Q&A

LNG

Released: 05 February 2020

 

The Q&A below provides information on the current projects and activities of SOCAR Trading, specifically in the Liquid Natural Gas (LNG) market. It also includes answers on frequently asked questions about EletroGas Malta, SOCAR Trading’s joint venture with Siemens Project Ventures GmbH, and GEM Holding Limited, the winner of the Enemalta tender for the construction of the new power plant in Malta.

I. About LNG

 

1. What are the benefits of  LNG?

For information on the benefits of LNG please visit: https://www.electrogas.com.mt/faq-2/.

 

2. When and why did SOCAR Trading decide to enter the LNG / power market?

SOCAR Trading was incorporated in December 2007 as the marketing arm of the State Oil Company of Azerbaijan Republic (SOCAR) with a mandate to market Azeri barrels produced from the Azeri-Chirag-Guneshli field and other surrounding fields in Azerbaijan.

SOCAR Trading identified the LNG market as one with rising demand and a multitude of technical and financial challenges in terms of delivering solutions.

Given SOCAR Trading’s ability to execute highly sophisticated projects from plant to power and its expertise in structuring oil and gas contracts, particularly at the Parent level, the company believed it could achieve profitable results in this market.

LNG is a clear growth market given the global trends for gasification and the need for countries with no access to gas to find alternatives to traditional fossil fuels.

 

3. What is SOCAR Trading’s experience in producing and trading LNG?

SOCAR Trading is a commodities trading house and has the ability, expertise and flexibility to acquire supplies from multiple sources. Since 2008, SOCAR Trading SA has become one of the leading trading houses for light crude oil and it has recently stepped into gas and power projects as well.

Building on SOCAR group’s years of experience in the natural gas business, SOCAR Trading has been actively supplying and trading LNG on the global markets for more than three years without direct participation in LNG production projects.  Instead, the company chose the strategy of entering into several short, mid and long term contracts both on free on-board (FOB) and delivered ex-ship (DES) basis around the world, including supply locations such as Nigeria, the United States, Australia and Trinidad, with investments channeled towards demand-generating re-gasification projects (LNG-to-Gas and LNG-to-Power).

SOCAR Trading is currently involved in several LNG-to-Power projects while reviewing opportunities to participate in further projects in Africa, Asia and the Mediterranean.

4. What is SOCAR Trading’s strategy in terms of investments in new LNG-to-Power projects?

Globally, there is a significant trend of switching to LNG from traditional fossil fuels. SOCAR Trading recognises this trend and aims to capitalise on it.

SOCAR Trading is currently involved in LNG-to-Power projects in Malta and Cote d’Ivoire, while reviewing opportunities to participate in further projects in Africa, Asia and the Mediterranean. Particular attention is paid to the Mediterranean Islands through developing a network of LNG import locations in the region.

Our successful LNG trading strategy rests on the company’s ability to create a balanced mix of long and short positions whereby the company secures long term offtake from a producer in line with its long term supply obligations, while using its trading experience to optimise supply around these flows. This allows the company to deliver the most competitively priced gas to local consumers, while not exposing itself to excessive risk.

With LNG becoming cheaper, more demanded and with its increased liquidity, creating sufficient demand through investments in power projects allows SOCAR Trading to secure long-term supply contracts with the downstream market. Once sufficient demand is achieved, the company secures long-term offtake from producers. This increases its total trading volume, and therefore, its profits.     

Via the implementation of this focused strategy, SOCAR Trading is aiming to become a leading regional LNG player by drawing from the synergies of its numerous supply contracts into the region and benefiting from storage and logistics opportunities that arise.

 

II. ElectroGasMalta Project (EGM)

 

5. How does the EGM project fit into SOCAR Trading’s strategy?

In April 2013, the Government of Malta tendered an infrastructure project to bring gas-powered electricity to the island and replace the costly, less efficient and polluting fuel oil-run generation currently providing electricity and power to its citizens.

This tender provided SOCAR Trading with a significant opportunity to establish a strong position in its core Mediterranean market where it was already present across the entire oil and gas value chain.

Adding its trading and supply expertise to one of the emerging consortiums – ElectroGas Malta or EGM – SOCAR Trading enabled this consortium to ultimately offer the most competitive proposition, meeting all tender requirements.

Since winning the Maltese tender, SOCAR Trading has advanced this strategy by participating in similar tenders and selection processes in various locations around the world. Recently, it was awarded, as part of the project company, a concession to construct a similar LNG-to-Power facility in Abidjan, Cote d’Ivoire, which should be West Africa’s first LNG terminal.

 

6. Why is LNG preferred for the new operation in Malta?

Natural Gas is a cleaner alternative to all other fossil fuels and can be transported to locations that have no direct connection to pipelines.

By supplying both D3 and D4 with natural gas, the ElectroGas Malta project has promoted a cleaner environment for Malta by reducing emissions by 50% and particulate matter by over 90% compared to the previous power generation energy mix.

