Although 2019 got off to a sluggish start, activity did pick up over the year and the slight decrease in overall deal volume compared to 2018 was offset by the total value of deals in 2019 amounting to over US$350 billion (up from US$328.7 billion in 2018). Government policy continued to drive sector activity. 

Most project finance activity was seen in the renewables sector reflecting the focus on clean energy initiatives with a particular focus on solar energy. The number of power and public–private partnership (PPP) transactions over the course of the year held steady and a number of large-scale transportation projects moved forward in Asia-Pacific and Europe. 

There was also a significant spike in mining activity in 2019 as sponsors took advantage of more favourable commodity prices, with several greenfield and expansion-related project financings representing several billion dollars’ worth of lending activity achieving financial close, while work continued on a number of major oil and gas developments expected to reach financial close in 2020. M&A and refinancing helped to keep deal flow strong in the secondary market.

Brownfield investments in renewables in OECD countries remained the preferred target for infrastructure funds with telecom deals in Asia-Pacific and Europe following in second place. Global Infrastructure Partners IV and Brookfield Infrastructure Fund IV each raised more than US$20 billion, setting new records as the largest infrastructure funds ever to be closed, which bodes well for activity in 2020 as funds seek out investment opportunities.

So what were the trends in the project finance market in 2019? Power

In terms of renewables, solar remained the key focus with the greatest number of deals reaching financial close, including mega-projects such as Phase IV of the Mohammed in Rashid Al Makatoum Solar Park in Dubai. Offshore wind took the lead in terms of the largest renewable sector deals by value to reach financial close with a number of ‘largest in region’ and ‘first in region’ greenfield wind projects, propelled by government initiatives to decrease fossil-fuel reliance. Notable deals include the 640MW Yunlin offshore wind farm in Taiwan (currently the largest offshore wind deal in Asia) which raised NT$85.4 billion of project finance debt with participation from both financial institutions and multiple export credit agencies. Taiwan enjoyed a buzz in activity as fund and industry players sought positions in the offshore wind boom and creative structures were adopted to maximise bank liquidity. 

In France, the 480MW Saint Nazaire offshore wind farm, developed as part of the French government’s goal to increase generation of renewable energy by 32 per cent by 2030, became the country’s first offshore wind deal to reach financial close. Further afield, the 400MW onshore wind farm in Saudi Arabia, Dumat Al Jandal, reached financial close enjoying the benefits of world’s lowest tariff for onshore wind with a levelised electricity cost of US$21.3 per megawatt-hour. The project is part of the first round of Saudi Arabia’s National Renewable Energy Program, created to support Saudi Arabia’s Vision 2030’s aim of developing non-oil related sectors.

More generally in the Middle East and North Africa region, the Saudi funded Al Dur 2 IWPP project in Bahrain reached financial close in June 2019. This 1,500MW power and 50MIGD water desalination project is the largest project of its kind in the country. In Abu Dhabi, the 200MIGD Taweelah independent water desalination project reached financial close in October 2019. It will be the largest reverse osmosis desalination plant in the world once completed with a capacity of 909,218 cubic metres a day. It was also notable for AWCA Power winning the tender process by submitting the lowest recorded tariff in the world for an seawater reverse osmosis project. This is becoming a recurring theme in many Middle Eastern power and water infrastructure projects.

Corporate power purchase agreements (PPAs) continued to gain mainstream media attention as scrutiny from green-conscious consumers and investors acted as the catalyst for energy hungry corporations to establish their own clean energy supply arrangements. Such structures are relatively common in the US, with Starbucks, Walmart and Smithfield making headlines signing corporate PPAs with Diamond Spring windfarm in Oklahoma to secure a plentiful source of green energy for years to come. In Australia, the Kiamal Solar Farm, which reached financial close in June, entered into multiple PPAs, including a 20-year PPA with Mars Australia to power its factories and offices in Australia and make it 100 per cent renewable reliant. Oil and gas companies also remained active in the renewables sector owing to their M&A activities aimed at diversifying their portfolios and achieving emissions targets.

Although renewables grabbed the headlines, fossil fuels were still very much part of the energy mix in most regions. By way of example, in Asia two large coal projects reached financial close in 2019, including the Van Phong 1 1.32GW coal-fired power plant in Vietnam, which followed a direct negotiation procurement model between the Vietnamese government and Japan’s Sumitomo (with negotiations lasting for over a decade), and the 1.3GW Yokosuka coal-fired power plant in Japan, where coal still comprises one third of the nation’s energy sources. However, the overwhelming trend is for banks and corporations to move away from coal and turn their focus to clean energy. 

