LNG plant financial model

Building production and supply chains of liquefied natural gas (LNG) requires huge investments and a long-term development strategy from the project participants, the development of an adequate contract structure and the creation of mutually beneficial conditions for cooperation with numerous stakeholders.

The success of the construction of an LNG plant and its infrastructure largely depends on a high-quality financial model that gives participants a clear vision of the future prospects and current needs of a particular project.

The global LNG market in 2021 exceeded 103 billion euros.

According to experts, this important segment of the global hydrocarbon market will show a CAGR of over 8% in the next decade.

The construction of new LNG plants and regasification terminals is proceeding at an accelerated pace, as are the launching of hundreds of methane carriers and laying thousands of kilometers of pipelines from seaports to end-users all over the world.

A rapidly growing market means high competition, including competition for capital. Attracting significant financial resources on adequate terms requires companies to provide comprehensive support for investment projects at all stages, starting with planning and forecasting.

It is clear that a sound financial model for an LNG plant attracts capital providers and lays a solid foundation for the future financial success of the project.

The role of financial models in LNG plant projects

Currently, digitalization covers all areas of business, including liquefied natural gas plant projects.

Modern conditions of the market economy have made financial modeling an important integral part of the effective management of any large project or company.

The detailed model allows the finance team to evaluate the development of the LNG project under changing conditions. Modeling also visually represents the economics of the project and evaluate the effectiveness of investments in a particular asset.

Financial models greatly simplify risk assessment and increase the efficiency of strategic decision making.

Due to this fact, the concept of financial modeling is widely used in the field of evaluation of investment projects in the oil and gas sector. In fact, any economic basis for a management decision requires a financial model, and its preparation requires a professional approach to financial modeling. Depending on the decision, the variability and duration of the consequences, the model can be built speculatively, and its detailing depends on the goals facing management.

The financial model for LNG projects is a complex tool that is used to create models of processes and objects for the purpose of their analysis, planning and forecasting.

On the basis of time, these models can be classified into two large groups:

• Financial models for making strategic decisions. The first group includes models for evaluating investment projects, determining the project value, macroeconomic forecasts, etc.

• Financial models for making operational or tactical decisions. This group includes financial models for predicting the effect of changing the procurement policy, tax optimization, etc.

In the LNG industry, there are many specific factors to consider when planning funding.

In particular, these are expensive equipment for gas liquefaction, as well as complex elements of delivery and transportation of the finished product. This means huge engineering costs in the early stages of a project, as well as high procurement costs. Consequently, the project initiators will require significant investments from the very beginning of the project, and the costs will increase many times over in the next stages, placing a serious obligation on the financial team.

The requirements for the financial model of an LNG plant are quite extensive. Regardless of the time interval and detail, the model must meet three key requirements.

The first and most significant requirement is compliance with the tasks that are set for the financial team.

The second requirement is that the costs of preparing a financial model should not exceed the benefits from its creation.

This benefit may consist both in choosing a more efficient project, and in the rejection of unprofitable solutions. These two requirements together form the principle of financial feasibility of a particular LNG project.

The third requirement for a financial model is its high controllability.

If the model influences decision making, then management must be confident that it correctly processes the input data.

The fourth requirement for a financial model is its versatility. The universality of the financial model implies that it can be used to evaluate and justify similar projects without making significant changes to the calculation procedure.

Finally, the fifth requirement is scalability. Scalability in the context of financial modeling means that the model will work stably with increasing complexity of the initial assumptions, detailing fixed and variable project costs, changes in the cost of natural gas, hiring additional staff, etc.

The ergonomics of the financial model also plays an important role in the success of the LNG plant project. This model must be built in such a way that the calculated indicators are calculated on the basis of a wide set of initial data, but at the same time it is convenient for users of all levels.

The principle of economic feasibility should be in the first place, which will reduce costs in the future, when the decision is made or the initial conditions of the financial model change.

In world practice, financial modeling rules are called "best practice modeling". These rules are the basis of various techniques, such as FAST modeling and SMART modeling. They are based on simple, intuitive principles, following which, taking into account the specifics of the industry, allows finance teams to create high-quality LNG plant models.

These principles of financial modeling can be combined into three large groups:

• Simplicity: all calculations and formulas underlying the model should be clear and understandable for a user who has not previously dealt with a specific LNG project.

• Flexibility: the financial model of the project should be easily adaptable to changes in external conditions and requirements of the customer or other interested parties.

• Visibility: A high-quality model should provide clear answers to the question of how a particular project will respond to certain changes, such as an increase / decrease in LNG demand, an increase / decrease in operating costs, etc.

These principles of financial modeling seem simple and straightforward.

But in practice, they are often abandoned for the sake of momentary savings in time and money. Such savings are dubious, because as a result, companies often have to redo labor-intensive projects, and in the worst case, a poor-quality financial model leads to significant financial and reputational losses during the implementation of an LNG project.



The services of experienced professionals, multiplied by the use of advanced software for financial modeling of the project will allow you to easily adapt it to changes in key indicators under various force majeure circumstances (price changes, geopolitical situation, etc.).

This approach will allow the finance team to calculate performance indicators in different scenarios, providing sufficient safety margin to the LNG project and minimizing the need for further project changes.

