa to meet significant dollar-denominated fuel costs. On the Department of Energy’s coal-fired power procurement programme, they have not accepted any dollar foreign exchange risk in relation to fuel costs.

Interfax: How would you assess the economic viability of LNG-to-power projects compared with coal-fired projects?

Chris Down: Firstly, LNG is not cheap. It is cheaper than liquid fuels such as diesel, but it is not cheaper than coal. In countries with no price on carbon it often makes sense for governments to back coal-fired power projects. A case in point is Indonesia, which has a lot of domestic coal reserves it can take advantage of instead of importing ‘expensive LNG’. One the other hand, you cannot get financial support from the World Bank for coal-fired projects. It will be interesting to see if multilateral institutions such as the African Development Bank and the Islamic Development Bank will decline to fund coal-fired projects after the COP21 summit.

Interfax: What about the bankability and financing of LNG-to-power projects?

Chris Down: Achieving a bankable LNG-to-power project is not a straightforward exercise. A 20-year take-or-pay contract for LNG is a significant financial commitment. With a take-or-pay contract, you need a high degree of certainty regarding the load factor on the power plant. You also need a robust regulatory framework so that the basis on which the plant will be dispatched if demand exists is clear – i.e., the local utilities cannot refuse to dispatch the power on an arbitrary basis. Such regulatory stability does not yet truly exist in Africa, for instance.

Interfax: Will the future be FSRUs or onshore LNG terminals?

Chris Down: It is not really a technology competition. Onshore LNG terminals are typically for larger gas import volumes. FSRUs work well for smaller, discrete projects – and this is really the area where we are seeing a lot more interest. A $300-400 million FSRU is a neat solution for countries with lower power demand, such as in sub-Saharan Africa. Or look to Chile, where Höegh LNG recently signed a 20-year contract with Octopus LNG for the Penco Lirquén FSRU. Malta is also developing an FSRU project to address the country’s high power prices. The use of an FSRU also provides flexibility in terms of managing risks – the vessel can be redeployed if, for example, construction of a power plant is delayed.