Published June 10, 2019, 10:00 PM By Myrna M.Velasco
With help from the shale gas-swamped
United States, the Department of Energy (DOE) has started fleshing out the
pricing matrix for liquefied natural gas (LNG), as this sector builds up
capacity for the country’s future energy mix.
To equip itself with the requisite
knowledge on project structures as well financial modeling on LNG projects, the
DOE has engaged the assistance of the US Department of Commerce-Commercial Law
Department Program, law firm Latham and Watkins and the University of the
Philippines-Gas Policy Development Project on a three-day training that tackled
project implementation parameters for the gas sector.
Key points of discussion had been on
project structures and contracting arrangements, costing and pricing
mechanisms, project valuation, budget analysis and financial modeling.
Energy Secretary Alfonso G. Cusi
asserted “it is high time for us to intensify our effort in realizing our
aspirations to develop our natural gas industry and transform the country as a
regional LNG hub.”
The energy chief has ambitious take
on positioning the country as “LNG hub”, but his concept differs a bit as this
just primarily delves on turning some Philippine ports a transshipment point of
LNG commodities being delivered to other countries – not the true-to -form LNG
hub wherein buyers and sellers could actually trade or execute transactions for
gas.
LNG pricing, in particular, is the
major puzzle that investors have yet to fully comprehend in the Philippine gas
investment re-set, especially with the emergence of regional hubs that has been
taking gas pricing away from its traditional linkage with oil.
In fact, for investor like First Gen
Corporation which is both into putting up its LNG import facility and new LNG-fired
power projects, it is looking at a pricing frame that will be coal-indexed, so
it could be assured of a competitive place in the Philippine energy mix.
On LNG contracting, investors are
similarly looking at a combination of short- to long-term contracts as well as
some degree of reliance on spot procurements – which is a diversion from the
long-term gas sale and purchase agreements (GSPAs) that reigned in the era of
the Malampaya gas-to-power project.
In current contracts, price review
and ‘exit’ or termination clauses are becoming mandatory provisions in the
buying and selling of liquefied natural gas –hence, these are crucial concerns
needing extensive study and re-assessments for markets freshly taking plunge
into LNG investments.
On LNG supply contracting, market
players reckoned that ‘flexibility’ is key for project developers initially
navigating a terrain for short-term contracts but they must also have
strategies to eventually replace them with long-term contracts.
Experienced LNG buyers know that new
supply projects don’t get built without long-term contracts to support them,
hence, the savvy gas purchasers pursue strategies of rationing the long-term
portion of their portfolio for greenfield supply contracts, while they sign
shorter term contracts with portfolio players.
As noted further, there are multiple
ways of doing this and it just requires a new approach – especially so since in
a well-supplied market, there is tendency for sellers to compete aggressively
on price even at the cost of a risk-adjusted negative return. But such has not
been seen sustainable because ultimately, operational and credit risk factors
need to be accounted for, it is for this reason that sellers in this
market-transforming gas environment need to figure out ways to compete more
than just on price.
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