LNG Playing Fields

In recent months, there has been considerable activity within the playing ‘fields’ of Vietnam. The Vietnamese have concluded major LNG trade deals with countries such as Japan and Korea. White & Case, is a leading law firm recognised for its legal innovation and outstanding service to clients. LNG trade deals form an outsized part of law firm White & Case’s growing portfolio. The firm specialises in LNG trade negotiation and project financing. Petromin’s Fuels & Power taps the minds of two of the firm’s leading experts from the firm’s offices in Tokyo and Singapore, for insights on LNG trade deals in the pipeline. Goh Tz’en Long reports.

1. What are your insights on the recent spate of mega power plant projects, powered by LNG and jointly developed between Vietnam and Japanese companies, which includes terminals for receiving LNG ships, regasification station and delivery pipelines.

Paul Harrison, Partner, White & Case Tokyo: While Asia remains the region with the greatest reliance on coal, its use as a fuel of choice continues to decline, and gas is increasingly seen as necessary to enable a transition to low-carbon solutions without limiting economic growth.  There is growing demand for power in Asia Pacific due to population growth, urbanisation and industrialisation, and associated increased consumption and living standards.  Natural gas can act in a bridging role to displace coal and complement renewable energy supply, as new technology continues to develop (e.g., battery storage, hydrogen, etc.).  Gas-fired power offers a solution to the power system security issues created by the often intermittent nature of renewable power, with flexibility to respond to peaks in demand. In the specific case of Vietnam, over recent years power demand has grown by an average of 10%-12% annually, domestic gas production is expected to start declining from 2025 and offshore exploration faces challenges in the South China Sea. In response to this, Vietnam has an ambitious list of 22 LNG-to-power projects planned for the next decade.  This pipeline offers significant opportunities for foreign investors and recent announcements by JERA, Tokyo Gas and Marubeni among others show that Japan is at the front of the line.  There is also support at a governmental level – on December 14, Japan and the US issued a joint statement in support of Vietnam’s energy transition through LNG utilisation, stating that LNG was key to ensuring Vietnam’s energy security, while reducing air pollution and assisting in transitioning to a low-carbon future.

2. We would like to seek your insights on why the Vietnamese and the Japanese co-investors are bullish on LNG despite the oversupply situation in world markets and the inherent risks imposed on demand by pandemics such as Covid-19.

Paul Harrison, Partner, White & Case Tokyo: Until relatively recently, a typical LNG Sales and Purchase Agreement (SPA) included take or pay provisions, minimum / fixed volumes and inflexible destination clauses.  LNG supply risk was therefore a key risk that needed to be managed on LNG to power projects, which often only governments were able to accept.  However, there have been significant changes in the LNG market in recent years including the rise of traders, aggregators and portfolio players and a corresponding increase in the amount of shorter term and spot sales.  This has resulted in the market demanding more flexible LNG SPAs, including with respect to pricing, tenor, volume and destination.  This should in turn help to manage the allocation of risk in LNG to power projects – for example, parties have greater access to alternative sources of supply and, conversely, in the case of over-supply, are able to utilise reversionary or re-sale rights to mitigate that risk.  This is not a panacea of course – while greater flexibility and lower gas prices are beneficial for LNG to power projects, volatility in the spot market, as seen in 2020 and the first quarter of 2021, may raise bankability concerns.  With respect to COVID-19, we do not see a significant impact on energy demand in the longer term – in our view, recent falls in energy consumption are a blip.  All the factors identified above (i.e., population growth, urbanisation and industrialisation) continue to apply and, as economic activity rebounds, so will demand for energy.

3. What are the risk factors involved in these projects and the delivery timescales?

Saul Daniel, Partner, White & Case Singapore: There are several key risk factors and how these risk factors get addressed may have a significant impact on delivery timescales. These include: (i) the need to further develop the legal and regulatory framework for the gas market in Vietnam. As recognised in the Gas Master Plan issued in January 2017, the current legal framework requires further development. It currently reflects the historically dominant position held by state-owned enterprises across the power generation, transmission, and supply chain, as well as the reality that Vietnam’s gas reserves have been sufficient to meet domestic demand. As Vietnam transitions into an LNG importer, policies on LNG import prices (e.g., to allow the ability to pass on increases in gas prices to consumers), technical standards for LNG infrastructure, and the liberalisation of the electricity and gas markets, among others, will be important considerations in the creation of a transparent and competitive market and will be critical for the development of the new projects. The process for amending and enacting new legislation can often be a difficult and time-consuming process. (ii) the proposed risk allocation in the projects and the role of the Government. The new Law on Public-Private Partnership (“PPP Law”) was ratified on 18 June 2020 and will come into effect on 1 January 2021 and will apply to the development of LNG-to-Power projects. The PPP Law raises several important considerations for investors and lenders. First, government guarantees for performance or payment obligations of state-owned enterprises (for example, to supply fuel or to purchase electricity from BOT power plants) were previously contemplated. The PPP Law is silent in this regard other than with respect to government guarantees to be given for foreign currency risk (for 30% of revenues after deducting expenses), access to land, exercise of land use rights, access to public services and public facilities, and rights to mortgage assets. These express guarantees for foreign currency risk are positive features under the PPP Law. However, the lack of broader performance or payment guarantees, and only partial coverage of foreign currency risk, will require careful assessment by lenders and sponsors. The new PPP Law also introduced a new risk sharing mechanism. The attractiveness of this structure to investors in LNG-to-power projects remains to be tested, as does its applicability in the context of take-or-pay arrangements. (iii) the electricity pricing structure. From an investor and lender perspective, it is desirable to pass on pricing risk to the end consumer to the greatest extent possible. The importance of this feature is reflected by the adoption in other jurisdictions in the region of regimes that pass through costs ultimately to the end users. As state-owned enterprises have historically dominated the electricity market in Vietnam and given that electricity tariffs can often be politically sensitive, electricity tariffs in Vietnam have remained relatively low. The Government has recognised the need for liberalisation of the power market, and reforms have been implemented in phases for the generation market, the wholesale market and the retail market in Vietnam. Further development in the electricity market regulations will be required and from the perspective of investors and lenders should ideally take into account a pricing structure that supports the development of a competitive LNG market, for example, pricing that allows costs (at least to a certain level) to be passed through to the end users.

Biography

Paul Harrison

Partner, Tokyo

Paul advises clients on major project and debt finance transactions, helping to fund multibillion-dollar projects. He has particular knowledge and experience of the oil & gas and power industries, including LNG, renewables and shipping. Paul has worked on transactions across the globe, including in Asia Pacific, the Middle East, Europe, Africa and the Americas. Representing project sponsors, lenders and borrowers, Paul develops financing arrangements to suit each client’s needs, guiding them through the complex stages of each transaction while focusing on outcomes which benefit them in both the short and long-term. Paul is currently a partner in the Firm’s Tokyo office and in 2012 became a Registered Foreign Attorney in Japan and a member of the Daini Tokyo Bar Association. Paul is recognized as a leading lawyer by legal directories and was named as one of Law360’s “Rising Stars” for project finance for 2018.

Saul Daniel

Partner, Singapore

Saul Daniel’s practice involves the representation of clients in a wide range of complex transactions across the energy industry including project development, joint ventures and project finance. He has extensive experience in the upstream, downstream and LNG sectors in particular. Saul has worked on major energy transactions throughout the Americas, Africa, Asia, Europe and the Middle East. Saul has worked in the Houston, London, Abu Dhabi and Johannesburg offices of White & Case.