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Jul 15, 2020

Colombia Relaunches Bid Process for Pacific LNG Import Terminal

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COLOMBIA RELAUNCHES BID PROCESS FOR PACIFIC LNG IMPORT TERMINAL

The Colombian government has issued a new timetable for the tender with respect to the design, construction and operation under a build, own and operate, or “BOO” scheme, of an LNG regasification facility in the Pacific seaport city of Buenaventura and the related pipeline to transport gas from this facility to the southwestern region of Valle del Cauca (the Project), where it will connect to the Colombian national gas transportation system. With an estimated overall value of USD 700 million, the Project is part of Colombia’s plan to enhance its gas supply infrastructure by providing for a second port of entry that would complement the country’s sole existing LNG import terminal in Cartagena on the Caribbean coast that commenced operations in 2016.

Colombia is facing a looming gas shortage, with internal demand expected to increase consistently in the coming years. Although opinions are divided as to when this gas deficit will ultimately occur, producers, industry experts and government agencies agree that a greater import capacity is required to meet the expected increase in local gas consumption. The Pacific LNG Import Terminal has long been championed by the Colombian government as a crucial milestone in its efforts to address this looming gas shortfall.

The initial draft tender documents for this Project were first published for public consultation in May 2018. During this first consultation period, the Mining and Energy Planning Agency (UPME) received comments from potential bidders, governmental agencies and other interested parties. Most notably, UPME received comments and requests from certain Colombian governmental authorities regarding certain key aspects of the Project’s feasibility, including its location.[1]

On June 30, 2020, UPME published its answers to the first round of comments, together with a revised draft of the tender documents that is partly based on feedback received during the first consultation period. Under the new timeline, the most notable deadlines are:

  • Second round of public consultation: open until July 17, 2020;
  • Publication of the definitive bidding documents: July 30, 2020;[2]
  • Deadline to submit bids: February 17, 2021;
  • Project award: March 8, 2021; and
  • Expected official Project commercial operation date (the COD): [tbd] 2023.[3]

Although the revised draft tender documents include several revisions, the overall structure of the Project remains largely unchanged. Below is a brief overview of some of its main features:

  • Project Bundle. The Project is to be awarded to a single bidder and will include the design, construction and operation of both (i) the LNG regasification terminal, which will have a regasification capacity of at least 400 Mf3/d and a storage capacity of no less than 170,000 m3, and (ii) the approximately 75-km pipeline connecting the facility to Yumbo, Valle del Cauca.
  • No Concession or other Agreement with the Government. The award will not involve any concession or any other form of agreement with the Colombian government. Instead, the winning bidder will be granted the right to receive an “annual expected remuneration” (or IAE) by the Colombian Energy and Gas Regulation Commission (CREG) for a period of 20 years. Upon the expiration of this 20-year period, the developer will retain ownership of the Project and its compensation would be based on a tariff determined in accordance with the general methodology applicable to this type of project in effect at such time.
  • Award Criteria. The Project will be awarded to the bidder that offers the IAE with the lowest net present value.
  • Source of Payments. The IAE is expected to be collected from two different sources: (i) tariffs paid by the “beneficiaries”[4] of the Project and collected by the relevant gas transporters, and (ii) direct payments in connection with the “associated services” rendered to the developer’s direct customers. More clarity is needed on this point, but at this time our understanding is that if the developer does not have contracts for the associated services, then the entire IAE would be paid by such beneficiaries of the Project.
  • Currency of Payments. All IAE payments will be in Colombian Pesos, but up to 42% of the annual payments may be set in USD (the USD Tranche) and converted to Colombian Pesos using the official USD exchange rate as of the last calendar day of the month immediately preceding the date of service. The USD Tranche is to be adjusted by the U.S. Consumer Price Index and the remaining IAE payments will be set in Colombian Pesos and adjusted by the Colombian Consumer Price Index.
  • Project Risk Allocation. All risks related to the Project and the services provided by the Project will be borne by the winning bidder, and the Colombian government will bear no responsibility or risk in connection with the Project (the Colombian government will not guarantee any form of minimum payment). In this regard, force majeure events may allow for an extension of time to achieve COD, but the developer would not be entitled to request an increase of the IAE (in fact, we understand that according to the regulations of the CREG, remuneration for the Project would be reduced in proportion to the installed capacity that is rendered out of service due to such events).
  • Open Technology. Bidders have the flexibility to select the technology (i.e., onshore or offshore storage and regasification) and other relevant aspects of the Project, so long as the minimum technical requirements set forth in the bidding documents are met.

