Baker Botts attorneys examine impact of financial crisis on LNG projects
The current financial crisis is unlikely have an immediate, direct impact on LNG project development. This is the conclusion of a group of energy attorneys from Baker Botts LLP, a large international law firm, who held a media briefing in Houston on the issue Oct. 9. Baker Botts has one of the most active and extensive LNG practices worldwide.
The attorneys also discussed the energy policies of the presidential candidates and whether or not the economic and financial crisis affecting the country will delay the next president in implementing his energy policy.
“LNG projects, and by this I’m referring both to liquefaction and to receiving terminals – the full value chain, won’t be affected immediately because these projects have a very long lead time, a long project development cycle that is measured in years,” said Steven Miles, a partner in the Washington, DC office.
Miles added that having a few months of economic turmoil does not mean that projects won’t go forward. “The short answer is: there’s no direct impact, nobody’s headed for the exits, nobody’s closing down projects, people are still developing the same projects they were developing six months ago or two or three years ago. But clearly, if the [financial] situation were to extend for a long period of time, it would have an impact.”
Having said that, the attorneys agreed that there are potential consequences to the crisis, depending on its length, breadth, and depth. One of those effects is credit. If there is an inability to access credit markets generally that lasts for months and into years, that will affect everything that needs financing, they said.
If the world were to enter into an extended recession, this would reduce demand dramatically with lower global oil and gas prices as a result. Clearly, lower energy prices will always have an impact in determining which projects go forward and which ones don’t, they added.
In response to a question about how much in the way of financing is in the pipelines at this time, David Asmus, a partner in the firm’s Houston office, said, “At a minimum, it’s in the high tens of billions, maybe more. Most of the projects coming on stream in the next two years have some sort of financing. There is a large bulge of projects coming on line in the next couple of years, and then there is a bit of a hiatus in the market.”
Asmus added, “The [LNG projects] that are under construction or starting construction, already have funding in place, so they’ll just be drawing down on those credits. And, so far, the financial crisis has not been so bad that the banks are unable to deliver the money they promised. So we’re still okay in that regard.”
Financing has been typically done “on the back end” of the deal, noted Miles. “It used to be that you’d spend a few years putting together your project agreements, you’d go to FID (final investment decision), make a financial decision, which is equity investment, and go forward. You’d have the deal fixed by that point in time, but you wouldn’t necessarily be doing all the financing agreements then. I think that may be changing in the current environment. People may be sensing that they don’t want to do all the work if they have doubts the financing will be there.”
Bruce Kiely, a partner in the firm’s Washington office, fielded several questions about the impact of the election on energy policy, particularly LNG development.
“There will be a difference between what the candidates say will be their energy policy and what actually happens,” said Kiely. “Part of this is just what you say to get elected, and this is just standard. Most of the time, actual policy depends on what the world situation really is when they take over, what kind of priorities they will face, and finally what Congress does to help them get their energy agenda implemented.
“There’s a lot of talk,” said Kiely, “but we don’t know which way it will go. Will we have a cap-and-trade program or just mandates? One thing we should all recognize: the president is rarely the ramrod on energy issues. Usually it’s the secretary of energy. It remains to be seen who will be appointed and whether or not that person becomes a ramrod of issues of concern to the oil and gas industry.”
Several attorneys noted that LNG is supposed to be – by statute – a priority of the United States. Projects are supposed to be permitted unless they are shown to be not in the public interest.
“The DOE pushes it to the extent they can, but they have no statutory basis,” said Kiely. “FERC approves projects at a pretty good clip, but then you get into the issue of permits. Among the agencies that require permits are the Corps of Engineers, the Coast Guard, and the Environmental Protection Agency. You also have to get approval under the Coastal Zone Management Act and the Clean Water Act. Our experience has been that many of those agencies are opposed to our projects. There is a limit to what even the president can do to dictate to the Corps of Engineers or anybody else. So, in effect, the national priority on LNG has been substantially frustrated.”