Governments too, under pressure from non-government organisations, have encouraged this movement by announcing their goals to reduce domestic coal consumption and laying out a proactive approach (mainly focused on increasing renewables and committing to restricting public spending on the coal sector).

 The German government, for example, has announced plans to establish a compensation fund worth over US$40 billion to assist its coal-intensive states in making the energy transition so that the country as a whole can be rid of coal as a power source by 2038. One practical application of the fund will include the retraining of coal-sector workers for new industries. In the US, the introduction of 45Q tax credits for carbon capture and sequestration that is expected in early 2020 will be watched closely to see what kind of impact it will have on the continued operation of existing coal-fired facilities.

Public–private partnerships

Several large-scale transportation projects moved forward in major cities across Europe and the Asia-Pacific region. Notably, the Sydney Metro Southwest (30 kilometres) and the refinancing of the Sydney Metro Northwest (36 kilometres) reached financial close in April 2019 with a transaction value of US$1.5 billion. In Thailand, the Bangkok Yellow MRT Line (30.4 kilometres) and the Bangkok Pink MRT Line (34.5 kilometres) reached financial close in March 2019 with a transaction value of US$1.80 billion and US$1.72 billion, respectively. In Europe, the Paris CDG Airport Express Rail Link reached financial close in February 2019 with a transaction value of US$2.9 billion. These projects are an example of improving mass commuter transit links in order to combat road congestion and reduce the use of personal automobiles in line with global sentiment to reduce air pollution and carbon emissions.

Oil and gas

Last year continued to see a shift of investment into midstream and downstream projects. Notably, in Malaysia, national oil companies Petronas and Saudi Aramco successfully brought their multi-tranche US$10.5 billion debt financing of their Refinery & Petrochemical Integrated Development to financial close in December 2019. Marigold is currently the largest petrochemical refinery project in Malaysia.

Looking at upstream projects, several noteworthy deals reached financial close in 2019, including Jambaran-Tiung Biru (one of the largest upstream oil and gas projects in Indonesia), for which the country’s state-owned oil and gas company Pertimina raised US$1.85 billion across two tranches utilising a trustee borrower scheme. In North America, the Calcasieu Pass LNG project reached financial close. Other activity in the LNG sector included Total’s acquisition of Anadarko’s 26.5 per cent interest in the Mozambique LNG project following its agreement with Occidental earlier in the year to purchase Anadarko assets in Africa. Total’s involvement as operator of the project has added impetus to achieve financial close, which is expected in 2020.

Sales from the project, supplemented by an adjacent Exxon Mobil Corp operated project in Area 4 (which had its development plan approved by the government of Mozambique), are expected to turn Mozambique into one of the largest exporters of LNG in the world. The next wave of activity is anticipated in Papua New Guinea, with the Papua LNG project and the expansion of PNG LNG expected to move forward in 2020.

The prospects for US shale remain uncertain. As the market matures, upstream participants are under extreme pressure from investors to reduce costs and seek to deliver elusive free cash-flow. However, unpredictable factors, including geopolitical instability in other oil-producing nations, may affect global supply and demand which could drive oil companies to increase investment for production in the long-term. For the short-term, US shale producers are expected to continue to pull the reigns on new drilling while the market is well-supplied with its current output.

Mining

Increased demand in base metals and commodity prices fuelled activity in this sector in 2019 and led to several large mining projects moving forward. Sub-Saharan Africa, in particular, saw an upturn in mining deals in 2019. These included the Guinea Alumina Corporation’s (GAC) Bauxite Mine in the Boke region of Guninea, which closed in April, the Cupric Canyon Capital’s Khomacau copper-silver mine in Botswana, which closed in July, and the Kinross’ Tasiast gold mine in Mauritania, which signed in December. 

The GAC Bauxite mine is one of the largest greenfield mining project financings to date in Guinea and is expected to produce 12 million tonnes of bauxite (which is used to produce aluminium) a year over a mine-life of 20 years. Khoemacau is expected to produce an initial annual average of 62,000 tonnes of copper and 1.9 million ounces of silver over a mine life of 21 years. 

Financing activity was particularly strong in the Americas for both major and junior miners, with financial close being achieved in April for Lundin’s Fruta del Norte gold project in Ecuador, Nevada Copper’s Pumpkin Hollow copper project in the US funding in May, and Teck, Sumitomo and Sumitomo Metals successfully achieving financial close on their US$6 billion Quebrada Blanca 2 copper project in Chile in November with the backing of six export credit agencies. Several other projects in the region took advantage of favourable market conditions to up-size credit lines, with Los Pelambres, Escondida and Antucoya each closing major financings in 2019.

