On this forum we’ve talked about why gas-to-wire (GTW) projects are technically viable and desirable from regulators. In this post we discuss why GTW is financially attractive for investors. The following conversation recorded in Manchester, Einar Antonsen (former partner at Fearnley Securities and currently Non-Executive Director of MFDevCo) and Damian Minty (CFO – Nu-Oil and Gas plc) discuss GTW from an investor’s perspective.
Let’s start with a general question, what are investors looking for when they assess potential opportunities?
EA: The easy answer is the returns, the size and the certainty. Risk appetites vary but all investors want to maximise their returns and minimise the uncertainty of those returns.
How do you think GTW fits?
DM: The work we’ve done demonstrates that GTW projects have the potential to deliver strong returns and have an attractive risk profile compared to alternative investments.
EA: I agree, the returns really appear very strong. One of the reasons that I expect investors to be eager to invest in GTW is because you have a static cashflow from a tier one client – i.e. the counterparty you sell power to. GTW projects intend to sell into a power market via long-term contracts with counterparties that have a high credit rating. That’s very attractive combination.
So, you believe that the potential size of the returns is attractive, what about the uncertainty?
EA: Sure, there are a lot of projects that investors can invest into but often the revenue is just a projection. The size of the returns predicted for GTW projects are extremely good, but investors want to know that those returns can and will be delivered.
There are a number of factors to consider. Firstly, how certain can you be about the price at which you can sell power – price risk is reduced because you are no longer selling gas into a volatile hydrocarbon market but through long-term power purchase agreements.
Secondly, what is the credit risk of your counterparty you’re selling to. It seems likely that the first projects for GTW will be in the UK, where the energy will be sold through a PPA contract with a large energy distributor with a good credit rating. So, you have an agreed revenue stream and low counterparty risk.
Thirdly, what is the demand for the product? Well I don’t see the demand for energy going anywhere, in fact all predictions show energy demand is only going to grow, especially with increasing electrification.
DM: There should be no concerns around demand for the power at all.
The one we haven’t mentioned yet is the biggest risk associated with oil and gas plays, namely subsurface risk. The projects GTW targets are end of life assets where the reservoir and its performance are well understood, there’s years of production data that can be used to reasonably predict future performance. Subsurface risk, that would ordinarily be associated with an oil and gas project, is as low as it can reasonably be.
Who are you targeting for investment – traditional oil and gas investors, ‘green’ funds or both?
EA: Combination of both, especially for UK investors you could argue that the way of creating electricity this way is a cleaner and greener way than, for example, importing electricity which could have been generated from a source such as coal. Today there are numerous funds which are focused on creating ways of investing in greener energy projects.
DM: Investors are seeking ways to move away from fossil fuels into investments that have a more environmentally friendly profile. In the same way that GTW provides a bridge to a cleaner energy future, these projects present investors a way to transition away from traditional hydrocarbon towards energy markets, through projects which on paper offer good returns.
EA: I believe that GTW attracts investment for two reasons: firstly, because of GTW’s greener profile – GTW can attract investors who are specifically looking for investments that help to address the climate challenge, such as renewables. Now GTW still utilises fossil fuels as a source but I’m confident that many of these funds will be interested in GTW projects as the bridge to a cleaner energy future.
Secondly, investors who are less concerned by the type of project but want to understand the numbers and the feasibility of the project – how certain are those returns. I think it’s clear that the risk/reward associated with GTW is very favourable compared to many alternatives.
What funding will be required for gas to wire projects?
DM: We’ve always known that projects will live or die depending on whether they can be financed. You can have the best engineering solution but if you can’t raise the funding to get a project off the ground, it counts for nothing. MFDevCo’s approach has developed specifically to create projects that are not simply technically viable, but just as importantly they can be financed without giving away too much equity.
Capital investments will of course depend on each individual project. However, one of the fundamental tenets of the model we’ve adopted is to reduce CAPEX, which is a key hurdle for any project where the economics are currently considered to be marginal. Leveraging existing infrastructure such as platforms, wells and transmission networks reduces CAPEX significantly and depending on the project certain elements of CAPEX can be deferred through leasing arrangements
EA: Cash is king, people look at cashflow, when you have secured revenue streams, which is possible on these projects, it makes everything much more attractive.
This is very important. The equity part versus the debt part will vary from project to project. All comes back to how secure and feasible the projects are.
So, the preference is to finance projects through debt rather than equity?
DM: Generally, introducing debt improve returns. Debt markets are pretty broad and include investors with very different appetites to risk and corresponding expectations of returns.
You’ve said before that GTW projects are akin to the shipping model, which is well known and understood in debt markets
DM: Rather than a ship, the asset is proven resources, existing facilities and subsea infrastructure; rather than a boat charter, the GTW operator has a long-term power purchase agreement to sell the product, which replaces the charter. The underlying returns, security of the revenue stream and lack of subsurface risk combine to make the investments as good as you can, for the debt markets.
