Investigating a developer’s forecasts
The level of interest of a potential investor in a proposed gas infrastructure project is often guided by the forecasts of the project developer. This is particularly true if the investor does not have specialist commercial and appropriate technical knowledge of the gas industry. Our work in this case demonstrated the importance of carrying out appropriate due diligence and independent forecasts on any project.
As a development bank, our client was interested in the potential for this project to support economic development and provide security of energy supply to the project host country and other countries in the region. Nonetheless, it wanted to test the fundamental market need for the project and to better understand if the proposed commercial structure of the project was appropriate.
The client asked us to provide the support it needed to determine whether the project was likely to achieve the utilisation and returns claimed by the developer. We were tasked with finding out whether there was sufficient LNG demand to support a new LNG import terminal in the region, as well as testing the proposed tariff against competing pipeline and LNG supplies.
Assessing timelines and costs
Using our knowledge of the gas and LNG market in the region and our trusted market modelling techniques, we prepared a market assessment to compare with that provided by the developer. Factors we considered included the region’s evolving power generation mix, competing supplies from pipelines and other LNG facilities, the impact of gas market liberalization and the evolution of decarbonisation policies through time.
We reviewed the project plan, regulatory and environmental permits, capacity allocation process, commercial agreements and other documents supplied by the developer to assess the planned timeline and costs for each aspect of the project.
Our forecasts of the potential cost and utilisation of the new terminal were measured against the financial model provided by the developer. We then tested various cases — using our own figures and the developer’s — to create a series of different revenue scenarios.
Red flags and risk
Through our forecasting and modelling work, we demonstrated to our client that the market fundamentals did not support the need for a new terminal. Furthermore, we demonstrated that the planned commercial model — as envisaged by the developer — was likely to be unworkable and that assumptions made in the financial model provided by the vendor were potentially unreliable.
We made a number of recommendations to the client as to how the project might be improved to create a more compelling investment proposition, and set out what we believed the client needed to see from the developer in order to be confident of putting equity into the project.
We advised on ways in which the bank might be able to invest in the project at a later stage, subject to particular circumstances changing.