The speakers are Geert Peeters, vice president — finance of Tractebel North America, Steven S. Greenwald, a managing director of Credit Suisse First Boston, Mehmet Muftouglu, finance director for ConocoPhillips, David Hodson, a former senior executive with BNP Paribas and now a principal with Dome Energy, a new company formed to develop, own and operate LNG projects, and Dan Rogers, who, before joining Chadbourne in Houston, was an associate general counsel at Enron with responsibility for LNG and other gas projects.  The moderator is David Schumacher, a project finance lawyer who manages the Chadbourne office in Houston.

MR. SCHUMACHER: Let’s start with Geert Peeters from Tractebel.  Tractebel owns and operates an LNG terminal in Boston, and it is in the process of developing another terminal in the Bahamas that will bring gas into Southern Florida.  What makes North America a good market for LNG?

MR. PEETERS: It would be too easy for me to say that Alan Greenspan is on our payroll.  Indeed, this week he gave the answer to that question.  Your country’s most senior economist is convinced that there is a serious imbalance between the future gas needs of the country and current sources of supply.  We felt the same thing a couple years ago when bidding on a proposed LNG terminal in the Bahamas.

Tractebel’s interest in this market did not start with the Bahamas terminal.  Tractebel invested in an LNG terminal more than 20 years ago in Europe.  That was at a time when we felt that Belgium needed to have more diverse sources of energy supplies.  It was after the Arab oil crisis.

Now, having terminals on both sides of the Atlantic, we are pioneering a little bit the view that LNG is not just a source of gas to resolve a local mismatch between demand and supply, but rather LNG is starting to become a real commodity — a real market.  You get more and more liquefaction plants going up in the Middle East and they breed more projects in Europe and the United States.  What that means, we think, is that we really see a commodity market coming and LNG will be treated more and more as a commodity.

We think this will lead, in turn, to some interesting developments on the financing side.  Will we keep seeing integrated models of the terminals or will we see more and more merchant terminals? I had a problem saying the word for all the reasons you know. [Laughter.] But yes, we want to open people’s minds about that.

When we bought the terminal in Boston, we thought all its “features” were actually very helpful.  That terminal for many years has been sourcing its LNG, not just from one place and on the basis of long-term contracts, but over a portfolio of different terms and contracts and from at least two places.  The LNG comes from Trinidad and Algeria.

That company as well has been owning ships on the one side, chartering ships on the other side, and also buying LNG ex-ship.  In other words, it has also been diversifying on the logistical model.  And last but not least, it has not only been buying LNG to sell in its Boston area, but also to resell in Puerto Rico.  It has been, to some extent, a pioneering merchant LNG business and so far financially very successful.

Key to Financing

MR. SCHUMACHER: Now that Geert has used the M word, let me turn to Steve Greenwald.  A number of new receiving terminals are on the drawing board along the Gulf Coast all the way down to Mexico.  If all of them were built, they would increase the receiving terminal capacity about five fold.  Obviously, not all of these projects will be built.  What makes one of these projects financeable? Does it need a tolling arrangement? Are these just fancy gas storage projects? Can the developers take any commodity risks and still get financing?

MR. GREENWALD: Commodity risk could mean a couple things to me.  Some of the new contracts that are being contemplated are very simple to understand because someone is signing up for 500 million cubic feet a day at no more than 30¢.  Trunkline refinanced a year and a half ago on the basis of a contract with British Gas for about 24 cents an mcf.  It was very easy to understand looking at a contract.  You knew what you had.

MR. SCHUMACHER: Twenty-four cents is the capacity charge?

MR. GREENWALD: Right.  Some of the newer contracts that are being negotiated no longer stipulate X¢ per million, but rather require payment to the owner of the LNG terminal of something like 13%, 12%, or 15% of cost.  With such projects, lenders might be asked to take some price risks.  People are signing up.  I don’t think lenders will have too much heartburn evaluating the price risk and coming to a point of view as to what their cash flows will look like.

However, to ask a lender to finance a truly merchant LNG facility where you don’t know where the LNG will come from or who will deliver the LNG is a different matter.  If I am financing an expansion near Boston for Tractebel, I can come to a point of view as to Tractebel’s ability to source LNG, to bring it there, even if there is no explicit contract to do so.  It would be different looking at an LNG import terminal proposed by a developer who does not have that upstream capacity, let alone downstream capacity.  I don’t think we’re there yet.