Delimara 4 Power Station, being a CCGT, is also able to further enhance the environment as it operates at a high efficiency of around 55% - amongst the highest of all fossil burning type of powerplants. This means that the same amount of power output can be reached with less fuel than that of a lower efficiency unit.

For information on the benefits of LNG for the new operation in Malta please visit: https://www.electrogas.com.mt/faq-2/.

 

7. How are similar infrastructure projects around the world normally awarded and implemented?

It is normal practice across different industries around the world for large infrastructure or commercial contracts to be tendered in public processes particularly when the Buyer or Off-taker is a state-owned entity – Enemalta in this case – where transparency is of highest importance.

The LNG-to-Power tender process in Malta was a competitive public process in line with the country’s laws and policies, and European Union regulations. The arrangement of the bid and the tender run by Enemalta was the first of its kind that covered the full LNG-to-Power value chain and has actually been realised. An essential factor in the success of this project was it being offered as a package deal.

For comparison, very few similar projects, which are announced, ever come to fruition due to their complexity and the inherent risks to developers.

The National Audit Office of Malta critically reviewed the tender and award process and confirmed the merits of the award. For more information please visit: https://nao.gov.mt/en/press-releases/4/211/an-investigation-of-matters-relating-to-the-c.

 

8. What were the selection criteria applied by the Maltese government?

The requirements of the tender included ensuring the gas and electricity supply of Malta for a fixed price in order to circumvent the risks of a highly volatile energy market, and the financing and building of a very complex infrastructure.

The successful winner of the contract would agree to undertake the design, construction, maintenance, operation, ownership and delivery of an LNG-to-Power project in Malta. This would include the construction of an onshore gasification facility and floating storage unit, the procurement of natural gas at a fixed price over a five-year period to Enemalta – controlled through Delimara 3 Power Station – and the provision of electricity to Enemalta for 18 years through a newly built Delimara 4.

For more information on requirements please visit: https://www.electrogas.com.mt/about-the-enemalta-contract/.

 

9. How many other companies entered the tendering process?

18 companies expressed interest in the project. The contract was awarded by Enemalta to EGM in September 2013 on the basis of EGM satisfying the tender requirements and offering the most cost-effective price. The deal was approved by the European Commission.

 

10. What is Azerbaijan’s and SOCAR’s connection to the tender and EGM?

Neither the Republic of Azerbaijan nor SOCAR have a direct involvement in this transaction.

SOCAR is the State Oil Company of the Azerbaijan Republic. It is one of its subsidiary companies – SOCAR Trading SA – that is the LNG supplier to the project as well as one of three equal shareholders in the ElectroGas Malta Consortium.

11. How did SOCAR Trading form the consortium which ultimately won? Who are the members of the consortium?

ElectroGas Malta was formed in 2013 to take part in a competitive bidding process set out by Enemalta, the majority government-owned utility company of Malta. The EGM consortium brought together international and local expertise to offer the successful delivery of all bid requirements for this challenging project.

SOCAR Trading was invited to join the Consortium which at that point was still lacking the commodities-focused partner.

The company is equally owned by Siemens Project Ventures GmbH, SOCAR Trading SA, and GEM Holding Ltd.

Each partner holds 33.3% ownership interest in EGM and consortium members have a strong combined international and local expertise in development and operation of gas fired power plants and in management of logistics for LNG supply. Together, the consortium members have been able to deliver the requirements set out during the bidding process.

For information on the members of the ElectroGas Malta consortium please visit: https://www.electrogas.com.mt/about-us/.

 

12. What were the key features of the Enemalta contract?

The two main contracts executed between Enemalta and ElectroGas Malta Consortium are the Power Purchase Agreement (PPA) to procure power produced in the Delimara 4 Power Station and a Gas Supply Agreement (GSA), to purchase gas used for power production in the Delimara 3 Power Station.

These contracts are valid for 18 years, with the price for gas fixed in the first 5 years of the contract starting in 2017.

13. One of the media outlets has estimated and others have thereafter quoted a figure of $40m profit on this transaction for SOCAR Trading. Is this correct?

As is standard for any commercial organisation we do not reveal precise profit figures on any contract. We can confirm however that this figure materially overestimates the profitability of the contract and the actual amounts are significantly lower and in line with industry norms.

The contract was won through a competitive tender meaning that the price offered by EGM was the lowest of the bids submitted.

 

14. How does the EGM consortium supply gas and electricity? What are the gas and electricity sources used by the consortium?

The project has put together major pieces of infrastructure in the Delimara power complex, namely a 215MW natural gas-fired combined-cycle gas turbine (CCGT), as well as receiving, storage and regasification facilities for liquefied natural gas (LNG) consisting of 125,500 m3 Floating Storage Unit permanently moored along the state of the art jetty and storm mooring structure built by EGM as well as a regasification plant.

Construction and installation of the power and LNG facilities took 24 months to complete and currently meet approximately 50% of Malta's electricity demand.

