Mon | Dec 18, 2017

Financing natural gas projects

Published:Monday | September 11, 2017 | 12:00 AM

What do the UWI Mona campus' police car fleet, Red Stripe, and Jamalco all have in common?

A plan to power their operations with liquefied natural gas (LNG).

As organisations recognise LNG to be one of the cleanest fossil fuels to burn, many heavy energy consumers in Jamaica are planning to convert. In their favour are the recent discoveries of large LNG reserves in North America which, coupled with the new technologies developed to extract and process the fuel, has brought LNG pricing to competitive levels in relation to other imported fuels. Furthermore, at the state level, the inclusion of LNG in the country's fuel mix offers the added benefit of power source diversity, thus improved energy security for Jamaica. Perhaps, however, the most important development is the Government's goal to make the island the central LNG hub for supplying energy in the region, creating opportunities for LNG bunkering.

The LNG supply chain for Jamaica commenced with the United States-based New Fortress Energy signing a 20-year supply deal with the Jamaica Public Service (JPS) in 2015, and investing US$750 million into the construction of the LNG terminal. In November 2016, the JPS Bogue power plant in St James began using LNG, achieving a historic milestone for alternative fuel use in Jamaica. History was again made earlier this year in April when NCB structured the financing of a US$330-million, 190-megawatt dual-fuel plant, with liquefied natural gas as the primary source of generation. Located in Old Harbour, St Catherine, the plant will be operated as an independent power producer selling the electricity it generates to JPS under a long-term power purchase agreement.

NCB's financing structure is comprised of loans and bonds maturing in 12 and 15 years, respectively, providing the JPS subsidiary with cash flow relief during construction and initial years of operation by delaying payments on principal during the earlier years of the facilities. With this move, NCB is building its capacity within this nascent energy sector that is set to transform how Jamaican companies power their operations.

... Complex transition to LNG to give positive results

The shift to liquefied natural gas (LNG) is expected to yield positive results, starting with reduced energy costs in high energy-consuming sectors, as well as grow industries to service the needs of a new LNG-consuming sector.

The transition, however, is a complex operation requiring the highest levels of coordination between parties to allow for the financial success of Jamaica's LNG terminals and regasification platforms. Due to their high capital outlays and required technical expertise, detailed contracts are required to address lenders' protection, financing, and risk allocation. To address these business imperatives, NCB has built safeguards into contracts which include assignment of cash flows, performance bonds, step-in rights, and dividend restrictions. The financial institution has also included guarantee from sponsors for their equity injection and the option to take a first charge over the assets of the business.

With Jamaica's heavy energy-consuming customers set to capitalise on LNG, financing the changeover of existing plants is now a critical step. This need creates an opportunity for local lending institutions to partner with these businesses to structure innovative, cost-effective financing packages. Additionally, as Jamaica moves towards realising its goal to become a regional LNG hub, terminal and regasification capital requirements will require billions of US dollars in funding.

"To meet the demand, we may have to get regional support or even join forces," said Brian Boothe, general manager, NCB Corporate Banking Division, said.

"For us at NCB, providing the level of financing needed may require drawing on the expertise of our Cayman and Barbados offices to attract investors to sophisticated financing vehicles. In so doing, we would be creating new ranges of investment products that will further broaden and deepen the capital markets of the Caribbean. This would, in turn, help to build resilience to financial risks, while leading to a maturing of the region's capital markets and reducing the need for funding from multilateral agencies," Boothe explained.