MR. SCHUMACHER: In other words, a project that lacks the backing of a Tractebel will need a binary contractual structure where both the sources of supply and the offtake arrangements are nailed down?

MR. GREENWALD: I certainly think you need it for so-called IPP developers or for someone just looking to set up an LNG terminal who has no upstream or downstream capability.  Anyone developing an LNG terminal and thinking if he builds it, they will come, will find it hard to get any meaningful amount of financing.

MR. SCHUMACHER: Even if it is just a tolling facility?

MR. GREENWALD: I thought the question was can you install a merchant energy facility, build it and, because Allen Greenspan says we need it, therefore lenders will take the view that the gas will show up? I don’t see that happening.

Market Screens

MR. SCHUMACHER: Mehmet Muftuoglu, coming from the LNG world at ConocoPhillips, what criteria do you take into consideration when looking at a project, upstream or downstream? And does the North American market meet those investment criteria?

MR. MUFTUOGLU: As an upstream gas company, we like long-life legacy projects that generate stable cash flows or earnings for 20, 25 or 30 years.  These are the projects that also allow us to book several hundred million barrels in reserves.  Reserves are one of the most important factors in our project selection criteria.

The market becomes critical, especially on the gas side.  If you look at our entire business, it is a global business.  However, on the gas side, it is primarily a regional business at best.  A capacity imbalance in the market becomes crucial so that you can generate acceptable revenues and know that there will be adequate demand.  If you look at the US market from this perspective, we believe that the current supply and demand gap will continue for a long time.  Of course, whether the gap is large enough to justify all of these projects is still unanswerable.  But we think that there is a role to be played by LNG, and that’s why we are looking at several LNG plants as well as bringing pipeline gas from Alaska and Canada.

MR. SCHUMACHER: David Hodson, Dome Energy Partners is also looking at developing LNG terminals.  You are obviously not Tractebel or ConocoPhillips.  Is there room in this market for smaller players?

MR. HODSON: The answer is yes.  That is why Dome Energy Partners established itself very recently.  We are an entity that has been formed to develop plants, fund plants, and own and operate LNG receiving terminals.  We are focused on the US.  We don’t think gas producers and LNG producers want to own LNG receiving terminals.  They basically want the gas moved from one place to a market where they can sell it.

MR. SCHUMACHER: Like the British Gas model in Lake Charles, Louisiana?

MR. HODSON: Right.  Natural gas is turned into LNG so that you can move it long distances.  It is sort of like wrapping up a package so that you can unwrap it when you get to wherever you transport it.  At Dome, we believe that if people like ConocoPhillips and the Exxon Mobils and the Shells of the world had a reliable creditworthy entity that could basically unwrap the LNG and turn it back into gas, they would be very happy just to have the capacity.  That is not to say that they wouldn’t develop some of their own LNG terminals themselves.  But at the end of the day, they want capacity, they want send-out rating, and they want storage.  And they want it at a low cost.

The other aspect that we bring to the table is that we’re looking at some innovative — what I call step — changes in the technology of regasification and storage and some more cost-effective means to do that.  As the end of the day, I think we are better equipped to move quickly and to adapt and to innovate some of these ideas.

MR. SCHUMACHER: Mehmet Muftuoglu, I want to pick up on your comment about the gas market being more regional compared to the oil market.  Why can’t you treat LNG terminals much like you treat a refinery and finance them like you would a refinery? Refineries don’t need long-term contracts to be financed.  Is the problem that the gas market is truly different than the market for refined oil products?

MR. MUFTUOGLU: I think as a company, we agree with Tractebel.  In the longer term, we see the energy business — especially in the United States — as an acquired commodity business.  We are not there yet.  As to financing LNG terminals, the main issue is providing the capacity to the regasification plants.  Unfortunately, they cannot be financed today without commitments.  It may be cheaper for us to go out and do this on our own because we do not need project financing in the US.

Are There Enough Ships?

MR. SCHUMACHER: Dan Rogers, one of the keys to making this a truly liquid market or a commodity market is the shipping capacity to move the liquefied product to the end market.  Will there be enough shipping capacity available to make it a truly liquid market?

MR. ROGERS: If you had asked me that question four years ago, I would have had some concern.  I think the situation has reversed itself in the last four years.  Today, we have a fleet of 140 ships.  Of those 140 ships, 56 of them will be more than 25 years old by 2007.  Of those 56, 34 will be more than 40 years old by 2007.  There could be a rapid drop off in terms of the existing fleet.  LNG tankers usually have a useful life of between 25 and 40 years.

