When China’s Huaneng Power put together the S$2.25 billion bridge financing (supported by BNPP, Calyon, DBS, Fortis, OCBC, SMBC as MLAs) for its acquisition of Tuas Power on 17 March 2008, it would have been impossible to predict how the debt markets would look only 12 months later. We understand from the market that the bridge financing will have to be refinanced within the next 6 months. Huaneng Power might be able to make use of China’s recently announced stimulus package to seek support from the Chinese banks (Bank of China and China Eximbank provided debt financing for the original acquisition), but even with this possibility, it is fair to say that Huaneng Power’s refinancing will face challenges and, even if it is able to access the necessary credit, the terms will almost certainly differ markedly from what had been anticipated when Huaneng Power concluded its acquisition of Tuas Power with Temasek.
Notwithstanding the credit issues, any financier considering its participation in the refinancing will need a thorough understanding of the nature of the Singapore energy market in which Tuas Power operates. We have been at the forefront of Singapore’s energy market developments over the past decade and our lawyers have helped restructure the power and gas markets (as legal advisers to Singapore Power), assisted the gas importers on the two most recent gas importation contracts into Singapore, advised the energy regulator on the feasibility for developing an LNG market in Singapore, advised the developer on Singapore’s most recent power station and advised the gas supplier to all of Singapore’s generating companies, including Tuas Power. These various roles have given us a unique insight and oversight of the Singapore energy market and the risks to be assessed by any potential investor/financier.
Gas market risk
Although Tuas Power has elected not to be a “shipper” of gas in the new gas market, certain risks associated with the Gas Network Code are passed through to Tuas Power by its gas supplier. The Gas Network Code provides the legal framework by which all gas is conveyed within the gas pipeline network onshore Singapore and was introduced on 15 September 2008. It is a complex legal framework which took over seven (7) years to develop. An analysis of Tuas Power’s exposure to the nascent gas market requires a detailed awareness and understanding of the Gas Network Code.
Regulatory risk and LNG
Given Singapore’s desire to diversify its energy resources and reduce its dependency on piped natural gas from Indonesia and Malaysia, the Ministry of Trade and Industry announced Singapore’s intention to proceed with the development of the LNG terminal in Singapore in 2006. Whilst Gaz de France was appointed as strategic partner to develop the terminal with Power Gas Limited and British Gas was appointed to undertake the role of LNG Aggregator, in 2008, the details of how this process will work in practice remains sketchy. The viability of the LNG terminal in a market which is dominated by (cheaper) piped natural gas during a time when the power growth projections for Singapore are under consideration (Singapore’s GDP shrank 16.4 per cent last quarter on an annualised basis) will be questionable if left solely to “market forces”. Market support measures will need to be introduced to get the project up and running at this stage and such measures will almost certainly affect the generating companies like Tuas Power. The moratorium on future piped natural gas for power generation was announced in 2006 as one such initiative, but others have been analysed including fuel mix policy requirements for the gencos and a preferential dispatch model for LNG users. In promoting the use of LNG, the Government of Singapore announced in September 2008 that “coal could not be used for power generation solely or on a large scale until the demand for LNG stabilities. We will not allow any entry of coal to adversely affect and jeopardize the viability of the LNG Project”. Initiatives of this nature will clearly impact any repowering programmes under consideration by Tuas Power, Senoko Power and PowerSeraya. Any market which develops by regulation needs to be carefully assessed by investors/financiers who look for transparency and consistency in the decision-making process before making the necessary commitments.
Competition and repowering
Of course, the purpose behind the energy market liberalisation was partly to promote competition in the power sector. Singapore remains a small country with a small population which has, until recently, been powered by three Temasek owned generating companies - Tuas Power, Senoko Power and Power Seraya (all of which were divested by Temasek last year). As alluded to above, Singapore’s power demand projections are being revisited - there tends to be an almost perfect correlation between GDP growth and the growth in the demand for power. With Keppel Merlimau’s 525MW co-generating facility having commenced commercial operation in 2007 and the on-going possibility regarding the development of Island Power’s 785MW power plant in Singapore, the old diesel-fired power plants of Tuas Power, Senoko and Seraya will likely need to be repowered in order that the plants remain viable. This is clearly a costly exercise and any decision to proceed would need to be taken in light of the prevailing circumstances.
Access to gas
With 80 per cent of Singapore’s power being generated using piped natural gas, Singapore’s dependency on Indonesia and Malaysia for its energy needs is obvious. While Singapore embarks upon meeting its objectives to diversify its energy sources (mainly using LNG) it is clear that this will not be resolved quickly and many hurdles will need to be overcome. The existing natural gas importation contracts will, therefore, continue to be relied upon for the foreseeable future. However, these contracts include depletion risk and the relevant exporters continue to face domestic demand concerns. Singapore’s demand for natural gas does not derive exclusively from the power generating companies as industrial demand continues to evolve (particularly from the capacity augmentation programmes of Singapore’s petrochemical plants operated by Shell and ExxonMobil). Commentators have reported that Singapore’s industrial demand (i.e. non power generation) for natural gas could reach 600BBtud by 2016. If the LNG issues are not resolved and the timing for the introduction of LNG continues to be delayed, it is not beyond the imagination that Singapore’s generating companies could end up competing against Singapore’s industrial users for a depleting resource.
With so many competing interests, the Government of Singapore and regulators will need to steer a very careful path to ensure that Singapore’s energy needs are meet. Any investor participating in the energy market will need to be prepared for that path to deviate occasionally. In this regard an understanding of the underlying regulatory environment will enable investors/financiers to anticipate market developments and act/respond accordingly.