What can we expect in 2020?

Although fossil fuel dependency will not die out overnight, with ever-evolving technologies making renewables a cheaper and more attractive alternative energy source (and target deadlines for global carbon emission reduction mandates creeping closer), the ‘green’ theme is expected to carry over to 2020 with an increase in greenfield investments for renewable projects in both developed and emerging markets.

 As the transition to renewables continues, the expectation is that there will be a corresponding increase in the number of energy battery storage co-location projects. These projects utilise rechargeable batteries to combat output reliability and transmission grid stability issues that naturally arise from intermittent energy sources such as solar and wind. The US currently leads the way in this field as a result of federal tax incentives for solar and storage, but future projects globally are anticipated to integrate energy storage capabilities into their programmes as technology continues to evolve and costs fall significantly. 

A number of tenders in the Middle East and North Africa region in 2019, for example, required or offered the option of battery storage capability, including the recent tender for the Al Dhafra PV solar project in Abu Dhabi. While there is a buzz surrounding standalone large-scale battery storage projects, project financing for this type of deals is still in its infancy. Most battery projects to date are small scale (and equity funded) or combined with power-generation facilities where the generation of cashflows supports the project economics and debt service capability of the project. Risk allocations are not yet standardised for these types of deals (ie, financing packages are currently bespoke suiting the needs of the particular project). It will be interesting to see how lenders and sponsors going forward will approach issues such as technical performance with the use of performance warranties.

As a result of the increase in demand for energy storage, greater investment in mining for the raw materials required to build such batteries (which are also utilised in electric vehicles), such as lithium, cobalt, large-flake graphite, copper and nickel is to be expected, as evidenced in late 2019 with Pala Investments’ acquisition of Cobalt 27 for C$501 million. In addition, mining projects in lithium-rich regions in South America and Africa (namely Argentina, Chile, Mexico and Zimbabwe) and rare earth projects in Australia are likely to move forward.

In response to government initiatives, large-scale onshore and offshore wind projects will continue to increase in number with Europe continuing to lead the way and Asian regions following. Notably, Japan will commence its first public bidding to select developers for the construction and operation of offshore wind projects, while India plans to build its first offshore wind farm off the coast of Gujarat (1000MW). The Korean government, for its part, has approved a draft Energy Basic Plan with the goal of being less dependent on coal and achieving 30–35 per cent renewables by 2040. It also aims to increase the country’s current renewables capacity of around 1.3GW to 130GW by 2040, including by having 13GW of offshore wind projects operating by 2030. However, it is expected that, unlike Taiwan, the domestic finance market will be able to provide liquidity to such projects.

In terms of non-renewables, global demand for LNG is expected by many commentators to continue to rise, especially in Asia where energy consumption is rapidly increasing and cleaner alternatives to coal are needed for the energy transition. An increasing number of LNG projects are expected to move forward. These include the Abadi LNG project in Indonesia, which is operated by Japanese oil company INPEX and is expected to produce approximately 9.5 million tonnes of LNG per year and the Darwin LNG Project whereby Australian gas major Santos (who acquired ConocoPhililp’s operating interest in the project last year) looks to develop the Barossa field to backfill the plant, which is expected to extend the operating life of the project by at least 20 years. In South America and Africa, recent discoveries in deep water prospects are expected to result in a resurgence in investments from oil majors in deep water projects. In addition, Mexico and Brazil are expected to ramp up the production of known deposits discoveries and also witness an increase in the demand for floating production storage and offloading units.

Furthermore, despite severe sanctions designed to disrupt Russian oil and gas projects imposed by the US, large Russian-led projects appear to be moving forward. Notably, Gazprom has acknowledged its intent to complete the construction of the Nord Stream 2 gas pipeline on its own despite suspension of work by its foreign contractors. It is unclear whether Gazprom can successfully achieve completion without access to the technical competencies of foreign companies. Further, it has been reported that Novatek’s US$21 billion Arctic LNG 2 project aims to obtain financing by the end of 2020. China and Japan are anticipated to be potential sources of funding for the project.

