Investment Review
Conversion Contracts
As of end-July, overall Hilli FLNG
project progress remained on schedule and expenditure for the quarter
was in accordance with the approved budget. During the quarter sponson
construction, assembly, blasting and painting work progressed.
Fabrication of piping and pipe supports continued and good progress was
made with the repair and life extension work for the vessel. Significant
activities undertaken during the last quarter included addressing
specific design and operation issues (Perenco/Cameroon) and the overall
project at the end of July is calculated to be 60% complete.
On July 21,
the Company executed agreements for the conversion of the 126,000m3 LNG
carrier Gandria to a Golar floating liquefaction facility (GoFLNG). The
Gandria conversion will now be dedicated to satisfy the commitments to
Ophir in Equatorial Guinea, covered by the agreement announced in May
this year, requiring delivery of facilities in 2019. This move will
release the Gimi (conversion contract signed in December 2014) to cover
the potential emerging demand for a 2018 GoFLNG project. Provisions in
the Gimi and Gandria contracts give Golar the flexibility to adjust
project timing and to limit expenditure. The objective for Golar is to
ensure that it does not remain financially exposed in any material
manner to more than one speculative GoFLNG. Golar's ability to deliver
fast track GoFLNG solutions by having a pipeline of key long-lead
components on order is a critical part of the business strategy.
The Gandria conversion contract is on
target to become effective by the end of September this year. This
contract provides similar beneficial cancellation provisions, which if
exercised before December 2016 will allow termination of the contracts
after deduction of a set cancellation fee.
GoFLNG - Business Development Progress
Agreement has now been reached with
the support of the Boards of both Golar and Perenco on the material
commercial terms and conditions for the approximate 1.2 million tonne,
8-year Cameroon FLNG project scheduled to commence operations in 2Q
2017. The Tolling Agreement which defines the material commercial terms
and conditions for the project is now subject to finalisation with SNH.
The Midstream Gas Convention setting out the regulatory and fiscal
regime governing the FLNG operations in Cameroon is now only subject to
finalisation with the government. All parties including the government
of Cameroon remain on track and are confident of approving the Tolling
Agreement and the Midstream Gas Convention by the end of September 2015.
Signing of these agreements will formalise FID for Golar's first GoFLNG
project.
The Company expects the project in
Cameroon to deliver an EBITDA for Golar in the first full year of
operation, based on the utilisation of 2 of the available 4 liquefaction
trains, in the range of $170 million to $300 million, with a flexible
tolling structure which correlates to Brent crude oil prices ranging
from a floor of $60/bbl to a cap of $102/bbl.
Golar announced on May 5
that it had signed a binding Heads of Terms with Ophir Energy Plc for
the provision of the GoFLNG vessel Gimi or alternate. Subsequently the
Gandria was nominated for the Equatorial Guinea project so that Gimi can
be available in time for potential GoFLNG projects starting operations
in 2018. The agreement for Gandria will be structured as a 20-year
tolling contract, commencing commercial operations in the first half of
2019.
Golar, with its partners Keppel
Shipyard and Black & Veatch, committed to the Gimi FLNG conversion
in December 2014. Gimi and Gandria will both benefit from utilising the
same configuration of utilities and liquefaction facilities as sister
ship Hilli, with variations to Gandria to accommodate production direct
from the deep-water reservoir. During the quarter, additional detailed
engineering studies (FEED) were commenced for Gandria with the objective
of finalising the design and budget for the deep water variations. The
integrated Ophir/GEPetrol/Sonagas/Golar project remains on schedule to
take FID during the first half of 2016.
The Cedar LNG Project development
activity for the quarter included continued support of the NEB LNG
export application as well as focus on solidifying arrangements for gas
transportation service into the Douglas Channel area. The Company
continues to monitor development activities for the relevant large scale
pipeline projects upon which the first phase of Cedar LNG is dependent.
Golar is currently anticipating FID for Cedar Phase I to be achieved by
the end of 2016 assuming such third party pipelines maintain their
current schedules.
New GoFLNG business development
activity has been focused on maturing projects that have the potential
to commence operations in 2018. A shortlist of 4 potential projects is
currently subject to active discussions. Interestingly, each of these
projects is located in a completely separate geographic region. In each
of these projects the competitive tolling fees and flexible commercial
structures have the potential to generate very attractive economics,
even at today's low oil and LNG prices.
To meet potential customers' demand
for early commencement, Golar has initiated discussions with Keppel
Shipyard and Black & Veatch. The target is to achieve a fourth
conversion with a delivery in late 2018/early 2019. A commitment will be
dependent on Golar firming employment opportunities within 1Q 2016.
The recent weakness in oil and gas
prices has highlighted the benefits of a fast track FLNG solution versus
large, capital intensive greenfield LNG developments. In addition to
reduced capital expenditure and accelerated start up, the Company's
counterparts appreciate the flexibility the floating toll creates with
respect to term and volume. Several of the business opportunities
currently being discussed are based on stranded, associated or flared
gas with limited commercial value without monetization through LNG
production.