Despite the responses provided by UPME to the observations and comments by interested parties during the first consultation period, the new draft bidding documents (and some of the responses provided by UPME) still include hurdles and ambiguities that interested parties will need to carefully review. Some of these challenges include:

  • Challenges of the Source of Payment. Absent a direct minimum payment guarantee from the Colombian government, potential bidders and lenders alike will rely on the prompt clarifications regarding the Project’s beneficiaries (the backbone source of payment of the IAE) and their interplay with the payments related to associated services. The ability to properly analyze the credit (and performance) risk of the counterparties responsible for the IAE component payments will be critical to ensure the success, and bankability, of the Project.
  • Determination of the IAE. Further clarifications regarding the determination of the IAE will also be needed (particularly in connection with the CREG’s right to abstain from issuing the requisite resolution approving the IAE if the result of the cost-benefit analysis based on the net present value of the IAE offered by the winning bidder is “not favorable”).
  • No Revisions to the IAE. Except for adjustments related to inflation, the winning bidder would not be entitled to request adjustments to the IAE based on extraordinary circumstances, such as a change in law or other force majeure events (political or natural). This point is particularly sensitive since the structure relies solely on tariffs that are not set out in a contract, but rather are determined in accordance with local laws and regulations.
  • Cap for USD Tranche. As noted above, the CREG has set a cap for the USD Tranche at 42% of the IAE. We note that for other major infrastructure projects, the Colombian government has been willing to partially mitigate the currency exchange risk. However, setting the cap at the current threshold of 42% may lead to an undesired effect on the overall cost of this Project as a result of limiting the winning bidder’s ability to procure the most competitive financing available in international and/or domestic markets.
  • Assignment Restrictions. The winning bidder’s rights and obligations can only be assigned to third parties with the prior written consent of UPME, and UPME will not entertain partial assignment requests before the COD. Moreover, assignees need to be public utility companies. These restrictions, in addition to the absence of a concession agreement underpinning the Project, may restrict the winning bidder’s ability to bring in additional equity participants post-bid (although change of control and/or transfer of capital stock in the developer do not seem to be restricted under the existing regulations) and may also prohibit the collateral assignments and step-in rights customarily required by lenders.

In spite of the challenges faced by this Project (exacerbated by the Covid-19 pandemic) and that crucial aspects still need to be further defined or clarified, it is clear that Colombia continues to strive for a stable and reliable gas supply to provide for its ever-growing internal demand. Colombia is experiencing a new momentum for investing in the country’s gas import infrastructure as other LNG related projects begin to appear on the horizon, such as the gas-to-power hub in the northern coastal region of Sucre. Hopefully, the success of these endeavors is equally driven by the country’s increasingly evident willingness to work with developers, lenders and other stakeholders in structuring crucial infrastructure projects that will help pave the way for Colombia’s continued development.

Please contact Gregory Tan and Christian Rudloff of Shearman & Sterling’s Project Development & Finance practice should you have any queries related with this matter.

Special thanks to visiting attorney Alejandro Medina, who co-authored this publication.

Footnotes

[1]  The Project could be located in a restricted area neighboring naval bases and stations. Other concerns relate to the possible interference with the operation of existing port facilities in the area and its potential environmental impact.
[2]  However, UPME reserves the right to amend the bidding documents until February 3, 2021.
[3]  The initial COD approved by the Ministry of Mines and Energy (the Ministry) was January 2021. According to the Technical Studies for the Natural Gas Supply Plan published by UPME for public consultation on January 2020 (such plan needs to be approved by the Ministry), the COD would be September 2023 for the LNG terminal and January 2024 for the pipeline.
[4]  At this time it is not entirely clear who would be considered “beneficiaries” (or demanda beneficiada) of the Project. Under the Technical Studies for the Natural Gas Supply Plan, UPME suggested certain composition of such beneficiaries to be distributed throughout the country’s regions, based on the fact that one of the main objectives of the Project is to enhance the country’s gas supply security and reliability. However, in its answers to the first round of public consultation, UPME mentioned that the base studies for the composition of the beneficiaries of the Project would be updated and submitted to the Ministry

Authors and Contributors

Gregory Tan

Partner

Project Development & Finance

+1 212 848 8324

+1 212 848 8324

New York

Christian Rudloff

Counsel

Project Development & Finance

+1 212 848 4301

+1 212 848 4301

New York

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