Presented By Robin Tayal

1. Impact of Spot Trading on Project Finance Presented By Robin Tayal

2. Contents 4 5 Impact of Spot Trading on Project Finance Conclusion 2 3 Development of LNG Industry LNG Spot Trading 1 Introduction

3. Introduction • Natural Gas has emerged as one of the primary sources of energy. • It is environmentally clean, highly efficient, and abundant in nature • Natural Gas Consumption has increased rapidly since last decade, consumption grew by approximately 3.1% from 2006 to 2007 • Preferred fuel in electricity generation industry • Heavy investments in natural gas industry owing to the entrance of new players

4. Contents 4 5 Impact of Spot Trading on Project Finance Conclusion 2 3 Development of LNG Industry What is LNG Spot Trading 1 Introduction

5. Development of LNG Industry • International Natural gas markets have gone through substantial institutional and economic change • The emergence of LNG industry has provided a new way of transporting gas to the new markets • LNG project is a chain of investments poised for collective performance but prone to total failure by the under functioning of the most insignificant link • Long Term Sale Agreements with take or pay clause, contracts of exclusivity and destination restriction clauses are the salient features of LNG industry • Though capital intensive, has developed rapidly.

6. LNG Industry Overview and Trends Liquefaction Plant Shipping Regasification Terminal • LNG vessels committed to specific LNG Projects • Project Financed along with the whole Project • Charter rates offering guaranteed cash flows • Accounts for 14% of the total Project Cost • Costsdepends onSize, Annual Temperature, Marine Conditions • Most Capital Intensive Link ( 58% of the Project Cost) • High Costs due to remote locations, strict design and safety standards, and use of cryogenic material • Big Plants so as to exploit economies of scale TRENDS TRENDS TRENDS • Significant Reduction in construction costs (about 35% - 50%) • Emergence of new players • Increase in size • Significant Reduction in costs (about 60%) • Increase in size and players • Speculative ship building • Increase in number of ship building and ship routes • Better understanding of Markets • Significant Reduction in costs • Increase in size and players • Increased interests of more and more countries

7. Rise of LNG LNG Industry has grown by leaps and bounds since 1990

8. Rise of LNG

9. LNG Industry and Project Finance Upstream Midstream Shipping Offtake

10. Contents 4 5 Impact of Spot Trading on Project Finance Conclusion 2 3 Development of LNG Industry LNG Spot Trading 1 Introduction

11. LNG Spot Trading • LNG Spot Trade is defined as “ one or less than one year period contract trading” • LNG Spot Trading though a recent phenomenon has grown substantially in last decade • It accounts for around 12% of the global LNG Trade • US and UK were the early entrants in LNG spot trading • Japan and Korea though the late entrants have emerged as the biggest spot traders

12. LNG Spot Trading

13. Factors driving the Growth • Liberalization and Restructuring of Energy Markets • Increased Competition • Speculative Tanker building • Innovative Dispute Resolution Mechanisms • Innovative Project Finance Mechanisms • Cost Reduction • Flexibility in contracts • Higher Margins • Acceptability of LNG Spot Trading Risk

14. Impact of Spot Trading on Project Finance • Project Finance is based on the fundamental that the debt shall be recovered from the isolated, identifiable and secured cash flows • Risk shared through contractual obligations between the project participants • Rigid clauses like “ Take or Pay”, destination clause and exclusivity clause guarantees the return on investments • Fundamentals of Project Finance shaken by increase in LNG Spot Trading as it is difficult to guarantee steady and consistent cash flow

15. Impact of Spot Trading on Project Finance • Risks due to Spot Trading • Volume Risk • Commissioning of large number of Projects with the part of the capacity reserved for the spot sale, resulting in the possibility of not being able to sell the untied part. • Price Risk • “ S-curve “ Mechanism used to protect the participants against extreme price movements. • With prices linked to the competing gas , no such mechanism • Flexible contracts with no destination clause allows the movement of cargoes to more price advantageous markets resulting in the uncertainty of cash flows • Spot Trading has aggravated risk as gas price fluctuate based on gas supply and demand

16. Contents 4 5 Impact of Spot Trading on Project Finance Conclusion 2 3 Development of LNG Industry LNG Spot Trading 1 Introduction 16

17. Conclusion • LNG Spot Trading is a way to go • It has grown from 0% in 1990 to more than 13% in 2007 and the trend is indicating an upward direction • Large number of countries are participating in the spot trading • According to an estimate 20%-25% of the tanker fleet is working on flexible basis • LNG Spot trading risks are well understood

18. Conclusion • Finance fraternity needs to adapt to the changes • Need to accommodate the participants requirements of more flexibility • An approach of portfolio investment with appropriate exposure in both kinds of projects could be handy • There is no fixed formula. • Each project should be handled on a case to case basis

19. Thank You