LNG investments face some risks

 By Eireene Jairee Gomez May 6, 2021

https://www.manilatimes.net/2021/05/06/business/companies/lng-investments-face-some-risks/870261/

 

A new report from the Institute for Energy Economics and Financial Analysis (IEEFA) revealed that investments in developing liquified natural gas (LNG) facilities in the country will face negligible development risks, particularly exposure to $14 billion in stranded assets, amid regulatory and financial uncertainty in the Philippines market.

Sam Reynolds, the report’s author and IEEFA Energy finance analyst, highlighted that the race to develop LNG facilities in the Philippines has gone from a marathon to a sprint but potential LNG investors must proceed at their own risk.

“Officials in the Philippines have endorsed a rapid build out of LNG import infrastructure due to the anticipated depletion of the Malampaya deepwater development, the country’s only domestic source of natural gas, and high GDP (gross domestic product) growth expected over the next decade,” said Reynolds.

In the report, he noted that exporting countries and industry players have pushed the narrative that natural gas represents a viable transition fuel from coal to renewables. The United States, in particular, has encouraged legal and regulatory reforms to stimulate LNG demand creation.

“In this context, it is easy to assume that the Philippines’ LNG demand will grow rapidly, and that investments in LNG-fired power plants will face negligible development risks and reap all-but guaranteed returns. But the picture is much more complicated,” Reynolds said.

The Philippines has a long history of incomplete LNG import projects. Currently, a large diversity of industry players with extensive financial capacity and project management expertise — including international oil and gas majors, commodity traders, state-owned oil companies, and regional utilities — have been unable to bring LNG-to-power assets online.

The report outlines the issues facing LNG-to-power investors, which include nascent legal and regulatory regimes, rapidly changing power market structures, a lack of existing transmission and distribution infrastructure, and plummeting renewable energy price trajectories.

Many of these impediments will take years to overcome, according to the report.

Reynolds estimates the total value of proposed LNG import infrastructure — including power plants, ports, regasification facilities, and pipelines — to be $13.6 billion (P653.5 billion), all of which is at risk of being stranded due to the rapidly changing legal and commercial landscape.

While policymakers have tried to increasingly iron out lower-level administrative hurdles and incentivize investment by issuing permitting rules, Reynolds stressed that higher-level legal and regulatory regimes for LNG are still in their nascent stages and could take years to refine and implement, adding uncertainty to the future market environment.

Meanwhile, the report mentioned that the global growth of renewable energy will cause LNG to become increasingly uncompetitive in the country.

“As renewables prices continue to drop and global LNG markets tighten to increase fuel costs, LNG-related investments will become increasingly uncompetitive in the Philippines market, especially as smaller electricity consumers become eligible to choose their retail suppliers,” Reynolds pointed out.

“Rapidly declining cost curves for renewables demonstrate that long-term pricing has shifted in favor of renewable energy growth. As policies in the Philippines accelerate the transition to clean energy, natural gas-fired power plants reliant on volatile imported fuel prices will realize fewer opportunities for long-term guaranteed returns,” he explained.

He added that going forward, “investors will have to take on significantly greater market risk. Whether they will be willing to do so remains to be seen.”