EA: You can compare these projects to Floating Storage Regasification Units (FSRUs). In these instances, you have a large ship moored offshore which is used to transport and store LNG which can be vaporised and delivered as natural gas through receiving facilities. You have a combination of the asset and the guaranteed contract to sell the product, which can be as long as 10 or 15 years. Funding these ships is very competitive because the revenue stream is secured, which is possibly the most important thing that the investor will look for. That’s why I really like the set up for GTW projects – the PPA guarantees the revenue stream.
DM: In the proposed structure GTW projects use proven technology to recover proven resources, that is sold through a long-term sales contract. That should be a compelling proposition for investors.
The final outstanding question is whether the projects can be delivered as envisaged
DM: Which is why MFDevCo has forged partnerships with companies like Petrofac and Siemens, who have a capability to deliver and the track record that demonstrates they will do so successfully.
EA: I agree, the involvement of these companies provides confidence that they can to deliver, because it’s not really new technology, it’s a new way of putting together the whole package.
DM: GTW opportunities have not been created because of revolutionary technology. It’s all a matter of timing. There are many projects that are coming to the end of their lives, they cannot be maintained economically with the current development plan, they are run by big operators who don’t want to spend money on redevelopment because they have competing capital projects to fund. Because they’re coming to the end of their life you have the infrastructure there. The current operator may not place a high value on the asset despite having resources and platforms in place, but they also want to defer the cost of decommissioning.
If you were looking at some of these as greenfield sites, to justify the cost of installing a platform offshore and drilling wells you would need to have a large number of generators to make it economically viable because you need that level of revenue. In this case, because you have the platform there the economics stack up.
So, for me, it’s the timeliness of GTW that’s crucial – from the perspective of available assets, the motivation of operators to find a solution, support from regulators, increasing demand for power and the urgent need to change the way in which that is produced.
It’s clear why you believe that GTW projects will be attractive to investors, are there any particular financial markets we are targeting?
EA: I think this should be attractive to investors the world over, UK funds, US funds, Scandinavian funds.
DM: The initial up-front equity to get everything moving could come from any number of sources, including companies and family offices. And one of the reasons Einar is on board is because he understands those markets and has strong connections we’re looking to leverage.
EA: It’s important to be close to the markets because the appetite can change week to week, month to month, depending on what’s happening in global financial markets.
DM: What’s your view on the availability of capital at the moment?
EA: Very good, there is a lot of risk capital out there for specific opportunities. The challenge for some time has been to find projects that are profitable enough for investors to put their money into. I believe that GTW could attract those investors.
Finally, we’ve talked on this forum about the support for GTW from various stakeholders. Why is that the case?
EA: Where does electricity come from these days? Germany for example has closed nuclear power plants, nuclear projects in the UK have been shelved because of costs, coal is terrible for the environment and have huge carbon credits attached, coal is going to be phased out over the next 10 or 20 years, all of which are going to create a shortage of electricity. GTW adds volume into the energy grid from greener methods that are being supported by government and regulators.
DM: If you consider what’s happening in the UK at the moment where the Prime Minister has committed the country to the target of net zero emissions by 2050. The Opposition have presented ways in which they would seek to punish companies that are not taking genuine steps to reduce the environmental impact of their businesses. This is the direction of travel and the energy sectors have a huge role to play in this transformation. Deirdre Michie, CEO of Oil and Gas UK has been quick to say that the oil and gas sector has to play their part.
Everyone involved in the industry is considering how they adapt their business models. This is not limited to the UK at all. As Einar will know very well in the Norwegian sector, Equinor have committed themselves to this path and want to become the world’s most carbon-efficient oil and gas producer. Now that doesn’t mean these companies have abandoned oil and gas, far from it, but they recognise that the world is changing, and they need to be ahead of that.
All studies show that there will still be a huge market for hydrocarbons but increasing electrification and economic growth is expected to drive demand for energy. If we are going to meet ambitious climate targets then we need to secure and sustainable energy supply.
Focusing back on the UK again, the Oil and Gas Authority recognise the potential for GTW to maximise recovery from gas fields in the Southern North Sea and the East Irish Sea. So much so that it features in their latest Corporate Plan as part of the energy transition. This is feeding down through other organisations who can fund the development and implementation of new technology in the sector.
EA: It is important for operators who are seeking to change their business model to demonstrate to regulators, investors and the public that they are responding. Redeveloping gas fields using GTW not only defers the huge decommissioning liabilities, which let’s face it is a key driver, but they are demonstrating that they are seeking to maximise recovery and by doing so they are responding to environmental concerns. This will be supported.
DM: Which is a reason why the likes of Petrofac, Siemens and the operators we’re talking to want to be part of GTW.