The good news is that in the last several years, there has been a lot of activity in the shipyards, a lot of very aggressive shipyard bidding as well as some pretty significant reductions in steel prices.  Today, we have 53 new builds underway.  At the end of the day, I do not think the capacity on the shipping side will be a problem.  More and more of the greenfield plants that are going into service are also financing the building of their own ships.  That will add further to the available fleet.

MR. SCHUMACHER: The LNG market has operated in the past as a binary market.  The gas supply is contracted to the ship which is contracted to the receiving terminal.  In order to make it a truly liquid market, these bonds need to be broken.  Can liquefaction be bought on a merchant basis to free up liquefied gas for trading?

MR. PEETERS: I think that we probably underestimate some market forces if we look at it only from the US.  The US would like to see more LNG coming in, and it will try to foster that.  When you are in the market today to sell LNG or to buy LNG for the US, you see that you are competing with European buyers.  This pushes up prices.  The competition among buyers is one of the things that accelerates the commoditization of LNG.

When you are selling LNG from the west coast of Africa or from the Middle East, you see that there are many more others who need it as well.  As a seller, you compete with your peers on the coast, with seller in the Middle East, with Egypt and others in the Mediterranean basin, and with Trinidad and other places as well.  We think we are in a very steep curve toward commoditization.

Financing Merchant Projects

MR. SCHUMACHER: Steve Greenwald had doubts about the financeability of many merchant terminals.  How do you get the lending community comfortable with projects that do not have long-term contracts?

MR. PEETERS: We are in the market to refinance our Boston terminal, and I had to review 22 confidentiality agreements so far.  There is a lot of interest from the lending community to lend to the business.  It will be interesting to see if we can come up with creative structures where maybe they share in the upside to some extent in exchange for taking downside commodity risk to some extent.  Maybe that is one way to start moving toward a buy and sell model, which we should get in a world of more commoditization of the LNG, as opposed to a tolling model which is — excuse me for being so blunt — a business of lending against spreadsheets.

MR. SCHUMACHER: Steve Greenwald, in light of what has happened to the merchant power market in the last several years, are credit committees ready to look at merchant LNG projects?

MR. GREENWALD: Nope.

MR. SCHUMACHER: Has your credit committee looked at any such projects?

MR. GREENWALD: Again, they will look at such a project for Tractebel, which has a history in the business.  I guess we will.  Now I know we’re actually one of 22.  I didn’t know it was that bad. [Laughter.] But putting money into an existing facility like Everett is much different than funding a project on the Gulf coast or Baja for someone who has not heretofore been a player in the business.  It is a much different analysis.

Let me put the question back to Mehmet Muftuoglu.  Do you think ConocoPhillips will build a merchant plan for $3.4 billion? I doubt it — although a company is doing it right now.  Exxon Mobil is doing it.  It has a merchant facility, but it is taking the offtake and it is trying to land in the UK.  Maybe lenders will take UK gas price risks.  Exxon Mobil is the first to have announced anything of this sort.

We have been working the last couple years with Shell on two projects.  Shell did not get permission to proceed with one of the projects on the basis that Shell would be able to find a market for the regasified product.  They have anchor contracts in the Far East.  Will they take some of it on a merchant basis and try to land it here in the States? Sure, they will try to do that.  But only the Shells and the Exxon Mobils might try something like that.  ConocoPhillips might try it, but for a small portion of an upstream plant.  I don’t see many of the big guys building real, real big facilities to be sold out on a merchant basis in the next five to seven years.

MR. SCHUMACHER: Liquefaction facilities have been built typically in partnership with government involvement.  How do LNG purchasers get comfortable with the credit of these LNG liquefied sellers?

MR. GREENWALD: If you have a short gas supply, that could be an issue.  Will you get the LNG? But if you have a gas supply locked in and it is coming from Trinidad or Algeria or wherever and you don’t have to live with the creditworthiness of the owner of that LNG regas facility, it is a lot less critical.  Think about the first AES power plant.  Who was AES when it built its first plant? It didn’t really matter, except everyone knew it had gas coming in under a contract, and there was a separate contract to sell to a credit-worthy purchaser.  I don’t think that’s an issue.