The challenges that major energy projects face are many – locating the resources themselves, navigating the political, legal and regulatory framework, selecting the appropriate technology, securing the materials and labour needed to build the project… the list goes on. One intangible yet essential input that is in increasingly limited supply and yet is required in ever greater quantities is money.
The global tightening of credit over the past half-decade or so has affected and will continue to affect energy projects, even in those parts of the world that have weathered the global financial crisis relatively successfully. An obvious point is the sheer size of the projects in question. An 11-figure project cost is practically entry level for major LNG projects today and even by the standards of modern project finance, the sums under consideration are tremendous.
Adding to the financial pressure is the fact that (lowered) country limits are likely to apply to the major project lenders. Finally, there is the impact of Basel III and the requirements thereby imposed on capital adequacy ratios, which effectively make it more expensive – sometimes prohibitively so – for banks to hold long-term debt.
Export credit agencies will thus be essential for successful project financings. The importance of export credit agency (ECA) financing is demonstrated by their role in the financing of two LNG mega-projects: PNG LNG and Ichthys LNG. These financings illustrate both the financial scale of such projects and the scope of the role that ECAs play.
The role of ECAs: examples
When PNG LNG closed in January 2010, it was the largest-ever project financing. Reflecting ExxonMobil's role as lead sponsor of the project, US ExIm provided $2.2 billion. China ExIm's $1.3 billion was surprisingly large (although see below for a consideration of the reasons for this). Australia's geographical proximity to, and links with, Papua New Guinea meant a US$350m commitment from EFIC. In addition, JBIC committed $1.8 billion. The total direct lending and guarantees from ECAs was more than four times the uncovered commercial debt – the financing would not have succeeded without the involvement of the ECAs.
A more recent example is that of lchthys LNG, now the world's biggest-ever project financing at $20billion. It is noteworthy that the ECAs who provided a total of $5.4bn of loan cover (NEXI, Atradius, Hermes, EFIC, K-EXIM, JBIC, COFACE and KTIC) each provided $675m – there was no disproportionate contribution from any ECA with respect to this part of the financing. For the direct loans, though, matters were very different. JBIC was, as is so often the case, the main player, lending a staggering $5bn– its largest such loan ever. K-EXIM provided $400m and EFIC another $400m.
In total, Ichthys received over $11bn of direct and covered ECA loans and, without the ECA involvement, it is highly unlikely that the project financing would have succeeded. The funding required for the project was simply not available in the commercial bank market and the use of project bonds in the pre-completion stage of a project is unrealistic, especially given the cost of carry for a project the size of Ichthys.
ECA policy drivers
It is not just the sponsors' need for funds that drives the involvement of ECAs in mega-projects. The raison d'etre of an ECA is to support the export of goods and services from that agency's country –‘tied lending’ – and the ECAs involved in the PNG LNG and Ichthys financings have certainly done that, as ECAs have in so many other projects. However, for a number of the ECAs mentioned above, export support is not the only policy driver.
JBIC's stated policy aims include promoting the overseas development and acquisition of strategically important natural resources. JBIC has long been a key lender to major energy projects globally, on an untied basis as much as a tied basis. Other Asian ECAs adopt a similar approach, with an emphasis on securing long-term supplies of natural resources – energy and minerals in particular – and a readiness to use direct finance and credit guarantees in order to achieve this aim.
Many ECAs provide support on the basis of the OECD Arrangement on Officially Supported Export Credits (the Arrangement). This is a gentlemen's agreement which is designed to ensure that goods and services are selected on the basis of their price and quality, rather than the availability of cheap finance from the relevant ECA. China is the most notable example of a country that is not a signatory to the Arrangement and the increasing prominence of Chinese export credit support is linked, at least in part, to the enhanced ability that China has to provide exceptionally competitive finance.
‘Non-Arrangement’ support is increasing and concerns have been expressed by a number of Arrangement countries that such support is distorting international investment, as exporters from ‘non-Arrangement’ countries are receiving subsidised financing and buyers are attracted by the absence of the ‘conditionality’ associated with other financing sources.
The Arrangement does allow ‘matching’ by an ECA of another ECA's terms (even if such terms are non-Arrangement). Barack Obama announced on 17 February 2012 that US ExIm will match the financing terms of any foreign ECA in order to keep US exporters competitive against rivals to ‘level the playing field for US companies and workers when our competitors don’t play by the rules’. A rise in the prevalence of matching does, though, start to raise questions as to the future effectiveness of the Arrangement itself.
ECAs and asset finance
Although this article has considered the role of ECAs in project finance, ECA support is of increasing importance in asset finance as well. While the drive to secure natural resources is, clearly, not applicable to asset finance, the reduction in the availability of commercial bank finance, combined with a desire on the part of ECAs to support exports and thus domestic employment, means that ECA involvement in the asset finance space is also expanding.
Even with the current prevalence of ECA financing, there is no reason to think that it will do anything other than grow as a source of funds. Between the ‘push’ of a need for finance, preferably on a long-term and relatively cheap basis, and the ‘pull’ of policy drivers to procure and develop natural resources, together with a growing relaxation of the terms on which ECAs are prepared to provide support, the involvement of ECAs in major projects can only increase. The basis on which this happens, and the degree to which ECAs adhere to the Arrangement, remains to be seen.