Key Considerations when developing FSRU project in new markets

FSRUs are considered ideal for the supply of early gas while a permanent onshore terminal is being considered or constructed.

Currrently, there are 22 operating FSRUs around the world, comprising about 17% of the regasification terminals. 6 units will be in operation in the upcoming two years, In addition to those on order. Options are available for 7 further vessels with DSME (shipyard) and a further 3 vessels with Samsung. The IGU has estimated that there could be 50 vessels in operation by 2025 ¹.

when developing a gas importation project in new markets through an FSRU scheme there are some key considerations to be taken into account. Those considerations can be summarized as follows:

Market demand and the fast track need for the gas introduction

FSRU can be a good option if there is a short term market of less than 6 MTPA. Project developers in the early stages will have to assess the markets need for the natural gas and to secure the gas customers commitments for the gas purchase, in order to be satisfy their expectations and to be inline with the customers plans.

Project Feasibility Studies

Each FSRU project is unique. They are site specific and dependent on several factors, including: The site readiness in terms of dredging, berthing and mooring, as well as the metocean conditions for the site, which will affect the mooring system required for the FSRU. This will require the development of a technical feasibility to ensure the optimum project configuration is selected, and then translate these technical configurations into cost estimates in order to develop project economical feasibility.

FSRU Contracting models

Normally there are two contracting options for FSRU projects; to either be leased or owned, depending on the CAPEX availability and the market needs (is it short term or long term?). The project developers will decide which option to go for.

project developers will have to consider the charter duration and it's flexibility.

If the project developers decide to charter an FSRU, they will have to consider the charter duration period. During the earlier days of the FSRU industry, charters were typically for a term of 10 years and the daily hire was determined in order to allow the owner to recover capital costs and finance costs over 8 years with the remaining 2 years as profit.² Whilst FSRU owners may charge a higher rate for such flexibility, owners of used vessels that are no longer subject to outstanding financing loans may be able offer such flexibility on a more competitive basis. For FSRU projects committed to a single customer (such as an industrial or power generation facility) the charter would typically need to be of the same duration as the underlying power purchase agreement (typically about 15+ years).

Financing

While most of project developers will prefer to go to the lease option in FSRUs contracting it is conceivable that an FSRU project will include different financing arrangements for different component parts of the project (e.g. marine infrastructure developer, terminal owner, port authority). The interplay between the different financing groups will be a critical consideration as it may introduce complex intercreditor issues such as security arrangements, termination and enforcement actions.

FSRU Procurement options

Typically there are two main procurement models; to either own a vessel, or convert an existing vessel, depending on whether there is sufficient time for gas introduction in the market or not. The project sponsors will need to decide whether to elect for a new-build vessel or convert an existing LNG carrier (or procure an existing FSRU).

Port and Marine Services

The project developer will usually enter into a port services agreement for the provision of tugs and support services with a third party provider. It is important not to underestimate how long it can take to negotiate port services, particularly as the “risk vs. cost” equation under the port services contract is likely to be disproportionate.

Other difficulties may arise, in countries where the port services provider has no previous experience with FSRUs and LNG carriers and their associated risks. In that case, the port services provider may be unable to deliver all of the required services.

Separate FSRU Owner and Operator

An alternative structure, with obvious benefits to the project sponsors, is for the project company to order or purchase the FSRU and/or FSU and separately contract a shipping company (with the requisite expertise that the project company may lack) to operate and maintain the vessel. This was the structure which was adopted by Swan Energy and Mitsui O.S.K. Lines for the FSRU/FSU LNG import project planned at Jafrabad, India.⁷ This allowed the project company to receive the benefits of the FSRU operator’s experience and expertise (including during the construction of the FSRU, where applicable). However, this structure may give rise to unforeseen complexities, particularly in relation to the interface between operating and charter contracts and how matters such as the liabilities of the parties and the responsibility for the performance of the vessel / regasification services are allocated.

Conclusion

The growth of the FSRU industry during the course of the last few years has allowed a number of LNG import projects to come online in timescales and at costs which may not otherwise have been feasible. although most of the projects have been successfully implemented, there were projects in which the project developers have not gone through detailed risk assessments, and ended up failing.