Unknowns and opportunities
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Unknowns and opportunities

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Anna Chung, Paul Epstein and Dan Feldman of Shearman & Sterling reflect on the prospects for renewables, nuclear and FLNG and the role of the capital markets

Anna Chung, Paul Epstein and Dan Feldman of Shearman & Sterling reflect on the prospects for renewables, nuclear and FLNG and the role of the capital markets



Two related themes have characterised the 2017 project finance market – unknowns and opportunities. In the UK, Brexit is creating significant unknowns for the UK's energy sector. Globally, political risk continues to cast a shadow over the project finance sector and has affected countries with an otherwise strong track record of industry success, such as Qatar. Yet opportunities are in abundance. Saudi Arabia is going full steam ahead with its privatisation programme, seeking to raise hundreds of billions of dollars in the next few years through privatisations in 16 sectors, ranging from oil to healthcare, education, airports and grain milling, as the country looks to reduce its dependency on oil.

The oil sector continues to adjust to what has been described as a "new normal" for prices, though the market has tightened after years of oversupply, which bodes well for the revitalisation of delayed projects in oil-producing countries. Analysts have started to take an increasingly optimistic view for 2018, raising their forecasts for the crude price amid extended output cuts by OPEC. However, the impact of lower prices continues to haunt the treasuries of impacted economies and, inevitably, there will be some inertia before these markets return to historical growth trends in infrastructure investment.

The power sector has continued to diverge on carbon transition policies and we have seen lending policies continue to take a more restrictive approach to fossil fuel projects. This can be seen in two core areas: the approaches to the role of nuclear and coal, both in terms of developing and funding these very different projects. As of June 2017, 11 major international banks had committed to end all direct financing for new coal mines and new coal plants worldwide. However, projects are still being financed where strict environmental guidelines and criteria can be met, particularly in order to support development in economies not yet ready to abandon the technology. Consideration of nuclear power as an alternative, clean energy source is likely to increase with a number of nuclear new build projects being considered in the Middle East and Africa, and the structuring and financing of these projects will continue to evolve as nation states look to meet environmental and political needs.

Around the world

We have seen a continued emphasis on infrastructure development in both developed and developing markets. Over 2017 we witnessed a number of flagship projects reach financial close, including:

  • the Karot hydropower plant – the largest hydropower plant in Pakistan to be financed on a limited-recourse basis and one of the priority projects of the China-Pakistan Economic Corridor;

  • Paiton's $2.75 billion debt refinancing – the first project bond and the largest rated amortizing international bond for an infrastructure project in Asia since 2000;

  • I-66 and I-395 HOT Lanes Projects in Virginia, US – $4 billion in combined project costs, continuing the trend of the successful, "managed lanes" toll road projects in the US, and including the largest US Department of Transportation (DoT) loan for a public-private partnership (PPP) project; and

  • the Cubico Solar Projects – on a combined basis, the largest photovoltaic solar plant in Mexico and Latin America to date.

The US power sector continues to show strength, both with respect to conventional power and renewable energy. Factors facilitating the robust market activity in the power sector include the continued low interest rate environment, which reduces capital costs, low oil prices, which reduce fuel costs and the willingness of lenders to provide project financing for power projects that have at least partial merchant risk (meaning they do not have a long-term revenue stream under a power purchase agreement), so long as there is a revenue hedge and the relevant project is selling its capacity into a strong capacity market.

The continued shift to renewables

The cost of renewable power has continued to fall, with record-breaking low pricing being tendered for solar photovoltaic projects in Argentina, Chile, India, Jordan, Saudi Arabia and the United Arab Emirates, and bids in some markets below $0.03 per kilowatt-hour. With renewable energy contributing more to generation capacity, system technology development and integration, demand management and storage will be increasingly important considerations.

In jurisdictions where renewables have become more mainstream, one question is whether such growth can be sustained even when elements of the government support these projects have enjoyed to date are modified or reduced.

Floating LNG on the rise

The first floating LNG liquefaction projects (FLNG) have entered production and are increasingly being considered as a lower-cost alternative to onshore LNG liquefaction facilities. Chinese lenders have committed almost $4 billion towards the financing of three FLNG projects in Africa and further projects are under consideration in Africa and South East Asia. Opportunities for the development and financing of FLNG projects are likely to emerge as the technology is proven and the outlook for the LNG market improves.

Project bonds

Developers are increasingly looking to institutional investors to finance a variety of projects across industries, including transportation, power, oil & gas, telecommunications and social infrastructure. We expect the project bond market to continue to be robust in 2018. There are a number of drivers of this change both on the supply and demand sides, including the increase in capital raising for, and allocation among funds and insurers to, infrastructure investments, institutional investors' willingness to take construction risk and make multiple disbursements during the construction period, and the limitation on the ability of commercial banks (unlike institutional investors) to lend with long tenors, due in part to Basel III capital requirements and liquidity ratios that have increased banks' cost of holding project finance loans.

Looking ahead

Whilst the macro-economic environment in certain jurisdictions remains challenging, and geo-political uncertainties persist, annual growth of the world economy is projected to advance slightly in 2018 with the continued expansion of developed and developing economies, the latter driven by renewed infrastructure investment in China and recovery from recession in major commodity-exporting economies.

Despite challenges in certain sectors and jurisdictions, we expect to see a steady pipeline of new opportunities and a number of high profile deal closings next year. We hope that you enjoy this year's selection of country chapters.

About the author



Anna Chung

Partner, Shearman & Sterling


T: +65 6230 3848

E: anna.chung@shearman.com

W: www.shearman.com

Anna Chung is a partner in the project development & finance practice, based in Shearman & Sterling's Singapore office. She had previously worked in the London and Shanghai office of Shearman & Sterling. Prior to joining Shearman & Sterling, Chung was at Corrs Chambers Westgarth, an Australian firm, in the corporate and advisory practice, focusing on projects. Chung's experience includes working on power, LNG, oil and gas, and petrochemicals projects.

About the author



Paul Epstein

Partner, Shearman & Sterling

New York, US

T: +1 212 848 5266

E: paul.epstein@shearman.com

W: www.shearman.com

Paul Epstein is a partner in the project development & finance group of Shearman & Sterling. He represents corporations, funds and other financial and public and private institutions in complex financings, focusing on project and acquisition matters in the infrastructure, energy and mining sectors domestically and internationally. Epstein has significant experience with projects procured on a public private partnership (P3) basis. He has been identified as a P3 industry expert and has served on a distinguished panel of judges for the P3 Bulletin P3 Awards for 2014 through 2017. Epstein is also recognized as a Rising Star in project finance and banking by IFLR1000.

About the author



Dan Feldman

Partner, Shearman & Sterling

Abu Dhabi, Dubai

T: +971 2 410 8158

E: dan.feldman@shearman.com

W: www.shearman.com

Dan Feldman is a partner in the project development & finance group in Shearman & Sterling's Abu Dhabi office and has 15 years' experience. Feldman is listed in Who's Who Legal as an Expert in Energy Law and was named by Law360 as a Rising Star noted for his "skillful handling of ambitious and complex industrial and infrastructure megaprojects," his use of "novel structures and innovative financing arrangements" and his impressive client roster, including industry leaders such as Petronas, Bahrain Petroleum Co and The Dow Chemical Co. Feldman leads teams on significant energy (upstream, midstream and downstream), power and infrastructure projects on every continent.

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