Downstream LNG projects, including floating storage regasification units  (FSRUs) and LNG-to-power, have enjoyed much success in Brazil. For example, the 1.3GW phase 1 LNG-to-power complex at Açu Port in São João da Barra (GNA I) reached financial close last April and financing discussions for the 1.7GW phase 2 (GNA II) are currently underway. Brazil is expected to continue development of greenfield LNG-to-power projects as LNG producers look to create new markets (following increased LNG production in the US) and the Brazilian government looks to manage the growing domestic energy supply demands by diversifying Brazil’s energy mix (which is currently 70 per cent reliant on hydropower plants whose output can be impaired by droughts) with reliable energy sources while taking a step back from coal. However, the path forward for such projects in South East Asia has been more treacherous. 

This, in part, is no doubt due to difficulties to be expected in developing new project structures in emerging markets that in many cases have legacy power and gas market structures and regulatory regimes. New commercial innovation is needed to navigate this landscape in a way that offers a competitive proposition to the local governments and utilities (who may be unfamiliar with the LNG value chain) involved in project procurement. Furthermore, uncertainty as to LNG pricing may have played a part although as a clearer picture for LNG pricing emerges, more potential projects do appear to be ready to move forward. Countries to keep an eye on include Myanmar, India, Pakistan, the Philippines, Indonesia and Vietnam. Bangladesh has perhaps been the most active so far (with two FSRUs in place) and is expected to move forward to additional regasification infrastructure and gas-fired independent power producers in the near future.

Something else to look out for is the prospect of increased foreign investment in downstream refinery projects in Indonesia and India where the local demand for petroleum products is outpacing local output. Both countries have been active in their efforts in recent years to increase production by revitalising existing projects and developing new greenfield projects. Currently in Indonesia, state-run energy company Pertamina is on track to achieve its goal of developing six refineries by 2025, which includes two greenfield refineries (the Tuban refinery and petrochemical complex and the Bontang refinery) and four revitalisations. 

In India, several revitalisation projects are underway and greenfield projects such as the US$44 billion Ratnagiri oil refinery and petrochemical complex project are expected to move forward. Further, Saudi Aramco’s purchase of a 20 per cent stake in Reliance Industries’ oil and chemicals business is expected to close in 2020. The strategic partnership is expected to reduce Reliance’s debt and create a secure sales stream of up to 500,000 barrels of crude oil per day from Saudi Aramco to Reliance’s Jamnagar complex.

This year is also likely to see an upturn in the development of greenfield projects by non-traditional participants such as consumer and industrial corporations and infrastructure development funds. In the case of corporates, Bloomberg has reported that ‘by the end of 2020, the number of companies that have set science-based decarbonisation targets will have jumped well over 100 per cent from 2019’s total of 754’. Along with the trend of corporates making commitments to become ‘100 per cent green’, it is expected that more private companies across all sectors will seek to secure corporate PPAs to lock in steady energy supplies and prices, not only in emerging markets in Latin America and the Asia-Pacific where grid reliability is lacking, but also in more developed markets where governments have rolled-back the availability of feed-in tariffs and so developers must secure other sources of long-term cash flow for new projects. 

Moreover, with data centres projected to consume a fifth of globally available energy by 2023, we could see technology companies follow the likes of Google, which proclaimed its intention to purchase 1.6GW of renewable energy across 18 new deals in regions including the US, Finland, Sweden, Belgium, Denmark and Chile. This will contribute to the development of new greenfield projects as Google seeks to feed its growing need for energy to power its business while at the same time aiming to achieve its goal of consuming only renewable energy.

As for infrastructure funds, it is anticipated that the market will see a greater interest from them in greenfield investments, especially in Asia. According to Fitch Solutions, Asia is dominant in number of projects and overall project value in the pipeline, which includes transport infrastructure driven by China’s Belt and Road Initiative. However, a rapidly growing population, industrial development and lack of previous investment in ASEAN countries has created an infrastructure financing deficit in the region, which is estimated by the Asian Development Bank to be US$459 billion per year for the next decade.

 This would seem to present an opportunity for infrastructure funds to ‘fill the gap’ in these markets by stepping in to replace roles traditionally taken by development banks and commercial banks to finance more greenfield projects. It will be interesting to see how governments intend to develop their policies to attract this much-needed investment as well as how infrastructure funds may evolve to take potentially riskier positions for greater potential returns and get comfortable with the country specific legal, political and economic risks prevailing in the developing countries that clamour for their investment.

Overall, 2020 looks to be an exciting year where we continue to see shifts in market practice as the global energy transition unfolds and an increasing number of non-traditional market participants make their presence felt more strongly by assisting in the development of new projects.