Financing LNG investment projects across the world

In the implementation of any LNG project, financing plays a primary role, which is provided through a number of internal and external mechanisms.

This process is called “investment project financing”. Traditionally, in the oil and gas sector, long-term investment loans serve as the main source of resources for business expansion. In any case, a professional financial model is the basis for the formation of funding sources for the LNG plant project.

The main methods of financing LNG projects are listed below:

• Investment of internal resources of the companies-initiators of the project.
• Equity financing (for example, the issuance and placement of company shares).
• Debt financing through loans or bonds, as well as leasing instruments.
• Mixed finance, including project finance and its varieties.

First of all, consider internal sources, which are based on the company's own funds, as well as cash flows that are generated as a result of current business activity.

In most cases, self-financing is used only for small projects. Larger LNG projects such as new plants, pipelines and regasification terminals are funded by both external and internal sources.

The advantages of this method include its simplicity, low risks of bankruptcy of a potential project in the future, as well as the ability to extract more profit in the future. Obvious disadvantages of self-financing include limited capacity and lack of external control over the use of resources.

If companies rely primarily on internal financial resources, this increases the risk of incomplete achievement of project goals. This is primarily due to the limited financial capabilities of most players, which often does not allow the use of the most advanced / expensive engineering solutions.

External sources of funding for LNG projects are listed below:

• Issue of bonds and other securities.
• Loans from commercial and state banks.
• Funds of financial institutions and non-financial organizations.
• Financial support for governments and municipalities.
• Additional investment of funds by the founders of the project.

External sources of financing for LNG projects ensure the attraction of significant financial resources, as well as control over the effectiveness of their use.

This will allow companies to consider larger projects and, as a result, make more profit.

Among the shortcomings of external financing, experts point out a long process of attracting resources, high requirements for financial stability (an in-depth analysis of the enterprise is carried out), as well as a decrease in profits due to the need to pay for the funds raised. In addition, in case of failure, the project initiators risk losing assets.

It is always risky to use external sources of funding, as there are many unpredictable factors that can interfere with a company's plans. However, the construction of LNG plants requires huge investments, and in most cases, the implementation of such projects by one or two companies is difficult or impractical due to the irrational use of internal resources.

A correctly drawn up financial model tells management the most profitable way in each situation, minimizing risks.

Table: Advantages and disadvantages of the main sources of financing for LNG projects.

Financing method	Advantages	Disadvantages
Self-financing	Simplicity and rapid mobilization of financial resources. Low risk of insolvency and bankruptcy. Free use of resources for different purposes. High profit.	Severely limited funding opportunities. Lack of control over the use of resources.
Issue of shares	Payments for the use of borrowed funds directly depend on the financial result of the company. Virtually unlimited amount of funds raised through the issuance of new shares. Dividends to shareholders can be paid only when the project starts to make a profit.	A time-consuming process that sometimes requires the establishment of a legally separate project company.
Lending	Flexible financing scheme. There are no additional costs for the placement of shares. The effect of financial leverage is used. Possible tax incentives.	A very expensive method of financing LNG plants, which can lead to serious losses if the project fails in the future. Numerous requirements put forward by banks when providing large loans.

First of all, the financial model should consider investment loans, since this method of financing LNG projects is one of the most effective and is widely used in capital-intensive projects.

This form of investment has the following features:

• No restrictions on the timing of project investment.
• No costs associated with the issue and placement of shares.
• The tax burden on the project is usually lower.
• The effect of financial leverage is applied.

The maturity of the investment loan is comparable to the project implementation period.

The main feature of this tool is the grace period, which provides the project initiators with long "holidays" before the start of the loan repayment. But the cost of borrowed funds will increase, since the payments will increase due to an increase in interest accrued on the rest of the debt.

There are a number of requirements for obtaining an investment loan:

• Presentation of the business plan. A company that aims to take this type of loan is required to provide the bank with a detailed business plan for the LNG plant. The bank must be sure that the loan will be repaid and the business plan is considered as a kind of guarantee.

• Liquid collateral for loan repayment. This implies that the bank may receive sufficient funds from the sale of the debtor's assets to compensate for possible losses. For example, collateral can be LNG project assets, including land, expensive gas liquefaction tanks and equipment, as well as licenses and intangible assets.

• Providing the lender with comprehensive information confirming the good financial health and creditworthiness of the borrower. It is important to note here that the project must be sustainable throughout the entire period of its life.

• Fulfillment of guarantee obligations, which include certain restrictions imposed on the borrower by the lender. This may be, for example, maintaining the key financial parameters of the project in a certain range for the period of financing.

Ensuring strict control of the lender over the targeted spending of funds on the loan is also important for obtaining a loan on adequate terms.

It happens that the borrower, having taken a loan, uses the funds for other purposes. Consequently, there is no project, the funds have disappeared, and the borrower is no longer able to repay the loan. Therefore, here it is important for banks to control the implementation of the project and its further operation.

Are you interested in long-term financing of oil and gas projects?

Sedona Investments offers large loans for the construction of liquefied natural gas plants in the Middle East, Africa, North America, Latin America and other regions of the world.

We are ready to finance and accompany your investment project at all stages, providing professional support, including financial modeling for LNG plants and other services.

Contact our team for details.