Gulf LNG output to grow as Asian demand climbs: Report

Growing demand from Asian markets especially Japan and South Korea for liquiefied natural gas (LNG) will enhance market share and total production of GCC producers by 100 per cent by 2010, industry officials was quoted by Financial Times.

LNG projects in the region are now able to secure better borrowing terms, but future challenges could have a financial impact.

"The share of GCC producers is increasing and total production is planned to reach 50 million tonnes per annum by the end of this decade, an increase of nearly 100 per cent from the existing levels," said Michael Hamilton, senior manager, project and trade, Arab Petroleum Investments Corp (Apicorp).

"Imports by South Korea and Japan from GCC producers reached 56 per cent and 22 per cent respectively in 2001 from less than 5 per cent each in 1996," he said.

The Saudi-based Apicorp is owned by 10 members of the Organisation of Arab Petroleum Exporting Countries (Oapec) and acts as equity investor, debt arranger and financial advisor.

In the current LNG world trade, the GCC countries account for 22 per cent of exports, almost the same as Indonesia. Algeria accounts for 18 per cent, while Malaysia accounts for 15 per cent. The other producers worldwide command the balance 23 per cent share.

Among the importing markets, Japan is the biggest, accounting for some 53 per cent, followed by Europe (23 per cent), South Korea (15 per cent) and others (9 per cent).

Hamilton said the participation of regional banks in lending for LNG project is increasing whilst there is a decrease in appetite of international banks.

"But projects in the region are increasingly able to secure better borrowing terms with longer tenors such as the Oman LNG refinancing of 16.5 years, aggressive leverage and uncovered (i.e without ECA support) facilities.

"However, the challenges facing the LNG industry are likely to have an impact on financing."

Notwithstanding the big role of banks in regional LNG financing and the growth opportunities for the LNG industry, there are certain key challenges to be faced, he warned.

The challenges are the deregulation of the gas and electricity industry in markets such as South Korea, Europe and India, shorter contracts, increased flexibility, take or pay commitments for less than 100 per cent and acceptability of credit risk of markets such as India, China etc.

Other challenges to be faced are the delinking of LNG prices from crude oil prices, availability of LNG ships, swapping of shipments and consumers strategy to diversify supply sources for LNG.

"These challenges to the LNG industry and to the financing market in the region are likely to place certain demands on developing, alternative financing sources, structures and terms. Financing based on merchant risk instead of offtake contracts or long-term charter hire in case of ships could be one example," he said.

Thus, it is likely that international bond market would be accessed for long-term funds for LNG projects and bank financing for short to medium term basis. Private equity funds would be another source along with Islamic finance.

"In the short-term, a sound sale and purchase agreement with credit worthy offtaker's would continue to be a basis for bank financing and in the long-term LNG trade could become a commodity business similar to petrochemicals. As this evolves, banks would be more flexible towards financing LNG projects." (*)