De-Risky Business- Increasing Certainty of a High Value Energy Opportunity

12/09/2019

Much can be done to de-risk a major energy project, but nothing compares with the positive impact of starting with a plant that’s already 85% mechanically complete (now 90% at the time of writing). This was the case with the GTL plant at Pointe-à-Pierre in Trinidad, however, when NiQuan Energy acquired title to the plant, a business decision was made to build as strongly as possible on this advantage by adopting a Project Execution Plan which actively sought to de-risk the project even further and as far as was commercially practical. 

NiQuan Energy won the open bidding process to acquire the plant on the basis that it would create a business with enterprise value; attracting investment, creating jobs and generating revenue, rather than simply realising the scrap value of the plant as others were proposing. A key element of NiQuan’s pitch was that the plant would be completed without any additional injection of public money. As a consequence, the ability to raise finance was always an essential element of the business plan and, with over a century’s worth of experience in the energy sector, NiQuan’s leadership team fully understood the challenges of raising such finance. The overwhelming consensus was that success required investors to be given the highest possible level of comfort.

With only a recent history of commercialisation, relatively few projects against which to benchmark and no precedent for small-scale GTL production which NiQuan is pioneering, the challenges involved in selling GTL to the financial community were considerable. The answer required a combination of education and risk management; developing the project as a complete package which could be easily explained, and which addressed all realistic concerns. 

The project needed to provide specific answers to some very specific questions. Where will the natural gas feedstock coming from and how sure can you be about security of supply? How can you be certain of controlling construction costs and schedule? Who will buy the finished products and what is the basis for a premium price? This demanding question set has been faced by all the GTL plants built to date, but the plant at Pointe-à-Pierre is probably the first GTL project to know all the answers to such an advanced degree before the first meeting with financiers.

In contrast with the other GTL projects in Malaysia, Qatar and Nigeria, gas supply was the hardest question for NiQuan to answer, largely due to local conditions in Trinidad and Tobago. Other projects generally started with a gas supply and developed a GTL project monetisation solution around it. In the case of Pointe-à-Pierre, it was obvious that security of supply would feature very strongly in any financial assessment and would be a decisive factor in any decision to fund. It was also the case that the received wisdom of the markets was that gas supply in Trinidad and Tobago was constrained and therefore the supply to the NiQuan plant could be in doubt. 

This was a very difficult challenge to overcome and, in the end, the answer came from the Government of Trinidad and Tobago itself. In recognition of the project’s strategic importance to the country and the benefits of cleaner energy, it was arranged for the project to be supplied with the required guaranteed natural gas feedstock from the Minister’s Share under various upstream Production Sharing contracts, and for supply to be contractually provided by the newly constituted Trinidad and Tobago Upstream Downstream Energy Operations Company Limited (TTUDEC). At a stroke, the project’s greatest potential weakness had been transformed into one of its greatest strengths.

The first GTL plant to be financed by the international money markets was ORYX GTL in Qatar in 2003. A joint venture between Qatar Petroleum and Sasol, it faced the challenge of producing what was then an off-spec product with unknown market appeal and questions from consumers as to whether that product would work in standard diesel engines outside of testing conditions. Almost twenty years later, GTL fuel is recognised as on-spec paraffinic diesel (EN 15940) with its own standard. It is also recognised as being far cleaner than the traditional petrol-diesel alternative (see “Let’s Talk About Diesel”.) GTL paraffinic diesel has proved itself as both a blendstock and in neat applications around the world, via multiple specific products demonstrations which have included trans-continental expeditions, the Olympic Games and at least one Royal Wedding. 

GTL products have now been a commercial offering for over a decade, most notably in Europe. With demonstrable global demand for cleaner energy products, and with GTL’s value confirmed by the markets, the ability for NiQuan’s GTL plant to ensure premium returns is a given. In the context of packaging the project however, NiQuan chose to enter into a guaranteed “take or pay” offtake agreement with the Petroleum Company of Trinidad and Tobago Limited. Though the market reaction to the zero sulphur, high cetane and low emissions qualities of GTL is an established premium fact, this agreement anchored the project economics and delivered a level of certainty for investors which could not be achieved any other way. 

With a guaranteed gas supply and a guaranteed off-taker for the project’s products at the highest competitive tender rates, investors were presented with a very high degree of certainty regarding inputs and outputs. It only remained to provide the same level of absolute certainty about completing and commissioning the facility that would turn natural gas feedstock into high value, low emissions, finished energy products.

For a GTL project, this last requirement was a particular challenge because, though ORYX GTL had been brought in on time and on budget in 2003, the next two plants, PEARL GTL and EGTL, were delayed and incurred cost over-runs of billions compared to their original estimates. It was the capital cost performance of these two plants that played the largest part in shaping wider perceptions regarding the risk and related economics of developing a GTL project and, consequently, created a challenging fundraising environment for NiQuan Energy.

NiQuan’s approach has been to attack the problem from two directions; using a combination of contracting strategy and extensive insurances to drive out uncertainty. This is easier said than done. 

The unique advantage ORYX GTL had was that it was built under a Lump Sum Turn Key (LSTK) contract, thus the cost was known from the very beginning and could be easily controlled throughout construction, however, the subsequent over-heating of the global construction market meant that an LSTK approach carried too much risk for the contractor and this route to cost control was closed down. The challenge for NiQuan was to find a way to re-open it and the answer was to take advantage of the plant’s advanced state of completion and adopt a two-stage project execution strategy.

Getting a plant to mechanical completion when it’s already 85% of the way there is clearly a far simpler task when compared to starting from a greenfield site. The major project risk identified was that some key components with long lead times might have deteriorated over time and, despite being under an asset preservation regime, may have required to be replaced or reconditioned. In order to give contractors the confidence that the requirements for completion were properly scoped and that they would not be exposed to nasty and costly surprises, the first phase of the two-phase programme involved an assessment of the plant and the development of a detailed programme of work which would enable its completion. 

On the basis of this increased certainty, the contractors were then able to work on a LSTK basis for the second phase. NiQuan took advantage of its unique position and, consequently, the plant at Pointe-à-Pierre has become the first GTL project in fifteen years to secure the same contract benefits that allowed ORYX GTL to come in on time and within budget.

In addition, to the guarantees of a LSTK contract approach, NiQuan, together with AON, developed an extensive Owner Controlled Insurance Programme (OCIP) in order to protect investors from delayed start-up and plant performance risks, even though the proven nature of the technology and the simplicity of the plant design had already reduced these considerably.

Today, NiQuan has controlled the “controllables” as far as possible and is in the position of knowing that the Government of Trinidad and Tobago stands behind its gas supply, that its products will be purchased at premium market rates, that the construction costs for the plant are fixed, that the technology performance is guaranteed and that the risks of delays in start-up are underwritten in the London insurance market. In combination, the contracting strategy and the insurance programme have ensured that all the risks associated with project delay or plant under-performance are mitigated away from the investors. 

For investors, NiQuan’s GTL plant is the complete package; near completion, with guaranteed feedstock, controlled construction costs and a manufacturing slate of future-proof products for which the market demand is strong. 

Talking GTL

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NiQuan Energy LLC

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NiQuan Energy Trinidad Limited

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