Capital expenditure for new, large
scale Greenfield LNG developments shows a cash breakeven level from $10
per mmbtu and upwards. The cash breakeven level for a turnkey GoFLNG
development can be significantly lower.
The Company is confident that a
GoFLNG solution supplied with African or Asian gas reserves generates a
reasonable return both for producers and Golar even with European and
Asian gas prices at current levels. Significant upside can be monetized
if gas prices recover. Golar is further confident that with respect to
feed gas price, capital cost, transportation cost and flexibility, it
has a competitive advantage over US export projects.
FLNG financing
As at June 30,
including the value of the original vessel, Golar has invested $411
million in the Hilli conversion project. Today this investment sits at
$424 million. From the end of September when the tolling agreement and
the midstream gas convention have been approved by SNH and the Cameroon
government, respectively, all remaining conversion and site specific
costs for the GoFLNG Hilli will be satisfied by a fully documented and
underwritten facility provided by CSSC (Hong Kong) Shipping Co. Ltd.
("CSSCL"). This will fund up to 80% of the GoFLNG Hilli.
The financing structure will be split
into two phases. Phase one enables Golar to draw down up to $700
million from the facility to fund the ongoing project cost once Golar
and its minority partners have spent $400 million of the estimated
$1.2bn project cost. Phase two is triggered upon delivery of the
converted GoFLNG Hilli from Keppel Shipyard and the satisfaction of
certain milestones. This will provide for the drawdown of a further
$260 million giving an aggregate $960 million. This final tranche is
expected to satisfy the remaining conversion costs outstanding at that
time and the remainder will be a release of the Company's equity.
The CSSCL financing has a tenor of
10-years, a 15-year amortisation profile and contemplates the eventual
sale of GoFLNG Hilli to Golar Partners. The expected cost of the
financing during the conversion period is 6.25% while the long term
financing is projected to cost less than 6% on a fully swapped ten year
basis.
Liquidity
The Company maintains a good
liquidity position notwithstanding the current weak operating results.
The cash balance at the end of 2Q is $375 million and a further $100
million is receivable from Golar Partners in respect of the Eskimo sale.
Additionally, the Company will receive $50 million in yearly
distributions from Golar Partners. The capital expenditure for Gimi and
Gandria over the next twelve months is to a large extent dependent on
progress with contractual employment discussions. As at June 30, 2015,
$50 million has been invested in the Gimi and Gandria conversions. If
no progress is made firming up employment opportunities, the total cash
expenditure will have increased to $65 million for these two vessels in
the period up to June 30, 2016, of which $30 million is recoverable in the case of termination.
Corporate and other matters
The recent collapse of oil and gas
prices has increased interest in LNG fueled combined cycle power
generation. A shortage of power in areas like Brazil, Indonesia, India
and South Africa and strong power prices in these areas together with
lower gas prices have dramatically improved the economics of gas fuelled
power generation. Simultaneously, we see stranded and associated gas
reserves that can be acquired at attractive valuations. The lack of near
term liquidity in the LNG market to a certain extent prevents resource
holders from developing reserves before they have firm off take
contracts.
In order to develop Golar further and
accelerate the implementation of the GoFLNG concept, the Company has in
recent months been negotiating with Brazilian power partners. These
partners have been awarded a 25 year PPA contract with Brazilian
authorities to build and operate a 1.5 GWha LNG fuelled combined cycle
power station in Sergipe, Northern Brazil. Golar has negotiated a right
to participate in up to 25% of this project and has the exclusive right
to provide the FSRU. In addition to supplying the power station with
gas, the FSRU would also have excess capacity to deliver gas to the
Brazilian grid. The partners are currently working through the
permitting process and are in negotiations with LNG providers,
contractors and financiers. The capacity payment achieved in the PPA
contract was awarded at a historically high level. If Golar proceeds, it
would do so on the basis of an expected unleveraged project return in
excess of 15 %. Further upside is available based on usage.
Golar intends to establish a
stand-alone, non-recourse subsidiary, Golar Power Ltd. to hold this
investment. The Company's total commitment to this subsidiary will
initially be $5 million in liquidity lines and $24 million in
non-performance guarantees, effective from 2020. Further equity
investments would be needed if the project gets a final go ahead. It
would be Golar's intention to bring additional partners into Golar
Power. In addition to the solid project return, Golar would use this
position to accelerate its GoFLNG activities by creating a natural
partnership with power producers and traders. The target is to offer a
more integrated LNG solution to resource holders. Golar has approached
several leading trading companies with this idea and has received
encouraging feedback. A final clarification around this structure should
be expected before year-end.
The size of Golar's investments in
Golar Power will be relatively small compared to the Company's
commitment to FLNG, FSRUs and LNG shipping. Golar's business model
remains to be a midstream gas company focussed on tariff based FLNG
production. It is the Company's intention to separate Golar Power from
the rest of the activities over time. This can take place through a spin
off to Golar's shareholders.
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