with Sveinung Støhle, President and CEO, Höegh LNG
Last year Hoegh LNG listed on the Oslo Stock Exchange. Having been in charge of Hoegh LNG since 2005, why was this the right time to go public?
This was a private family owned by the Hoegh family but it was always part of the long-term strategy to go public once it had been developed to a certain size. The second criterion was having open capital markets with conditions in these markets varying on an almost daily basis. The third factor for us was an opening in the market for ordering new vessels. When these three factors combined, in a matter of two weeks we decided to launch and IPO on the back of ordering a string of regassification vessels, FSRUs which is what Hoegh LNG now focuses on.
In June the company was listed and the initial IPO raised USD 140 million and then we launched a second IPO in February 2012 which generated USD 230 million taking us to USD 370 million overall. Initially we ordered two FSRUs from Hyundai Heavy Industries for around USD 270 million per unit. We ordered a third in February this year taking us to three overall. Two of these FSRUs have contracts in Lithuania and Indonesia.
The gross value for the Indonesian FSRU is up to USD 1.5 billion and around USD 7-800 million.
We launched the construction tender at the same time as the IPO, inviting three Korean yards and Hyundai Heavy Industry won the contract.
The global LNG market is growing around six percent and the market requires an additional 72 vessels. How will Hoegh LNG make the most of this international growth?
Hoegh LNG has a fleet of eight LNG carriers, six of these are standard ships meaning that they only transport cargo, and two are FSRUs which are already in operation, chartered to GDF Suez. The ones currently on order are FSRUs and Hoegh LNG is now focusing exclusively on the floating regassification market. We no longer participate in the standard transport market for new vessels.
Hoegh LNG is very good on technology and finding new solutions to bringing gas to the market. This is what the FSRU gives. It gives the customer the means to input energy without the expense and time required to build a land based terminal. An FSRU can deliver gas to the market in half the time, half the cost and if needed it can be moved to a new location. It is a new market that Hoegh LNG has been part of creating; four years ago this market did not exist. There are 11-12 terminals in operation around the world today and there are around 30 new projects on the list which we focus on.
We have a continuous growth strategy whereby we always have one tender open and the moment we win a contract we order a new FSRU. We have one we are bidding for in South America.
Regarding our focus in world markets I would highlight Asia, Asia, Asia and South America. Hoegh LNG opened an office in Singapore two years ago, from which most of our work in Asia is run, including the project in Indonesia. There are opportunities in other locations such as the one we won in Lithuania due to become operational in the middle of 2014.
The market which is growing the fastest is Asia and its main driver is all the production coming from Australia. This means that for the first time in the history of the LNG business, the gas will be consumed in the same region where it is being produced. This means that Australian gas will flow directly to Asia. Much of this gas will go towards traditional markets like Japan, Korea and Taiwan, but there are a number of new markets opening up where they do not have the means to import gas and this is why many of them have embraced LNG terminals because of the reduction in set-up time, cost and instead of building one large terminal you can have several import points like what is going on in Indonesia. We are bidding for another project there.
To what extent is the moveability of the FSRU a success factor in these markets?
It is a major element. LNG is a very capital intensive industry and in some regions there are two challenges of distance and geography. Indonesia may be a special example but it highlights the use of FSRUs. It is a very large country, with 17,500 islands and it is volcanic so you cannot build pipelines across the country because it is not safe. Therefore instead of building one very large import terminal and then connecting pipelines to that to serve the whole market you can place several import terminals to deliver the gas directly to the demand market. This is the Indonesian strategy today. There will be a number of terminals to serve the different islands.
One can observe the same development in India, in Malaysia which is actually the fourth largest LNG exporter in the world but nonetheless it has opened a terminal for imports. This is our main focus.
A similar market development is now occurring in South America where there are already 5 terminals in operation. The main driver there is using gas to fuel power production which is an issue of distance and cost. The coastline of Chile is 3.5 thousand km long with only a few large demand points and it is not economic to build pipelines between the points. In three to four years there will be four FSRUs operating. Argentina and Brazil have the same issue and I believe that this market will develop in the Caribbean.
Europe is attempting to diversify its gas supply and LNG is a major factor in this policy. What are the prospects for floating LNG in this market?
Although we are supplying an FSRU to Lithuania there are a few challenges in developing floating LNG for this market. The market has been in development for over 50 years and there is pipeline infrastructure throughout the region. There have been import terminals in some countries for over 30 years. From a long term perspective it makes sense to place the import terminals next to the large pipeline hubs so in contrast to South America and Asia the huge pipeline grid meaning that it makes more sense to build a large land based terminal. There are a few countries where there could be pockets of demand where a floating terminal would make sense and we have analyzed a few options mainly in southern Europe.
Another factor is time which was the main driver for the Lithuanian project. They also had a developed gas grid, but they wanted something to be built in a short time. The quantity of imports will affect the economics. If the demand is small to medium then on a cost basis this is best served by an FSRU. For a medium to large demand with no hurry to develop a terminal and conduct and EPC project, a land based solution makes more sense.
With strong global growth opportunities, how do you make sure that you generate return on assets?
This is a very capital intensive business and I simply do not have the capital to participate in all the countries that I would like to. Hoegh LNG has chosen an organic growth model and we will always have the capital in place before purchasing something that we do not have the capital for. We have a prudent approach and it is perfectly possible to grow the business in this way. When the delivered cost of one of these units is USD 300 million, we already have a commitment which exceeds USD one billion. Once we have a contract for the third FSRU we will order a fourth and look to generate more money either from equity or bond markets and so on. Particularly in Europe, the financial markets are challenging, however last week we raised USD 250 million in bank debt for the Lithuanian project showing that despite banks choosing not to lend to any shipping company at the moment, Hoegh LNG can still receive money. This is because we are not strictly in shipping, but in energy and infrastructure in long-term contracts.
What is your vision for floating LNG over the coming years?
Five years ago, Hoegh consisted of two old ships and that was not interesting to me. Therefore when I joined Hoegh I told the owners at the time that if we could agree on a direction for the company that was different from the competition and if they could guarantee the raising of adequate capital then we could put together a winning team. Overall I believe that we have succeeded. I wanted to place Hoegh LNG in a competitive position in relation to the other companies and this is why I decided to move away from standard shipping, to focus on R&D and focus our work on technical solutions that we knew the market was after, which would be floating regassification.
The LNG business has a very bright future and the growth prospects continue to look good. LNG is natural gas which is going to be the future of the next three to four decades. However to keep growing you need to come up with technical solutions and that is what Hoegh LNG will provide.