Societe Generale bets on Asian LNG and offshore finance

In an unassuming Hong Kong conference room, open-collared Mark Westley sits down to discuss shipping. His recent appointment as managing director and head of Asia-Pacific shipping and asset-based finance at Societe Generale, is another sign that banks are now positive about the future of Asian shipping.

This is an about-face from the doom and gloom of a year ago. A sizeable percentage of global trade flows disappeared and, by some estimates, as much as $100 billion of trade financing dried up in the six months from October 2008. The decline was so bad that the Baltic Dry Index, the global benchmark for shipping demand, is still down more than 80% from its all-time high in May 2008. But all this is of little concern to Westley.

"My appointment was about taking LNG [liquefied natural gas] and offshore financing knowledge and adding it to our capabilities in Asia-Pacific," he said. "At the moment we're seeing a lot of ship-owners, drillers and production companies involved in Asian projects to Asian customers. It was quite hard to do these 100% Asian deals from London."

LNG shipping refers to the transportation of the liquid and the regassification of LNG in different countries. Offshore relates to the drilling for and production of oil below the sea bed.

Broadly speaking both businesses constitute "shipping" within SG but, as Westley points out, the sectors are significantly more capital intensive than simple oil tankers or container ships and require significant oil and gas industry knowledge. Because of the high capital intensity, LNG producers sign long-term contracts, typically up to 20 years, that, regardless of the market price of the fuel, can produce a steady flow of cash for ship-owners.

"When bulk [ship rates] are going up and down and providing volatility to earnings, the LNG and offshore segment provides stability of earnings," Westley said. "We like LNG as a bank."

An example of the high investment cost, and long development time, for LNG projects is the Gorgon field in Australia. Recently approved by the government, the field off the northern coast of Western Australia has been in various stages of planning since the 1980s, but once completed for an estimated A$50 billion ($44.1 billion) it is expected to produce 15 million metric tonnes per year of LNG.

According to Westley, a typical LNG project will include a gas liquefaction plant at a cost of $5 billion to $15 billion, four to 12 ships at $250 million apiece and a re-gas plant for $1 billion to $3 billion. Offshore assets can cost anywhere between $200 million and $1.5 billion each.

"If you put two liquefaction projects into the market in the same region within the same quarter, there will be clear market problems," he said. "Projects will naturally be spaced out." The steady and long-term nature of contracts plus the quality of the companies involved makes them attractive for banks.

Other institutions also like LNG finance. Export credit agencies often play key roles and most projects have multiple institutions involved. Other players in the sector include The Bank of Tokyo-Mitsubishi UFJ, Standard Chartered Bank and Sumitomo Mitsui Banking Corporation.

Indeed, when asked what last year's significant fall in shipping demand did to the LNG market, Westley said: "Literally nothing when considering the long-term contracted part of the market, which is most of it. LNG just carried on, continuing exactly as it was, just moving cargos back and forth." He explained that the vast majority of LNG shipping fleets are contracted with a small amount of capacity purposely left uncontracted.

Societe Generale is betting on Asia-Pacific for growth because the region is not only home to the majority of new LNG fields but is also where most of the world's LNG shippers are located. In addition to the Gorgon field, other Australian LNG projects in the works include the North West Shelf and the Pluto ventures. Elsewhere, Papua New Guinea is in the final stages of putting together financing for a 6 million tonne per year field and Qatar is set to expand its LNG export capabilities to 38.7 million tonnes per year by 2011.

According to Westley, Japanese companies, including NYK, MOL and K-Line, are dominant players in the LNG business globally. Korean shippers are heavily involved but only for their domestic market. A few Chinese companies are involved to date. But it is really the number of new projects in the pipeline that is driving the banks' interest in the region.

"There are a lot of projects out there but we've been watching them for quite a while," he said. "I think this is the time for Australian and Asian projects. My outlook for the region is good and there is more than enough business for us."

Currently, Societe Generale derives approximately 40% of its shipping income from the region but, despite the increased focus on Asia-Pacific, Westley is doubtful that that proportion will rise much further. This is because of significant oil field developments in Brazil and the Atlantic basin.

On the whole, the LNG pie is growing, both in the Atlantic and Pacific basins. Westley makes clear that the revenue split between regions is not indicative of what the bank sees as a growth business in Asia.

"For the last few years the activity has very much been in the Middle East and Africa," he said. "It's now Asia-Pacific's turn to see a bit more activity." And Societe Generale is ready for it.