Business Overview

A remote refinery needed reliable power and heat supplies to maintain constant operations. A 100 MW CHP/cogeneration plant to meet refinery demand was proposed. The fuel was to be sourced from a local gas field, which had been stranded by a lack of local gas demand from creditworthy buyers. Excess power generation was to be supplied to the city grid to alleviate local blackouts

Challenges

Political risk in developing countries is often the main challenge to mitigate.

Issues of creditworthiness of the refiner and currency risk were to be compensated by payment in kind through fuel oil liftings from the refinery by the gas supplier and power developer. The dollar denominated fuel would be traded by the developer in full payment for the power and heat provision. This swap system was convenient for the gas supplier since the price of gas is typically linked with the price of fuel oil in remote countries.

A major challenge was to synchronise the development of the co-generation plant and the gas field so that both supply and demand sources would be ready simultaneously. The complexities of the combined developments also meant that financing solutions were more difficult to identify.

Solution

About $120 million of finance was required to build the cogeneration facility. Sources of Islamic Finance were forthcoming and promising. The loan was secured by a long-term fuel oil lifting agreement between the refinery and the gas producer/power developer. The gas producer was to self-fund the gas development once the power project was in progress.

A power purchase agreement was negotiated with the local power distribution company.

Design and development plans for both the co-generation project and the gas development were initiated.

Results & Benefits

While negotiations and engineering were in progress, the political situation in the country deteriorated to the point where both supply and demand side project sponsors could no longer proceed. The final Investment decision was deferred indefinitely as were the benefits of a stable source of heat and power, not just for the refinery, but the local populace.

Most project related risks can be mitigated and challenges overcome through innovation and collaboration between technical, financing and commercial team members. All projects, however, require stable political and social platforms to attract investment.