Natural gas is supplied by SOCAR Trading in the form of LNG and is then fed to the regasification unit. From there, the gas flows to the Delimara 4 Power Station, constructed by EGM and the Delimara 3 Power Plant, owned by Enemalta and located at the same site. To enable that, Enemalta has upgraded the plant to run on Natural Gas.

For information on gas and electricity supplies by the EGM consortium please visit: https://www.electrogas.com.mt/about-lng-supply/.

15. How is EGM operated?

ElectroGas Malta is working with three different operators, ESB International, Reganosa and Bumi Armada – all world-renowned plant operations and maintenance professionals. Operations, HSE, security and maintenance are handled by these Operators, closely supported by the ElectroGas Malta technical team. This ensures that the Power plant, Regasification compound and jetty, and FSU are expertly manned 24/7.

All facilities are running to stringent international regulations governing maritime gas installations. In addition, expert classification societies and external audits ensure safe operations.

Further to this, ElectroGas Malta is engaging closely with the CPD, OHSA, TM and ERA to ensure that the plant meets all the Maltese standards and legislation.

For information on ElectroGas Malta’s operations please visit: https://www.electrogas.com.mt/faq-2/.

 

16. Who are the directors of EGM, how often did they meet and what kind of documents have they shared amongst each other?

Following the completion and successful delivery of the project, the shareholders nominated new Board members, who meet four times a year for a quarterly review of performance and operations of the company as well as discussions on future strategy.

The Board is currently comprised of three members – European nationals with years of relevant professional experience - representing each of the shareholders.  

For more information please refer to the ElectroGas Malta website here: www.electrogas.com.mt.

 

17. Some of the leadership of the EGM consortium has changed since the project has entered Phase 2 – Operations. What is the reason behind this change?

As part of a planned process to reflect ElectroGas Malta moving from development to an operational phase some staff members of the EGM consortium have changed. EGM’s first CEO and CFO which managed the construction and commissioning phase have moved on with the Board bringing in new specialists focused on operations. Board members have also been replaced with this change including SOCAR Trading consultant Mr. Turab Musayev who resigned from the Board of EGM in December 2019. As consultant to SOCAR Trading, he continues to be involved with the EGM project and the build-up of SOCAR Trading’s LNG Desk as Head of LNG Trading.

18. Which EU regulations needed to be complied with?

The European Commission has approved under EU state aid rules Maltese plans to pay ElectroGas Malta, operator of the Delimara plant, for providing energy to Maltese electricity company Enemalta.

The project complies with the Commission’s 2011 rules on services of general economic interests and Articles 9, 26, 32 and 33 of the Electricity Directive.

More information is available under the case number SA.45779 in the State Aid Register

 

19. What economic impact will result from this LNG facility?

For information on ElectroGas Malta’s operations please visit: https://www.electrogas.com.mt/faq-2/.

 

20. How were the complicated pricing hedges completed in the contract/deal?

Complicated pricing hedges such as the ones employed in this transaction by SOCAR Trading are completed with specialized institutions, namely investment banks, whose balance sheets and risk appetite are more suitable to sustain long-term exposure to the direction of Brent and EUR/USD exchange rate. SOCAR Trading, therefore, shifted all the risks and benefits of this hedge onto such institutions by acquiring deferred positions for Brent swaps where these were available.

These financial instruments locked both the Brent level and EUR/USD exchange rate for 5 years starting from 2017, meaning that neither EGM nor SOCAR Trading would be exposed to any fluctuations in the underlying commodity pricing or exchange rates.

When the original contract was signed in 2013, Enemalta was able to guarantee prices for energy at a lower rate than they were in the country at the time, and to secure that price for 5 years during a period when global energy markets were highly volatile. Compared to the level of Brent [swaps] and related LNG pricing, this deal was advantageous for Malta.

 

21. Could EGM or Enemalta buy LNG directly from one of the LNG producers? What is the role of SOCAR Trading in this process?

EGM is relying on SOCAR Trading for providing the LNG supply for a fixed price first and a variable price thereafter. SOCAR Trading, therefore, guarantees logistics and delivery of LNG based on EGM’s demands and established a structure to absorb risks related to daily fluctuations in the price of LNG.

Contrary to media reports, LNG purchased by SOCAR from one of the international suppliers is not the only source for SOCAR Trading’s Malta supply portfolio. The company handles the gas and organises its transportation adding value to EGM operations via its specialised desk based in London. Furthermore, to comply with the fixed-price requirement, SOCAR Trading has put in place a series of complex agreements with specialized service providers, another major value adding service, that was not offered by the majority of other bidders in the tender.

As part of a planned process to reflect ElectroGas Malta moving from development to an operational phase some staff members of the EGM consortium have changed. EGM’s first CEO and CFO which managed the construction and commissioning phase have moved on with the Board bringing in new specialists focused on operations. Board members have also been replaced with this change including SOCAR Trading consultant Mr. Turab Musayev who resigned from the Board of EGM in December 2019. As consultant to SOCAR Trading, he continues to be involved with the EGM project and the build-up of SOCAR Trading’s LNG Desk as Head of LNG Trading.